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

Good morning, everyone. I'm Robbie Marcus, the Medtech analyst at JPMorgan. Thanks, everyone, for joining the 2024 JPMorgan Healthcare Conference. Very happy to have our next presenter Adam Elsesser, the CEO will be speaking for Penumbra. Adam?

Good morning. It's great to be here at this year's 42nd Annual JPMorgan Healthcare Conference. And of course, I want to thank Robbie for inviting us and your coverage of Penumbra. That's our safe harbor statement. Penumbra is a healthcare company focusing on interventional products that treat a variety of medical conditions throughout the body. We're best known for our thrombectomy business. We're moving blood clots from head to toe. We started the company in 2004 and currently have approximately 4,000 employees worldwide. We're headquartered in Alameda, right across the bay from here and we manufacture all of our products in California. Our revenue guidance for 2023 is between $1.05 billion and $1.07 billion. In addition to this strong growth, we're also delivering strong profitability in 2023 and expect that to continue in the future. Now let's turn to the details of our business and why we are so optimistic about 2024 and beyond. We think about our business in 3 categories: thrombectomy, embolization and access, and immersive healthcare. In our embolization and access business, we have unique market-leading products that have grown in the high single digits on average over the past few years. Our embolization coils are unique and that they are larger in diameter and longer in length in certain sizes, together with being very soft. So they create a dense packing ratio, which is clinically important. Regarding our access products, we continue to innovate and provide additional tools to make accessing the neurovascular anatomy easier and easier, whether from a femoral or radial approach. Our Immersive Healthcare business is developing novel technology for physical rehab and mental health issues with the additional focus on being able to provide individualized patient monitoring an assessment as well as an in-home solution. We are working closely with the Department of Veterans Affairs on developing this technology as well as validating the pathways of care for these therapies. Now I'd like to do a deeper dive into our thrombectomy products. Our unique products remove blood clots from the brain, the arteries in the body, the veins, pulmonary arteries, and the heart. 2023 is the year Penumbra launched our true second generational platform technology, computer-assisted vacuum thrombectomy or CAVT for short. This technology is the result of almost 20 years of incremental innovations that have led to this transformational second generational platform. CAVT now exists for arterial with Lightning Bolt 7, DVT and PE with Lightning Flash and Thunderbolt for stroke, which is in an IDE trial. I want to share a few examples of recent cases with all 3 of these products. This first case is a DVT case with Lightning Flash. An elderly patient presented at the hospital with an occluded iliofemoral vein, which the physician anticipated to be chronic. This hospital is new to Penumbra's technology for DVT and PE. Flow was completely restored after 1.5 minutes of aspiration time and the patient symptoms resolved. As you can see from the picture of the clot here, some of the clot has a white color, which is indicative of a much older, more chronic clot. The next case is a pulmonary embolism case. This patient presented with severe shortness of breath and a CT revealed a bilateral pulmonary embolism. With only 5 minutes of total device time, both the right and the left were treated and the patient's O2 saturation improved from 88% to 95% and their PA pressures dropped from 40 to 20 on the table. This physician was also new to our technology when he did this case and has since adopted Lightning Flash for both DVT and PE cases. This next case -- I'm sorry, this -- here we go. This next case is an example of clot in the arteries in the leg. This case is actually quite extraordinary. One Lightning Bolt 7 removed 4 separate clots very quickly. Again, the physician was new to our technology. This patient is in their early 50s and has a history of Afib. They presented to the hospital with acute leg pain. Imaging showed an occlusion at the popliteal artery. Lightning Bolt 7 was introduced and cleared both the popliteal and the posterior tibial in a single pass. You can see those in the next 2 images. A second pass cleared the peroneal artery but an angiogram revealed additional clot in the distal anterior tibial artery. Lightning Bolt 7 was about 5 centimeters away from this clot. You can see that in the second to last slide. And it was unable to track further because of the length of the catheter. However, the physician turned on the system anyway and after less than 5 seconds, Lightning Bolt went into Bolt mode, which indicates that the clot is being ingested. The physician watch the clot come into the tubing as the system returns sampling mode and subsequent imaging confirmed that the clot was cleared. The total device time for this entire procedure was about 5 minutes. The final case is a stroke case. This is a case performed as part of our IDE study for Thunderbolt. This patient had suffered a severe stroke and was not doing well when they first got to the hospital. The clot is in the first segment of the middle cerebral artery. You see that in the red circle there. The physician first use the RED 72 SENDit to get to the face of the clot. The first image shows the blockage and where the clot is located. Thunderbolt was then attached to RED 72 and used to successfully quickly open the M1 occlusion. The second image shows the vessels open after Thunderbolt removed that clot. 24 hours after the procedure, the patient was doing really well. These 4 cases represent the best-in-class technology for thrombectomy now. 2023 also had 2 other significant milestones for our thrombectomy business. First, we estimate that in 2023, over 100,000 patients were treated in the United States with our thrombectomy products, a significant milestone but we believe it is just beginning. The second milestone in 2023 was the clear communication from