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

Okay. So we're ready to kick off. This is the fireside chat with Penumbra. My name is Mike Sarcone. I'm one of the analysts on the U.S. Medical Supplies and Devices team. And with us from the company today, we have Adam Elsesser. He's Co-Founder, President, Chairman and CEO. We've also got Jason Mills, Director of Strategy; and Cecilia Furlong, who is a Director of Business Development, is also here with us. So team, thank you for joining us today.

Yes. Thanks for having us.

Thanks.

Great. So just to kick off, Adam, maybe we could start high level. Can you talk about PEN's mission and how that's influenced the company's strategy. The pace of innovation at the company has been really impressive. We'd just like to get your take on where we stand in the innovation cycle and how you're thinking about key growth drivers?

Yes. Well, let's -- thank you. The mission, just to remind everyone, we started the company really 21 years ago now, which every time I say that, it's a little shocking. But with the simple idea that was fairly controversial at the time of making a product that could easily and safely remove blood clot from the arteries in the brain that have caused a stroke. And it was controversial at the time because that just wasn't done. People thought that, that wasn't possible and it's somewhat of a fool's errand, even some of the folks in -- the operators or the interventionalists in our field. And we did. We made our first product. It looked fundamentally similar in the sense that it was a catheter with an aspiration source, and it worked. It just took a long time. It wasn't efficient. It didn't have the capacity to treat every possible consistency of clot and so on and so forth, and we just kept iterating from there. And we kept making better and better catheters, bigger catheters, more trackable catheters. We improved the aspiration source, went through 3 different pumps along the way. Until we -- then we moved to other parts of the body, of course, because clot was -- is everywhere, and we didn't need to just focus on stroke, which obviously is now the much bigger part of our business. And then a few years ago, we launched the first wave of using a computer to sort of help control that aspiration source. And again, we're in the early stages of that. There's a lot more to come, but that's really been, I think, a major change in the trajectory of the company and really for patients going forward. And I think that's where innovation, as I said, there's still work to be done on catheters, but less pronounced than what I think we can continue to do on the computer side.

Got it. And that kind of gets to my next question. When you think about the innovation road map and, again, you've been on this incredibly fast innovation pace, expanding to different areas of the body. How do you continue to push the limits on innovation? And what do you view as the next meaningful areas of improvement?

Well, yes, first of all, if it's okay, I need a quick shout out to our team at Penumbra, who have been doing this. The folks around R&D and have -- are really as good as anybody has ever been as a team in this med-tech field. Many of them have been there from the beginning. Some have added along the way, but it is just an incredibly creative sort of clever team, if you will, who really looks at problems with a different eye and the ability to solve it. So I'm really happy about that. The next frontier, what can we do? It really comes out of the basic core things. How do we continue to evolve the products so that they just become -- you never think about clot. We've come a long way in 21 years. But you still think about clot as, "Oh, God, you have a clot. What do we do?" Sometimes, it's okay, but a lot of times, it can be life threatening not just in stroke, but obviously in PE, and it can have a devastating effect in the arteries and so on with loss of limbs and so on. So we got to get to the point where we don't think that way because there's a solution that's relatively just, "Hey, we just do it. It's easy, safe, very efficient." And I think we're headed there. I think we have a line of sight there. And that's what unites the whole team, the company, the R&D team to get to that point. And 21 years ago, did I think that would happen? Probably not. We were just trying to make the first one work. But it's really incredible to be able to at least have some line of sight to that ultimate goal.

All right. Great. And Penumbra is in multiple different markets here. But as you mentioned, you started in neuro. And we're on the precipice of another innovative product cycle with Thunderbolt. So I was hoping you can just talk to us about the capabilities there, and what you're planning to bring to market with the technology?

Yes, so the good news is, Thunderbolt is our newest product in neuro where we're bringing CAVT, but we've also had 1.5 years of experience with that same fundamental technology in the arteries already, in the rest of the body. So it's not novel to the field or to the world, it's -- that's a new indication. We've done, at last count I'd lost, but tens of thousands of cases already in the legs, plus, of course, the trial that we did. So that technology, I think, will bring sort of the next logical frontier. And I think it's the start of that of we've now evolved catheter technology in stroke a lot. Catheters, I think we've now found the right size, the trackability with our RED 72 SILVER LABEL with or without SENDit is now really, really good. And I think that's sort of showing that's the right size. You get too big, of course, like with some of these 088 and stuff, it's just too big. Aspiration actually doesn't work as well. And that's just the science behind aspiration. And so I think people are starting to realize that the data is confirming that. And so I think the catheter side is, there's room to go, but it's going to be more incremental going forward. And I think the next step is the other part of the procedure. Once you get the product there, then you still have to get the clot out. And so there at least has always been on in the last 1.5 years in the arterial side on the consistency of fast ingestion times of clot. And it's not just 1 or 2 times, but just the consistency of clot ingestion times. And that's not something that neuro has had to look at yet. So it's a new thought, but it's the next step of the procedure. Getting it there is one thing. How fast can you get the clot out is the next thing. And so there's sort of an obviously -- obvious logic to what this innovation we think will bring to the field.

