Penumbra Inc

NYSE:PEN

Earnings Call Transcript 2021-Q1

[Operator]

Good afternoon. My name is Katrina, and I will be your conference operator today. At this time, I would like to welcome everyone to Penumbra's First Quarter 2021 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

I would like to introduce Mr. Stephen Dobson, Investor Relations for Penumbra. Mr. Dobson, you may begin your conference.

[Stephen Dobson, Investor Relations]

Thank you, operator, and thank you all for joining us on today's call to discuss Penumbra's earnings release for the first quarter of 2021. A copy of the press release and financial tables, which includes the GAAP to non-GAAP reconciliation, can be viewed under the Investors tab on our company website at www.penumbrainc.com.

During the course of this conference call, the company will make forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding our financial performance, commercialization, clinical trials, regulatory status, quality compliance, and business trends. Actual results could differ materially from those stated or implied by our forward-looking statements due to certain risks and uncertainties, including those referenced in our 10-Q for the year ended December 31, 2020 filed with the SEC.

As a result, we caution you against placing undue reliance on these forward-looking statements and we encourage you to review our periodic filings with the SEC, including the 10-K previously mentioned, for a more complete discussion of these factors and other risks that may affect our future results or the market price of our stock, including, but not limited to, the impact of the COVID-19 pandemic on our business, results of operations and financial condition. Penumbra disclaims any duty to update or revise our forward-looking statements as a result of new information, future events, developments or otherwise.

On this call, certain financial measures are presented on a non-GAAP basis. A reconciliation of GAAP to non-GAAP financial measures is provided in our posted press release. We anticipate the prepared comments on today's call will run approximately 20 minutes.

Adam Elsesser, Penumbra's Chairman and CEO, will provide a business update. Maggie Yuen, our Chief Financial Officer, will then discuss our financial results for the first quarter; and Jason Mills, our Executive Vice President of Strategy, will discuss our updated 2021 guidance.

With that, I would like to turn over the call to Adam Elsesser.

[Adam Elsesser, Chairman & Chief Executive Officer]

Thank you, Stephen, and I appreciate you filling in for Jee while she is on maternity leave. Good afternoon, everybody. Thank you for joining Penumbra's first quarter 2021 conference call.

Our total revenues for the first quarter were $169.2 million, a year-over-year increase of 23.2% as reported and 21.5% in constant currency. For the first quarter of 2021, we recorded operating income of $13.5 million or 8% of revenue, compared to operating income of $0.6 million during the same period last year.

Our Vascular business produced outstanding growth again this quarter, with revenue expanding 50.5% year-over-year to $89.2 million, and we believe we are just getting started in Vascular.

Our Neuro business exceeded our expectations in the first quarter, posting total revenue of $80 million, up 2.5% year-over-year. Our Neuro team's extraordinary work following the Jet 7 Xtra Flex recall in mid-December, sets us up well throughout 2021 and beyond as we prepare to launch important new products. Further, we continue to make progress with our REAL Immersive therapeutic platform and we are increasingly excited about the growing opportunities to help patients. And lastly, we saw solid trends in our international business, especially in China. Our first quarter results show that our products are positively impacting more patients than ever before, yet we are driven every day by the number of patients we can still help. We have been purposeful in building a true portfolio of innovative products that has provided us the base to produce durable growth.

Now I'd like to briefly discuss our innovation and portfolio breadth across each of these franchises. Let's start with our vascular franchise. Our proprietary Lightning technology coupled with our latest catheter innovation CAT7 and CAT12 once again drove strong growth in our peripheral thrombectomy franchise this quarter. The effectiveness speed and value of our technology in both these vascular beds is resonating with our physician customers driving increasing adoption of these tools to help patients suffering from clots in their bodies.

Lightning 12 continues to be incredibly successful at removing blood clot in single sessions from the veins and pulmonary arteries. And with the recent PE indication cleared by the FDA and the upcoming launch of Rapid AI's artificial intelligence PE platform, we continue to think our Lightning franchise will drive strong growth for Penumbra in the venous space going forward.

On the arterial side, we launched Lightning 7 to our customers toward the end of the first quarter. The feedback has been extremely positive. CAT7 utilizes our proprietary hypotube lumen maximizing technology which provides to physicians treating arterial clot, a catheter with a smaller outer diameter without materially compromising on the inner diameter, plus it incorporates the significant benefits of our proprietary Lightning technology for blood saving and ease of use.

With both Lightning 12 and Lightning 7, we now have the opportunity to help a significant number of arterial and venous clot patients among both current and new customers. Bringing this technology to all interventional radiologists, vascular surgeons and interventional cardiologists will not happen in one or two quarters. It will take time but we understand the benefits for patients and our team is committed to this mission.

