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

Good afternoon, everyone. 2023 Baird's Global Healthcare Conferences. I'm David Rescott, senior medtech analysts here at Baird. Pleased to have the Penumbra team with us, Jason Mills, EVP of Strategy. [Operator Instructions] So Jason, thanks for being here.

Yes. Thanks, Dave, for having us. First time at the Baird Conference.

Glad to have you. Hope for the next or two.

Thank you.

So let's start off maybe flashing back or looking back 2019, the goal was to achieve $1 billion in sales by 2023. The company is on track to do that this year. So have hit those goals. Wondering over the next 4 to 5 years, maybe what the growth outlook looks like for the company? And if we may have an opportunity to see maybe on paper, maybe more what the outline looks like if there's another Analyst Day, maybe coming up that you could give some more hard endpoints to where the growth looks like over the next couple of years?

Yes. I appreciate the question. Again, thanks. It's been a good experience for us here at Baird. So indeed, in 2019 and this is obviously before any of us knew or even had in our lexicon COVID. We at that time, the company said that we thought $1 billion in revenue was achievable by 2023. And notwithstanding COVID, we are indeed on track to achieve that and exceed that actually given our guidance for 2023. What we've talked about really along our journey over the next 5-plus years is really more of the opportunity in front of us, especially in our primary business of taking clot out of the body. In just focusing on 3 out of the 5 areas of the body we take clot out of where we have computer-aided vacuum thrombectomy, which we think is transforming and taking clot out of the body and will be the predominant way this is done going forward. There are 800,000 patients. And this is specifically in the arterial anatomy and in the deep veins where there's thrombus there, DVT as well as in the lungs with pulmonary embolism. Cumulatively, the incidence of patients that have clinically significant clot in those 3 areas is 800,000. The industry is treating 10% of those patients today, may be a little less than that. And the feedback we're getting on the latest launches in computer-aided vacuum thrombectomy, specifically lightning flash. I prefer to both DVT and PE and Lightning Bolt 7 on the arterial side is we've moved the arc of innovation along that significantly. And that now physicians believe, thought leaders believe we have the technology, we can go out and help if not all of those patients, the vast majority of them. So if we're only successful in helping with our technology, half of those patients, that's a significant number of patients to help. And obviously, you can do the math in terms of the opportunity that portends for Penumbra's business. So we have a lot more in front of us than behind us and it is really a testament to the outcomes we're seeing with these 2 technologies.

In the 800,000 patients, you said arterial DVT, PE, that's specifically within the Peripheral Vascular business, so excluding what the neuro-thrombectomy segment does? Or is that inclusive of...

Yes. That's just arterial vascular so not in the neuro side, DVT and PE. We also have proprietary technologies for the neuroanatomy, taking clot out of the brain for interventional stroke procedures. We were -- the company was started, as you know, with the premise of getting clot out of the brain as quickly as possible for patients that have suffered a stroke. And we've evolved technologies to address in a purposeful way, taking clot out of those 4 anatomies. In addition to that, the heart and the coronary anatomy, we have a product called CAT RX that continues to grow and be one of our most successful products. So we really are focused on clot wherever it is in the body.

Okay. I think the biggest news maybe last week within my covered universe, 20% growth next year is achievable. One, confirming that, that was what the management team had said at a competitor conference last week. And then two, when we think about the moving pieces to get there, I think the guidance for this year assumes that Vascular is a bigger driver? Any sense for how we should think about that growth number next year and how you get there?