All right. Great. And I guess just on that front, can you give us an update on where you stand in the path toward commercializing Thunderbolt and what are the milestones we should be looking out for?

Well, we ran our trial. We finished collecting all the data, and we submitted it to the FDA. And when we get approval, we will let you know.

You've been very steadfast on not giving us the time lines.

So I've been doing this a while and predicting working with the FDA on something like this is not something that makes sense to do.

Understood. And when you think about Thunderbolt, do you view this as just catalyzing a product cycle within the existing customer base? Or is there an opportunity for meaningful share gain here?

Yes, I think, there is an opportunity for share gain. I think, again, going back to the most fundamental thing, what does everyone want? They want an efficient case that gets all the clot out and as short a time as possible. Time in any of these cases matters, whether it's on the arterial side or in stroke. But in stroke, it matters a lot because there's been -- the statements time is brain and how many neurons die every second, those things matter. And so efficiency matters a lot. And again, you don't always control that. But when you have technology that's been purposely designed and built to make that efficient, I can't wait to see that out in the field.

And you've also talked about streamlining this procedure, making it a little bit simpler, and that begs the question of democratization and maybe expanding penetration of the market, which I guess has kind of been stuck around the 30% range. how you think about that?

I think it's complicated. I think neuro physicians have done an extraordinarily good job after the stroke trials came out as a group and organized to do the work necessary to try to get patients moved around to the right place and triage the right way. But there's only so much that can be done. And I think that's the topic. I don't think a product changes that per se, unless there's some magic way you don't move patients, the people who have tried that. In the past, there was a company that -- a robotic company that was going to do remote stroke. And obviously, that didn't work. There are some serious issues around where the money flows and payments that make that probably not a viable solution. So it really comes down to the question around where are the physicians, where are the patients. I think that's somewhat independent of Thunderbolt, albeit if it becomes a more efficient procedure, is that going to result in more patients treated just because it's faster and easier. You got to have a little hope out there. So let's hope that, that happens.

And outside of Thunderbolt, understanding you're talking about one single product, not changing the trajectory here necessarily, like when you look out 5 to 10 years, do you see a market that's 40% penetrated or...

Yes, I think there's a natural course that can get you to that number. I think getting in stroke, I think it's different in the rest of the markets we're in, and I'll explain that in a second. But in stroke, because the patients aren't all in the right place to start, that becomes the larger sort of question of, are there more and more doctors to do it, different kinds of doctors to do it. Those are the questions that the field is wrestling with that is not directly related to the product. The good news is on the other areas we do, whether it's arterial DVT or PE, we don't have that issue. Those patients are in hospitals that can treat them interventionally. And so one of the things that I started to remind folks and mention is STORM-PE, which is our randomized trial against anticoagulation and our CAVT product FLASH 2.0. I'm excited about that because they're like stroke, that group of trials and our trials, particularly are like the stroke trials, but without that burden or barrier of moving patients. So I think that group of our data, again, when the trial is done and we see what it all is, has the potential to dramatically change that market.

I definitely want to get into VTE for sure. Just a few more questions on neuro and then we'll get there. I guess what do you think about market growth and what that looks like today in the neurothrombectomy market?

I -- Jason, I don't know if you -- you don't want to share your perceptions on the numbers, I think it's really hard to have exact numbers, but I know you focus on.

Yes, I mean, the stroke market is growing again. That's good news. It's not growing at the pace that our other thrombectomy markets are growing, specifically VTE and arterial. There was a period of time, obviously, after the stroke trials: MR CLEAN, SWIFT PRIME, et cetera, that the market sort of went from 10% penetration to 30%. There was growth commensurate with what we're seeing now in PE and DVT. And then during COVID, as you remember, stroke and heart attacks weren't being treated in hospitals. So you actually saw market down a little bit. We've recovered from that. And so mid-single-digit growth is probably the best estimate we have for the stroke market at this particular moment.

Got it. All right. That's helpful, Jason. And can you just level set us, what's the latest and greatest on where you think Penumbra's share stands in the thrombectomy market?

It's over 50%, certainly probably approaching 60%.