our customers including a significant number of new users of our thrombectomy products that our second-generation technology or CAVT, was proving that the technology was now so good that they wanted to start doing the work together with their hospital systems to expand the pathways of care for their thrombectomy patients to be successfully treated with our products. This is significant. This huge interest has created significant momentum in bringing our CAVT platform to more and more people in the United States. In fact, we believe that our U.S. thrombectomy business will grow over 25% this year. Now let's turn our attention to the specific vascular beds and review our market share in the United States for thrombectomy and the opportunity in front of us for the next several years in the U.S. before we also get to bring our CAVT platform to the rest of the world. Focusing on stroke first, let's look at the U.S. market for purposes of our latest technology where we have our 4 Red catheters and RED 72 SENDit. We currently have 57% share of the current stroke aspiration mechanical thrombectomy market, 28 other catheters compete for the remaining 43% share. We estimate the mechanical thrombectomy in any form is used only 30% of the time to treat large vessel strokes. So we have an opportunity to both gain share of the current mechanical thrombectomy market and help increase the number of patients getting mechanical thrombectomy. Now let's look at coronary. Currently, we have 44% of the mechanical thrombectomy market with our power aspiration platform with CAT RX while 5 other manual aspiration products share the rest. With CAT RX, we have the opportunity over time to convert the remaining 80% of patients to a better therapy. Now looking at pulmonary embolism, where we just this past year, we launched our second-generation computer-assisted thrombectomy or CAVT. We estimate that we grew our share of the mechanical thrombectomy market in 2023 from low single digits to about 20%. We think as more and more physicians try Lightning Flash for PE, we have room to continue to gain share with our CAVT platform to be the market-leading product. In addition, that still leaves a significant percentage of the eligible patients not receiving mechanical thrombectomy. Our Storm-PE study is underway and will hopefully unlock the larger group once the trial is complete and after we have broadened our footprint with CAVT. In DVT, we also launched our second-generation CAVT platform this past year and we already estimate that we have almost half the market share with Lightning Flash compared to 9 other products competing for the remainder. Our share has grown significantly this year with Lightning Flash. As you can see on the slide, there are more than 90% of the possible patients to treat who are not getting treated today. In a moment, we'll review the work we're doing to help those patients as well. Finally, let's focus on arterial. We also introduced our second-generation CAVT platform in arterial this past year with the launch of Lightning Bolt 7. We estimate that we currently have about 75% share of the mechanical thrombectomy market with 12 other products competing for the remainder. As you can see from this slide, the vast majority of patients with clot in their arteries are still getting either open surgery or catheter-directed lysis. With the launch of Lightning 7 and the CAVT platform and the work ahead on market access, we are confident that we will continue to grow our arterial business significantly. Recently, we have outlined the 3 areas of work that we are undertaking that will help our thrombectomy technology available -- to be available to all patients that can benefit from these products. The first area is, of course, innovation. We intend to launch 4 new CAVT products within the next 16 months, some sooner than others. These products are intended to fill out the spectrum of needs that our CAVT platform reaches the broadest possible areas in the body and variety of clot morphology. In addition, we have commenced work on integrating the collection of information both procedural and case specific into our CAVT platform to better inform physicians both in real time and in reflection so as to better treat their patients by focusing on the safety, speed and simplicity of each case. This is made possible by the proprietary technology already embedded into our CAVT platform. The second area is the continued evolution of our commercial team. This work started in the very end of the third quarter and took a good deal of effort in the fourth quarter. But most of the work is completed and the team is set up for success in 2024. This evolution has included making sure we have the right team in place with the right numbers of territory managers to take advantage of the opportunity in front of us. This means we're adding roughly 25% more territory managers in Vascular. The majority are already hired and we plan to have the rest hired, trained and fully in place during the first part of this year. Importantly, we saw a noticeable uptick in our peripheral thrombectomy business, starting late November. We believe this is the direct result of new customers getting Lightning Flash and Lightning Bolt 7, as we discussed on our last earnings call, coupled with the changes we have made to our commercial team. This new trajectory gives us a great deal of confidence for 2024 and beyond. The third area of work is our market access effort. This involves working with large hospital systems to first validate the clinical benefit of our thrombectomy products and then review the health economics of our thrombectomy products, which then empowers hospitals to make better informed decisions on treatment paradigms. For the past 20 years, the Penumbra team has worked very hard to continuously innovate and in so doing, has built what has become the largest thrombectomy company in the world. We're moving blood clot from head to toe. With that effort, we understand that we now have the privilege to work with hospital systems and physicians to make our technology available to everyone who can now benefit. That work will be hard, but motivating and profound. I believe our team is not only ready but fully engaged in doing so. Thank you.