Yes. Yes. Thanks for that question. We indeed put a little bit more specificity around it, albeit it's still -- we have a bit more quantification as opposed to the qualification we'd given on the second quarter call about our real optimism around our business. So nothing changed about how excited we are about our business. We decided just to be a bit more specific. We usually give guidance on our fourth quarter call, specific guidance. We'll continue to think about doing -- plan on doing that. But we thought it was appropriate to talk about the trajectory of our business and a bit more of a quantifiable way. And what we said was we thought at least 20% growth was achievable in 2024 but I think it's also important to say and going back to your first question, 2024 isn't the end of the journey. We would expect to not only gain share and develop the market, continue to grow the market in 2024. But that also -- we won't be nearly done when we turn the page to 2025 and 2026. And we have several initiatives, clinical health economic initiatives in addition to continuing to innovate that will drive us forward towards those 800,000 patients in just those 3 areas. You asked the question about what's going to drive that growth. The biggest opportunity for us is in those 3 areas of arterial, DVT and PE. But we have also launched new technology to move our leadership position forward in stroke. In addition to stroke, we expect to see continued strong growth in coronary as well. But the predominant driver of that will be in U.S. vascular product.

Okay. A lot to get into there, which we'll go into in a little bit. Just again, from a high level, I think the view has been that you make your way toward gross margins above 70%, maybe mid-70s longer term. Without a better sense for a guidance level for when you get there, we have you getting there by 2027. Over, under do you think around when maybe that mid-70% or at least 70% gross margin becomes a reality for Penumbra?

So just to level set, this business had before COVID run in the mid-high 60% level. We invested quite a bit in Northern California to keep our folks safe and spreading people out. At the same time, we opened up a new facility about 2 hours away outside of Sacramento. And longer term, that's going to contribute to our ability to expand from where we are today at 63.5% gross margins last quarter to 70% plus. And what we've said is a few years. So your year in your model certainly represents that. I think we're going to try to work really hard to achieve that level before your time frame, but there's a lot of work to do. I think we do have visibility into that, notwithstanding the work. And the components of that are mix shift in our products. Thrombectomy tends to be higher margins. That's where the majority of our growth will come from for a while. The productivity gains will -- we're already seeing, frankly, that isn't reflected yet in the actual reported gross margins as we scale up our Roseville facility and eliminate duplicate costs. And then we have longer-term initiatives that are underway now that really manifest in the 2- to 4-year period of time that are specific to improving productivity across the organization -- manufacturing organization at large.

Okay. Have the success that you've seen with flash so far with Bolt and then [indiscernible], I guess, so far too and then potentially longer term with Thunderbolt, has that changed the way in which you think you can get to that 70% plus gross margin level or even on the operating side from the broader leverage of the portfolio?

I don't think the success of those products, and we continue to be really excited about what we're seeing from those products in really early days. I'm sure we'll get into that has changed how we're thinking about their contribution to our margin profile over time. I think the bottom line is when you think about our opportunities to help a lot more patients than we're currently helping today, the growth opportunities on the top line, what we've just talked about with our gross margin expansion opportunities and our disciplined spending, we don't need to increase our sales force by leaps and bounds. Our folks are really professional. They are strong leaders in their regions and territories. And we can, therefore, continue to invest in R&D at a similar pace and R&D productivity has been outstanding over the years and grow our overall operating expense infrastructure at a slower pace than where we think our revenue will grow in any given year, let alone over a 5-year period. So I guess said more simply, we should be significantly more profitable over the next several years.

I think exiting the year at 10%, above 10%, maybe around 10% operating margins for 2023 exiting the year. Consensus for next year is at 11%. Obviously, the blended step-up is bigger when you think about where you started the year at. You mentioned that you don't necessarily have to significantly invest in the business. How should I guess, we think about maybe more of that near-term profit outlook as well as where you think you can get longer term?

So just to go back to something you said, we will continue to significantly invest in the business but our growth profile should be faster. So there's some margin expansion potential, notwithstanding, we continue to invest in the business. I just wanted to make sure that our commitment to investing in innovation is a golden goose that will continue to feed and we will continue to invest where appropriate just in a disciplined way. And so we think that there, over time, our opportunities to invest. It's just not going to be as fast a pace as where we think our top line can grow.