Okay. Great. That's helpful. And I think you already alluded to this, Adam, when you said you think we've got the right-sized catheter and you talked about 088s. But we did recently just see a competitive clearance for an 088 catheter for aspiration. Just wanted to get your thoughts on the competitive landscape, how we may see it evolve and if there's anything we should be keeping an eye out for?

Yes. Again, I don't want to cast aspersions or anything, people can look at that data. I don't think that data was helpful for 088.

Enough said. Okay. And then on the thrombolytic drug front, is there anything that we should be on the lookout for?

I don't -- if the question is like as a competitor?

Yes.

I don't think so. I'm heartened to see that there's still work being done on that category. Just to again, sort of level set, there are way more than the 200,000 strokes every year in the U.S. Those are just what are defined as sort of large vessel strokes, where we're indicated to go after that. The rest, and it might be as much as 1 million people have smaller strokes or lacunar strokes. And those are the strokes that need those -- that constant innovation on thrombolytics. So I'm glad to see that's happening. I don't see them as competitive between us and them.

Got it. Understood. And I guess just on that topic tangentially, I mean, do you feel like Penumbra is positioned well to attack like the medium vessel occlusion outside of the LVOs?

Yes. So the -- just there's a lot of terms that get thrown around distal, medium, LVO. So we're on label, are indicated for up through the M2 branch. There have been people who have tried to do -- so that's sort of what is normally treated. There have been a very small percentage of the business is for folks who have taken some of our smaller catheters. Our RED 43 is best known for that catheter to go a little further up, started probably some years ago as I'm treating a lesion in M2. It bled into the M3, and I can't just leave it because I'm almost done. So "Oh, I got it out. Wow!." Let's -- so that's sort of how that evolved a little. It's, again, a small percentage. The trials that you're alluding to used -- one used lots of different things, some focused on just stentrievers. I think the data would have been different if they were using RED 43 alone. And so I don't think that's a negative on people thinking that's possible. I also -- it's a small enough patient. I don't yet see physicians in a need like let's study that specifically, but that might change. And we certainly have the product that seems to work really well there. So we'll see. But I don't see that yet.

Great. Okay. That's helpful. And then yes, maybe we can shift to VTE. You've posted 2 really impressive quarters, 40% plus growth year-over-year. I would just love your take on what's driving that growth. I know we have had some competitive disruption due to the acquisitions. I'm not saying that's the -- I'm not attributing it to that, but yes, any color...

Yes, that's -- I appreciate the question. The growth -- the fourth quarter obviously had nothing to do with competitive anything disruption because there was no disruption. And it continued -- and that's because it was what I've said, not to be cute here, but we have a really good product, and it's actually just better. We continue to innovate. This is Flash 2.0, which is obviously the second generation. We iterated that algorithm very quickly to get to a much different place. And so we're able to quickly and safely take out the clot in a way that doesn't compare to more analog technology. And we're only going to make that better and better from here. One can assume that Flash 3.0 will be better than Flash 2.0. That's not to say that 2.0 is not great, but that's been our model for a long time that you can make this faster and better and better and better. So we're going to take share, and I don't see that stopping because we certainly don't have a majority of the VTE business in PE particularly, but we've made some big headway over the last 6 months. Again, that doesn't come, and I say this as a generic comment, not a specific comment, but it comes in waves. It doesn't come in a linear fashion because you're convincing physicians sort of one by one to do something that they haven't done before. And that just takes time. It takes people on the ground, that takes conversations. It takes doctors talking to their friends who have switched or tried things. And that process is, I can assure you, well underway to continue that for quite some time. And it's really satisfying work because you're taking dedicated -- talking to dedicated physicians who have helped build the space who are willing able in case of going, "Wow!, now it just got easier and easier." It got better and better. Like that's how it's supposed to work. And to play a small part in that is very satisfying right now.

That's helpful. And I guess what is your estimate of where your share stands today in pulmonary embolism?

Well, it's -- it probably quadrupled. It's up 4 to 6x in the last -- since FLASH was launched. So somewhere probably approaching 1/3 on its way to 50% going forward, we're over 50% now in DVT. We've crossed that a few quarters ago. So going in the right direction.

Yes, definitely. And so I mean, the 40%, I think if I'm kind of reading your comments right, like it doesn't seem to be sustainable longer term? Where do you think market growth is?