Turning to our coronary thrombectomy system CAT RX again posted record results. And it still has a very long runway in a market we estimate is approximately the same size as the US stroke market. The Society of Cardiovascular Angiography and Interventions updated their guidance late last year to include CAT RX as a viable option for treating large thrombus burden in saphenous vein grafts. And we are investing in further clinical work to expand CAT RX's presence in this relatively large field.

Our Peripheral Embolization business also had another record quarter in the US growing nearly 20% year-over-year. Not only do we have a unique portfolio of products in this area, but we continue to invest in innovation here as well. For instance, one of our newest products Ruby Low Profile or LP once again contributed meaningfully to our Peripheral Embolization growth this quarter.

Overall, within this franchise we are seeing both new physicians gravitate to our products and increasing utilization by our existing customers. In sum, the continued strong performance from both peripheral thrombectomy and peripheral embolization highlight the extraordinary important work our vascular team is doing in this field.

Now let me turn to our neuro business starting with our Neuro Access franchise, which had its best quarter ever. We are seeing increasing adoption of BMX96 as nearly double the number of our neuro physician customers used BMX96 during the first quarter as compared to the fourth quarter when it was initially launched. BMX96 is being used not only in stroke cases, but across all neurovascular cases. Indeed our Access franchise produced double-digit growth in the US alone.

We still have a long way to go with this product in the US and also internationally where we have not yet launched it. BMX96's early success is a good example of why we put so much emphasis on both innovation and portfolio. Products within our vascular and neuro franchises are not only unique, but are also interconnected with other products within each respective portfolio giving physicians a comprehensive solution set to help as many patients as possible.

Looking forward and with a continued focus on both innovation and portfolio we believe we are very well positioned for future growth across all of our neuro franchises stroke, access, embolization within which our SMART COIL line had its best quarter ever and also neurosurgical.

Speaking of our Neurosurgical business, which we don't talk about as much, we had one of our best quarters ever with the Artemis system. It is worth noting that we are investing in the development of important clinical evidence that we believe is necessary to open up this therapy to many more ICH patients in future.

Turning to our stroke franchise. Our business in the US exceeded our expectations. Our neuro team did extraordinary work demonstrating strength, resilience and expertise in the field we were instrumental in helping create over a decade ago. We focus on a few things we think are critical in this field. The importance of offering stroke physicians a full portfolio of innovative products, commitment and service to our customers, and most importantly, the best end-to-end solutions to treat stroke in both large and distal anatomy.

Looking forward, we are excited to bring to customers our newest stroke catheters, the RED Series. In the next several months we hope to introduce RED62, which will be an extraordinary step forward in stroke, intervention for the distal anatomy optimizing trackability and maximizing thrombus removal. We believe that there are still a disproportionate percentage of treatable strokes in the distal anatomy that are not treated because of limitations on technology. We think RED62 will be a cornerstone product helping physicians treat more stroke patients going forward.

Further we look forward to launching additional catheters within the RED Series soon thereafter. And we are also excited by the work we are doing to introduce a new paradigm in stroke intervention as well.

I'd like to now focus on the REAL platform. Our vision for REAL continues to expand, as we learn more and identify additional opportunities to help patients within the realms of both physical rehabilitation as well as mental and cognitive wellness. We are fully aware of the unique opportunity we have to do something groundbreaking in virtual reality for healthcare. We will leverage our proprietary technology for fully immersive mobile experiences to make the real immersive therapeutic platform available in all settings in which we believe patients can benefit from virtual reality therapy.

There is already a significant amount of clinical evidence showing the benefits, provided by virtual reality for both, rehabilitation and mental health applications. And we have plans to build on these data, working with some of the world's foremost VR experts in healthcare.

We have a lot of work to do and a lot to prove with REAL in the VR field. But each day we see the potential, to help a great number of people. Later this year, when it is safe to congregate physically, we plan to host an investor meeting focused on our REAL platform. We will update everyone, over the coming months.

Now, let's turn to our international markets. Our business in China, augmented by the new multifaceted agreement we signed with Genesis MedTech Group, last quarter performed very well again in the first quarter. And we are optimistic about additional growth opportunities going forward.

In Japan, we continue to expect solid growth in 2021, and beyond. We also made solid progress in Europe, Latin America and Asia Pacific notwithstanding, some impact from the pandemic. And we expect to see growth in these regions going forward.

I'll now turn the call over to Maggie, to go over our financial results for the quarter.

[Maggie Yuen, Chief Financial Officer]

Thank you, Adam. Good afternoon everyone. Today I will discuss the financial results for the first quarter 2021. Additional details will be contained within our quarterly reports on Form 10-Q.

For the first quarter ended March 31st 2021, our total revenues were $169.2 million, an increase of 23.2% reported and 21.5% in constant currency, compared to the first quarter of 2020. Our geographic mix of sales in the quarter, were 71% U.S. and 29% international.