Okay. Guidance for the full year, I think, sits at 24% to 26%. You grew with 22% in the first half, so you're accelerating into the second half of the year. From a high level, we've heard questions around vacation travel in the quarter and potentially rising COVID cases. Anything you've been seeing on the ground level as it relates to a more unseasonably seasonality in Q3 at all?

No, I think we obviously consider all of those things as we think about the third quarter of any given year. I don't think we're seeing anything that is different.

And then in the second half of the year, I think in Q2, there was -- the vascular from back to in business grew 50-plus percent. That was in Q2, been growing pretty strong so far in Q2. You also had, I think, some maybe weaker sales, maybe an embolization or in the international segment. So can you just talk about maybe specifically what that was and then how you're contemplating that either maintaining at these current levels or improving in the second half of the year?

Yes. So the second half of the year, the growth will be driven predominantly in the United States and in the United States in our vascular thrombectomy business. We also expect to see continued momentum that we've shown in the stroke business in our neurothrombectomy business. But the growth profile on a percentage basis will be driven by vascular thrombectomy in the U.S. where we have these new products, Lightning Flash and Lightning Bolt 7. Outside the U.S., there tends to be more lumpiness on a quarter-to-quarter basis because while we're direct in a lot of markets, we have distributors in other markets. So -- and they -- a lot of our distributors sell both our neuro business and our vascular business. So there can be 1 quarter where neuro is more weighted in the vascular quarter, the next quarter. So looking at it on a full year basis, I think you get a more clear picture of progress we're making in distributor markets. But on a quarter-to-quarter basis, we have what we've had in the third quarter, which we guided to our international business being in the single-digit growth and then reaccelerating to double digits in the second half. Again, these are markets we still see a lot of growth out of and there are markets we don't have any of our new products that everyone is asking about with respect to Flash, Bolt and send it in stroke.

Okay. So I guess starting or sticking us on the VTE segment. So Flash was launched in the early part of January. You had Bolt coming out toward the end of March, I believe. I think at the time of Q2, the company highlighted 1,000 accounts that are currently going through the VAC process. One, any update on maybe where those company -- or where those accounts are within that VAC process. And two, can you at least give us a perspective maybe of where that is relative to maybe how many accounts you're in, in total either from the existing business or specifically for Bolt and Flash?

Yes, all really good questions. And what we specifically said is well over 1,000. We didn't say 2,000, or else we would have said that. So you can sort of do the math and split the difference. But there are -- the reason we called that out at all was because the number of submissions, which is a manifestation of the interest level and specifically the demand for our product to be on the shelves, and in the majority of case, demand for our product to be on the shelf at customers that had not used our thrombectomy products heretofore, the previous generation products was, frankly, unprecedented in the company's history. Just the sheer number of accounts that were going through the submission process. And just so everyone knows the submission process for a unique technology is generally required in the vast majority of cases. Both those customers that had been customers with our thrombectomy business and, of course, new customers who hadn't, both -- it was the same for both, generally speaking. And that process can last on the front end 2 to 3 months if things go very quickly. In some cases, 9 months and even up to a year depending on the hospital system. So we don't have control of that timing. What we do know is that there might be a case or 2 where we haven't gotten through the submission process and dozens and dozens of product launches over the last 20 years of the company. But we're successful getting through that process almost all of the time. The timing of when you get through that process is not up to us because, by definition, a physician at that hospital has to champion that product through the process. So we have been appropriate with respect to how we think those new accounts will come online. But in the meantime, they cannot buy our product. They typically get approval to use and buy from us 1 or 2 products before they start the submission process. And then until they get this -- the approval and they've gone through supply chain and pricing at which point they can place the order, they don't. So there's a lag there. That's part of the process, that's built into our guidance. But the good news is we said that the number of accounts and submission relative to the number we've been selling in, especially on the venous side and also on the arterial side, too, to some extent, would significantly increase, let's just say it that way, significantly increase the number of accounts into which we would be selling our thrombectomy products relative to last year.