I think people have estimated that in VTE, it's been around high teens, 20% range for a bit. I think that's probably as good an estimate as one can have. Again, that -- our goal in addition to continuing to innovate and make better and better products to take share is also the work we've talked about with market access, where we're going to hospitals with this data from Vizient and sharing with them what it looks like to treat more of these patients, so DVT patients and PE patients. And so that work, again, it's place by place. It's time consuming. But I can tell you that from the ones that we have gone to that have decided to change how they're thinking about those -- that patient group, it changes the growth curve pretty dramatically. And it's good for patients, good for the hospital in the long run. So I'm optimistic about that. On top of that, again, going back to STORM-PE, that's another element that could change that growth rate with that data, again, when it comes out because some of that is being held because we don't have that data. DVT is different. Most people already believe that at least on the iliofemoral DVT side, we should be doing this. So it's just -- it's a question of when -- how do you get those patients to the hospital, what is the protocol when they hit the ER, how do you change some of those things. But it's -- there's less of a need to have that kind of randomized data. We're not hearing doctors say they need that. In PE, that's been necessary.

Right. And you mentioned this before, particularly for PE, those patients are already in the hospital and very available to be mined. So the way you've designed STORM-PE, if the trial hits on its endpoints, like do you think this could be a pretty massive catalyst? I think the readout is next year for uptake.

Yes, so that's -- clinicaltrials.gov says that, obviously. Do I think -- I wouldn't -- I was about to say yes, when you said, will this be a help or whether, and then you used the word massive. And so I'm trying to be disciplined and not use terms like massive. So -- but for that term, I would have agreed with you.

Could this be helpful in catalyzing more penetration?

I think it will help a lot. I mean, we saw -- there's so many parallels to stroke and PE in terms of the group of physicians who are involved and responsible for those patients when they get to the hospital. Interventionalist is one of those, but not the only one and how people sort of think about those patients historically. So I think -- and at least the conversations I've had with many of the leaders of the various groups and societies and [ PERT ] and so on, they have done a lot of work looking at what happened with stroke and what lessons are learned and how to -- they, again, don't have the biggest limitation, which is not having the patients. So I think people are getting ready along -- not us as a company as much as the field is ready. And that's exciting. It's come a long way.

It is. It is, especially given how underpenetrated the opportunity is. And so if we look at stroke as an analog, you talked about there are geographic limitations that kind of put a kind of a cap on where we can get penetration-wise, and that doesn't seem to exist in pulmonary embolism. So where do you think penetration could ultimately go?

Yes. I mean, ultimately, if we're using the term ultimate, so there's no actual time frame on it.

2050. 2050, yes.

I would like to think that everyone who qualifies can get treated. And that seems logical. Again, I'm not putting the term -- I'm using the term ultimate. You have data that says that the patients are all there. Like what causes that not to happen. Again, we have to first finish the trial, has to be successful. But assuming all those things, I think we're feeling pretty optimistic that we can help a lot of patients. And PE has some of the same devastating aspects of stroke. One, obviously, it can be fatal, but it also afflicts a group of patients, sometimes younger patients. Pregnant moms, particularly is a weird subset where we've seen a number of those kind of cases. And there's nothing more profound than being able to actually help patients like that. And you started the talk today asking about our mission. So if you'll indulge me, we had our national sales meeting in January, like we always do, and we invited a patient who was pregnant with her fourth child. Had a fairly significant PE, I believe, coded when she got to the hospital. Revived her successfully with Flash 2.0, and she came to the meeting to share her story with the whole sales team and talk about it. And then utterly unprompted, and this part like still, like wow!, this is a woman middle of the country, she had never been on an airplane before, flew to our meeting with her husband. Her parents or his were taking care of the rest of the kids. Her baby was successfully born, by the way, a couple of -- a week later. And at the end of sharing her story, she looked out at the whole sales force and said, I have one request. And I'm going to look like what's it going to be? She goes, I want you guys to not stop until everybody like me is treated. I was like, wow!, we didn't even prompt that. It was just from the heart, like -- and you know what, if that doesn't remind us why we're doing this and what the important mission is, nothing can. So God bless.

Yes. That's a great story. I appreciate that. And we only have like 25 seconds left. I did want to make sure to touch on profitability. It's been -- you guys have outperformed and it's been a real bright spot among many. So maybe you could just talk about how you're viewing near-term margin trajectory and what the drivers are?

Yes...

Yes, I can start, and then you can jump in. On our last earnings call, we reiterated we expected to expand gross margins this year to over 67%, a 100 basis points and see more expansion in operating margins. The guidance we gave then was 13% to 14%. And then additionally, over a little longer period of time, we did reiterate the comment that we thought we would be at 70% gross margins by the end of next year. And we consistently said that we think operating margin expansion will outpace gross margin expansion. So that gives you a little bit longer framework. But in general, as we -- we're still really underpenetrated in our markets. And, obviously, as we penetrate those markets, the revenue should be even more profitable than the revenue we're currently generating.

Awesome. Very helpful. And that's all the time we have. So Adam, Jason, Cecilia, thank you for your time.