Great. Thanks, Adam.

I want to start realizing you haven't preannounced fourth quarter yet here. I want to start with your comments for 2024, given everybody is always looking forward. And in 2023, you made comments at a couple sell-side investor meetings that you expect to grow 20% or better, I think, or at least 20%, one of those ways.

There's a difference.

So why don't you tell us what it is? And then give us -- what's driving the confidence to make that so early in 2023 before guidance was even ready?

Yes. So first of all, it's a fair question. What I specifically said was -- we thought 20% growth was achievable if I quote myself pretty accurately. The reason we said that was really -- just in reaction to what we saw our business -- what was happening with our business. This is not -- first of all, this is not linear growing at the scale that we're doing it at $1 billion and accelerating that growth is not typical. Our growth rate obviously accelerated in '23, and we think we're going to keep a more elevated growth rate. What we're seeing is, what I laid out in the prepared remarks, which is the technology platform is changing the way these cases are going. It's changing the outcomes, it's changing the perceptions of physicians and hospitals in wanting to treat these patients with mechanical thrombectomy. We had a lot of work to do to be ready for that. And I laid that work out, not just on the innovation side, but in the structure with our commercial team and also in how we engage with the hospital systems so that we can do that work with them. They're asking us to and we're rising to occasion. But we weren't set up. We didn't have a team built around that work because we've never done it before because the products weren't at the level that they need to be in the field to do it until now. So we're obviously seeing that in the prepared remarks. I just said we saw really -- the late November time frame, some of the benefits again not linear, but some of the benefits like taking hold. And that's really exciting. But again, we're not looking at '23 anymore. We're fully into '24 and focused on that and we have a lot of confidence given what we're seeing and the work we've already done.

There's a lot to talk about product specific but I want to start with the different penetration charts that you put out. That was the first time we've seen that level of detail, really helpful. Sort of on the left with share and the right was penetration. And while there were impressive share numbers, especially already in PE going from low single digits to 20% in the U.S., what struck me more was how small the penetration into the addressable markets were for all of the different segments you discuss. So maybe we could start there and focus on one, what can Penumbra do to drive better penetration? And two, what can the industry or what is the industry doing?

So -- that's a really important question. And it's taken us a while, I think, to understand that because each area is slightly different and we learned those lessons from stroke. Where we got to a certain point and stroke was more complicated than these because it involved moving patients from hospital to hospital. Here, you don't have that issue with DVT/PE and arterial. But what we know is that for the first time that we've been in these other vascular beds, the physicians and their hospital systems have wanted to do something about this. Up until then, there were other things they did and they were fine. Open surgery for an arterial clot was fine. And the first time we're hearing not 1 or 2, but a large number of people engage on this. So that's led us to engage and what can we do? And obviously, what one has to learn is what -- let's validate the clinical outcomes are good that this new technology is doing what we think it's doing in scale of numbers, and you can do that relatively quickly when the hospital systems are engaged and then look at the health economics, making sure that it's a viable procedure financially. And when you add those two up, that allows the hospital, as I said in the prepared remarks, to do the work that they need to then do, to make the right decisions on changing their own algorithms or paradigms inside the hospital system, not just with the treating physician. The treating physician has some capacity to do that, but in the most of the time, more so on the arterial side but most of the time, it's a group of physicians that all have to sort of agree and be part of that decision-making process.

I remember 2014, Mr. Clean and then 8, 10 different trials. Global, well run. Tons of patients and that's what was needed to drive stroke and stroke even still is a very low penetration to the addressable market. Do you need that same level of clinical data in all of these peripheral applications and if not, why?