Are those accounts that you are expanding into that are significantly increasing that, are they accounts that are generally doing more conservative medical management, other thrombectomy, other kind of catheter-directed thrombolytics? Where is the share versus -- market expansion versus share gain from international -- or sorry, other interventions?

So I'll answer that question because the answer is different because the dynamics are different in the venous thromboembolism space versus the arterial space. In the venous space, it's generally customers that had used other mechanical thrombectomy modalities. [indiscernible] Based thrombectomy or grabber technologies, right? And so they are demanding and interested in computer-aided vacuum thrombectomy. On the arterial side, there isn't much -- we have developed and shepherded the arterial thrombectomy market over the last number of years. And so it's generally the alternative is traditional therapies, which are twofold: surgeries, embolectomy balloons used in a cut-down procedure; or catheter-directed lytic drips, which are done in the ICU. Those make up 8 to 9 out of every 10 patients treated with arterial clot today. And so the new customers they are predominantly surgeons or interventionalists that are doing one or both of those traditional therapies.

Okay. Last one on Flash and then some of those points that you mentioned on Bolt and arterial just as it relates to the process and what you've seen so far is the typical time frame in which a new account works its way through the VAC. Is that a 3-month window, a 6-month window, 9-month, 12-month? Where do you think some of these accounts that are currently in that VAC process start to roll? Is that Q4, Q1, Q2? How do they roll in?

Well, so they all vary, so it's difficult to tell and our guidance is contemplating appropriately so that we don't have control over it. But we're assuming that a few will, but the -- I would say it this way, the vast majority of them will have worked through the process, whether they are on the short end of that curve or the long end of that curve as we roll into 2024. So our 2023 guidance assumes that we're going to get some of those through that process. But the vast majority is likely going to be more influencing our 2024 business.

Okay. On -- and we're under 10 minutes now left. So on Bolt and then we'll shift to some other -- the neuro side. The -- where you are with Bolt now. You mentioned that there is a little bit of a difference between surgical, maybe vascular surgeons versus the interventionalists. Can you help us at least think about that opportunity relative to where the bulk of growth maybe has come from so far with Bolt and where you expect the majority of growth to come from going forward as it relates to either just driving a higher number of interventionalists intervening or just converting a lot of those open surgical cases toward more [indiscernible] interventions?

Yes. So clearly, we've seen -- and Bolt was launched subsequent to Flash in the early part of the second quarter. And the early effort was to introduce that product to users of our thrombectomy systems heretofore. So the Lightning 7 users, the CAT 6, CAT 8 users, et cetera. And we continue to go through that. That's gone really well. When they use Lightning Bolt 7, even those that have success with Lightning 7, the technology is truly another move along that arc of innovation that they respond to. The next phase of Lightning Bolt for us will be to continue to educate and help vascular surgeons on one end and interventionalists on the other, see the difference that they can have and the speed and safety as well as the ubiquitousness, if you will, of getting clot out relative to, if you're a surgeon having to cut down and do it surgically or if you're an interventionalist who has tended to send those patients to an ICU for a couple of days of lytic drip. And that -- really, the proof is in using the product and seeing the outcomes for yourself. And we've seen -- the reason we're so excited about it is we've seen a number of physicians who heretofore have said, I may have tried thrombectomy, I believe surgery in my hands is the way I want to continue to go, that see it differently when they're using Lightning Bolt 7. And it's because of the modulated aspiration technology able to get the catheter there quickly, push a button, and the clot gets ingested in a matter of minutes, is profound to them, both in terms of how quickly the clot comes out and how less invasive that procedure is relative to surgery and how lower risk generally it can be relative to the risk that are associated with a lytic drip.

Okay. On the VTE side, you talked about the physician interest in computer-orchestrated aspiration thrombectomy. We know that you guys are doing the STORM PE trial, maybe potentially market expansion or there's other companies doing stuff in DVT PE. How much of the market expansion do you think is dependent on some of these head-to-head trials longer term relative to perhaps what computer orchestrated aspiration is opening up in the near term?

In PE specifically?