U.S. and international reported growth of 25.4% and 18.2% respectively, compared to the same period in 2020. Revenue from our, Vascular business, grew to $89.2 million in the first quarter of 2021, an increase of 50.5% reported of 49.1% in constant currency compared to the same period last year.

In the quarter, our Vascular performance were driven by growth in both, thrombectomy and embolization franchises with growth across the Europe and U.S. Revenue from our Neuro business was $80 million in the first quarter of 2021, an increase of 2.5% reported and 0.6% in constant currency, compared to the same period a year ago, driven by growth in our Access franchise across all regions.

Our Neuro business increased 0.3% sequentially, driven by growth in the U.S. Japan and China, partially offset by decline in Europe and Latin America with the resurgence of COVID impact.

Gross margin in the first quarter was 65.8%, compared to 64.1% in the same quarter last year, and compared to Q4 2020 gross margin of 56.5% and non-GAAP gross margin of 65.2% excluding the product recall impact.

We have implemented additional safety protocols in our manufacturing facilities with the resurgence of COVID cases in California in the beginning of the year. And I'm proud of our ability to continue to scale production capacity to support our expanding portfolio of products.

Looking forward, our gross margin could fluctuate slightly due to price and product mix. Total operating expense for the quarter was $97.9 million, or 57.8% of revenue, compared to $87.4 million or 63.6% of revenue for the same quarter last year. Our research and development expense for Q1 2021 were $18.1 million, compared to $12.9 million for Q1 2020. We will continue to invest in product development and platform capabilities.

SG&A expenses for Q1 2021 were $79.8 million compared to $74.5 million for Q1 2020. The increase is mainly attributable to investment in commercial resources, and we have also seen domestic travels and other in-person activities gradually increase over the last few quarters.

For the first quarter 2021, we recorded operating income of $13.5 million, or 8% of revenue compared to operating income of $0.6 million for the same period last year. We ended the first quarter with cash, cash equivalents and marketable securities balance of $242.6 million. Usage of cash in the quarter is attributable to the product recall and raw material purchases for new product launches.

And now, I'd like to turn the call over to Jason to discuss our 2021 guidance.

[Jason Mills, Executive Vice President of Strategy]

Thank you, Maggie, and good afternoon, everybody. With the update of our first quarter results, we are formally increasing our 2021 revenue guidance range to $695 million to $705 million, which would represent 24% to 26% growth over 2020 revenue of $560.4 million, illustrating continued momentum expected in our business. This updated guidance compares to our original 2021 guidance range of $675 million to $685 million, given on our fourth quarter call in February.

We see multiple drivers of growth and continue to expect our revenue to increase throughout the year. From a year-over-year standpoint, we expect our second quarter growth rate to be higher given the outsized impact of the COVID pandemic during the second quarter of 2020.

On a quarter-over-quarter basis, we expect growth to be higher in the second half of the year as we expand the rollout of new products including Lightning seven and the RED Series of stroke catheters as hospital value analysis committee's work through several products introduced during the pandemic.

Overall consistent with our approach to setting guidance in the past, our updated 2021 revenue guidance represents current views on our markets, timing of new product launches and other relevant inputs.

I will now turn the call back to Adam for closing remarks.

[Adam Elsesser, Chairman & Chief Executive Officer]

Thank you, Jason. In the last several earnings calls, I have acknowledged the amazing work our customers have done, the dedication of our production workers and the entire team that has supported their work, during the heart of the pandemic and the extraordinary innovation from our engineers.

Today, I would like to specifically call out our field-based sales and clinical teams throughout the world. You all have stayed so focused and passionate on being available for your customers and through them the patients they treat. Your work has always been best-in-class. But during the past 12 months, watching your engagement and dedication has been inspiring.

I also want to say that this past quarter we lost a valued member of our sales team to an untimely passing. I know the entire team will join me in acknowledging his character and his extraordinary contribution as well as our deepest condolences to his wife and children. We love and we'll miss you. Thank you. And now we'd like to open the call to questions. Operator, please go ahead.

[Operator]

[Operator Instructions] Your first question comes from the line of Robbie Marcus from JPMorgan. Your line is open.

[Robbie Marcus, JPMorgan]

Great. First off, congratulations on a really nice quarter.

[Adam Elsesser, Chairman & Chief Executive Officer]

Thanks.

[Robbie Marcus, JPMorgan]

So Adam it'd be great -- really got two questions. I'll just ask them upfront here. One it seems like you have some really good momentum coming out of first quarter. It'd be great to get a sense of how it progressed and really importantly how you exited and the trends into second quarter here so far?

And then maybe just probably part of that is a lot of people after XTRA FLEX was pulled in fourth quarter were concerned that you'd lose a good chunk of those sales. Maybe just speak to what you've seen within stroke in -- around the world and have users migrated and stayed within the Penumbra platform? Thanks.