So it's a really good question. It depends on which one. So in PE, our STORM-PE trial is similar to those early stroke trials where we're randomizing this treatment to traditional treatment, which is anticoagulation. That is sort of necessary because you have a whole group of physicians involved in that treatment decision, just like you did in stroke. So there's a lot of parallels between PE and stroke. The only big thing is once those trials are done, you don't have the same issue of moving patients that has kept the stroke numbers from really achieving their biggest potential because of that logistics, you have the patients there already in the hospital. And there's a lot of conversation and I've had with some very senior physicians, the conversation about the mistakes made in the market, development work with stroke and making sure in PE, they're not made. And again, a lot of that is at a system level. On the other areas, DVT and arterial, again, they're slightly different. And the conventional wisdom says you don't need randomized data. There's no question that randomized data needs to answer. You really need other kinds of information and that's what I've alluded to working with the hospital systems to make sure that you can get those patients. It's hard to think about a randomized trial in those areas that would -- what question would it ask or answer that would change those growth curves. They're just different. So we're pursuing less randomized data, more collective system data, health economic data and so on.

If I just focus on Flash for a second, that was probably the most exciting, the most anticipated launch number in 2023. You gained over 15 points of market share, low single digits to 20% in the U.S.

In PE. We gained a lot more in DVT, obviously.

In PE, in that market, it's really 2 competitors that I would say have the vast majority of the share. So my question is, how far can your share go? 15% plus is good. I would imagine you're probably not going to be happy to stop there. How far can you go? And why wouldn't people be using Flash in DVT or PE?

Yes. So well, I appreciate that you know me as well as you do. Yes, I'm not satisfied with anything other than making sure that patients have the best treatment that they can. And I'm very, very convinced that we're offering that now with our CAVT platform, and we're going to make sure that over time, we make that the standard of care. I believe that's very viable. I think that is just a question of innovation. And that's been what's driven Penumbra for the last 20 years. We've just kept going and going, and all those small incremental changes, one little improvement, one little improvement, one little improvement has really allowed us to get to this more transformational point using the computer. Now what's interesting is that now changes aren't just catheter-based. For so long, it was is the catheter a little bigger? Is the catheter a little longer? I mean you heard obviously we could use a slightly longer catheter on the arterial side. We got lucky with that case. But that's sort of the spot we're in. But the changes are also software-based. The algorithms can keep getting better and better. And as that happens, I think it's going to be hard to imagine us not getting significant more share.

So part of adding the software to the hardware is that you can charge a higher premium for higher, more innovative technology?

Yes. That's not the rationale, obviously.

But financially might be the people that one of the...

The rationale is the computer can do what the human hand can't do much better and more efficiently. But yes, there is a -- it costs a little more to make.

And if we're thinking about our models here, I think we've started to see the benefit down the P&L with a pretty significant amount of margin expansion in 2023. So maybe you could speak to, one, what sort of the reception to the higher pricing for the better technology in your customer level? And then how we can think about that moving forward down the P&L in terms of upside to margins?

Yes, good question. The conversations, there's nobody in any hospital system says, "Oh my God, you're raising your price a little bit. Thank you. I'm so glad. At least I'm not aware of anybody who's ever done that. So there is a discussion and a process there. That being said, we are still a fairly priced in the markets that we're in and that allows us to sort of move through that relatively quickly. Over the course of 2023, some of those pricing discussions slowed it down a little, but I'm not aware of any moment, a significant business that we didn't get because of the pricing situation. That being said, I think the -- when you look at the larger health economic piece, it's a very efficient and hospitals aren't losing money when they do the procedure this way. And I think that will help us going forward.

Earlier in 2023 when you launched, there was a little slowness as you mentioned with some of the value committees moving through hospitals. Do you think that's been resolved at this point?

Yes. I wound not articulated as a slowness, I think it was very typical for us. The first wave happened in the first sort of 6 months. The difference was we are adding and still are a significant number of new customers. So we had that many more processes to go through and not just the value analysis committee but then the process of actually ordering it, getting on the shelf and doing all that work. That was just at a level that we hadn't seen in our thrombectomy business ever before. So that also led to reevaluating and making changes in the commercial team so we could do that work more efficiently. When you have 18 to 20 accounts. That's a lot of work when everyone wants it all and that's just different. We hadn't had that. So I'm really, really proud of the team for kind of rethinking and getting organized. The good news is when you're adding people to your sales force and you're doing it in the context of a pretty transformational launch, who you attract is very different. So we've been really lucky to see some incredible talent, some very experienced folks join our team and probably at the level -- at a higher level than ever before in our company's history. And that's partly because of the word out there in the Street and the products that are performing.

We touched on PE, DVT, you said you gained even more share in 2023. So maybe touch on that market, the competitive dynamics you're seeing there and your outlook for that?

Yes. DVT is not -- I mean, we don't have 100% share. So there's always competitive aspects to it. It's not really, in our minds, a competitive play now, it is really just penetration and getting the products where they need to be and getting everyone used and trained on them. And then ultimately, that's an area where getting to all the various clot and all the various locations of DVT will benefit from additional products as well.