Both. PE and then DVT.

So good question. I'll sort of take them both separately because they're slightly different. In PE, there is, I think, more of an emphasis on -- and a need for clinical data. And there are specific questions that both the interventionalist and the referring physician, the pulmonologist, need answered, that is best delivered to them through the STORM PE study. That answers the questions. We've been developing that. Dr. James Benenati, a luminary in the space, our Chief Medical Officer, has worked closely with the societies and the key opinion leaders at those societies, to develop the clinical study and specifically the endpoints that will answer the question they need answered for pulmonologists to refer more of their patients with submassive high-risk pulmonary embolisms to an interventionalist for an intervention, as opposed to either anticoagulation or otherwise. And that will be important. The STORM study, we have actively -- we've gotten centers to now go live and active. They are actively screening patients. And so we're optimistic about enrolling that study over the course of time. And that's a relatively small randomized study, 100 patients. So that will be important, as will continue market development and just outcomes that people are getting by using the product. On the deep vein thrombosis side, it's slightly different. In deep vein thrombosis, you have patients that aren't coming into the hospital that are generally being seen by general practitioners outside of the hospital and the market development work there is different and it's ongoing for us. And we'll continue to work through hospitals because the best referral data point for those referring physicians are the outcomes their patients are getting who they refer to the interventionalists. And the concept in DVT is very simple: get the aspiration catheter there as quickly as possible. Press a button, get all the clot out, don't take blood out, don't damage the vasculature. That's the key sort of premie around taking clot out of the body in any anatomy. That's certainly true in DVT and outcomes will drive that. What we're also working on, though, and this is both a near-term process as well as a cross-function collaboration that is important to Penumbra, is clinical and health economic evidence. That will be really important in answering the questions for hospitals to see not only the clinical improvements they'll get out of doing thrombectomy and DVT, but the health economic benefit out of doing it. And they will then take that message to their communities and general practitioners. And over time, that could be one of the biggest drivers of development to that market.

Okay. We have 1.5 minutes left, probably should spend more time on Thunderbolt and acute ischemic stroke in the time that we have left. But I'm going to just quickly try to get 2 questions here. So one, so the Thunderbolt was delayed by about 12 months or so. What gives you the level of confidence that the delay that we have thus far is kind of maybe where the ultimate delay is? Are you assuming that there's any contribution for this in any of the comments that you've made about 2024?

So the last part of that question is no. And we haven't specifically talked about 2025, but we wouldn't include it in that either. But we are very confident that the time lines we've talked about are the time lines because we're not assuming an acceleration in the pace of enrollment, notwithstanding that's typically what you see as centers become more proficient at enrolling patients over the course of a trial. So we're assuming a similar pace of enrollment, perhaps a higher number of centers as time goes on. And the patient -- so if you just do the math on what that translates into, 12, 13 months is the appropriate time frame. So if people were expecting us to complete enrollment end of this year, beginning of next year, then you apply that 12 months because of a higher end value of the trial.

Okay. Last one. So you talked about potentially what could Thunderbolt do, maybe you gain share. You have [indiscernible] benefit, you expand the market. You've already seemed to have done 3 of those things with the SENDit technology. Can you just talk about how SENDit...

It's a stepwise. We are doing all 3. But we're doing all 3 in a step function with SENDit, and there will be another step with Thunderbolt. The real key thing to note here is that SENDit addresses the front end of the procedure. It allows more ubiquitous trackability of an 072 catheter to the face of the clot. If you're allowing physicians to do that at a higher success rate, their propensity to adopt a technology that acts on the second part of the procedure, once you get the catheter there, which is clot ingestion into the catheter all the way through so that you get holistic removal of that clot, their propensity to use that technology, Thunderbolt, is higher because they know they can get the catheter there.

So Thunderbolt -- or SENDit doesn't take away the ability for Thunderbolt to potentially...

They will be used together.

Okay. That's all the time we have.

Thanks, David. Appreciate it.