[Adam Elsesser, Chairman & Chief Executive Officer]

Yes. Thanks, Robbie. Those are great questions. So I'll start with the first and sort of the trends. There's no question that some of our business in the early weeks of the quarter in January when things were looking a little more difficult or feeling a little more difficult with the pandemic were a little lighter. But as you know a lot of our business is more sort of emergent and therefore wasn't as impacted maybe as others. But there's no question we saw that improve throughout the quarter.

Hard to tell again given the nature of our business how much of that was the normal sort of quarterly sort of rhythm versus the pandemic. But obviously, we're feeling confident about where we sit right now and the business going forward. As it relates to stroke and that business we've been very fortunate. There's no question that the -- there's been a lot of sort of trialing and moving around. We commented on that earlier and in the fourth quarter call around that business.

But the success of our product line in stroke the whole product line the JET 7 Standard Tip as well as the ACE68 in markets where that is have continued to perform really well. And we have seen doctors who have tried other products and other companies aspiration catheters come back to us. We think there's more room to go there and we think we're really positioned quite well as both the RED62 comes out but also the other catheters in that series in the back half of the year. So we're feeling optimistic.

[Robbie Marcus, JPMorgan]

Great. Thanks, Adam.

[Adam Elsesser, Chairman & Chief Executive Officer]

Thank you, Robbie.

[Operator]

Your next question is from the line of Larry Biegelsen from Wells Fargo. Your line is open. Once again, Larry Biegelsen from Wells Fargo. Your line is open.

[Larry Biegelsen, Wells Fargo]

Hi, Adam. Can you hear me?

[Adam Elsesser, Chairman & Chief Executive Officer]

Yes, Larry.

[Larry Biegelsen, Wells Fargo]

Okay. There was a problem with I think my phone. Apologies for that. And I missed the last part. I did want to ask about RED62. Can you comment on the timing? Is this the next-generation workhorse kind of aspiration catheter which will kind of replace ACE68, JET 7? And kind of what are the benefits of this catheter over current catheters? And I did have one follow-up.

[Adam Elsesser, Chairman & Chief Executive Officer]

Yes. Thanks, Larry. So we -- in the prepared remarks and I realize everyone's got a busy day and other companies. So in my prepared remarks, I commented that we're hoping to be able to have that product in a couple of months RED62. So RED62 is obviously a little smaller than the other catheters and we think it will play a big role in the sort of growing interest in discussions around treating more distal strokes.

Right now there's some limitation on some of the technologies to do that and we think RED62 will play a pretty important role in helping to treat more and more of those strokes that are -- that may not be treated now because of technology limitation. As it relates to other sizes in the RED Series we did -- I did comment that we will have additional catheters in the RED Series that will follow the introduction of RED62, but I didn't give a more specific time frame. But it will follow that time frame that I outlined for 62. So yes we think 62 will matter, but it won't -- it's not meant to replace the larger catheters that will be coming after that.

[Larry Biegelsen, Wells Fargo]

That's very helpful. And then one on Lightning 7. Indigo has historically been stronger I think on the arterial side than the venous side. In the past it was about two-thirds to one-third in favor of arterial. How do you see that changing in 2021 and beyond? And can you put the launch of Lightning 7 at the end of Q1 in context for us? Thanks for taking the questions.

[Adam Elsesser, Chairman & Chief Executive Officer]

Yes. No, that's a really good question. And if I had different sales teams selling the -- Lightning 7 versus Lightning 12, I would absolutely use your question to challenge both of them to outdo each other. But since it's the same team, I can't get away with that. We look at those two products really as complementary. And the scale of work to be done both on the venous PE versus arterial is so open. There are so many PE patients that we can still help. So we don't really look at it as, which will grow faster per se. I think it will depend obviously on each physician and region and so on. But the opportunity now that, we have brought Lightning technology to both sides of that, and really updated the catheter technology with sort of CAT7, CAT12 with the new – sorry, hypotube technology that we're finding really, really successful, I think we're going to have some real success in both of those areas. Which will outgrow the other? It's hard to know right now. And let's hope they're pretty – they're both successful. I think patients will benefit.

[Larry Biegelsen, Wells Fargo]

All right. Thanks for taking the questions.

[Adam Elsesser, Chairman & Chief Executive Officer]

Sure.

[Operator]

[Operator Instructions] Next question is from Margaret Kaczor from William Blair. Your line is open.

[Brandon Vazquez, William Blair]

Hi, everyone. This is Brandon on for Margaret. First, just a question on guidance. If I'm assuming kind of, relatively small sequential increases in the Vascular segment, maybe that's arguably a little conservative given the strength in the product launches coming up. It kind of – it seems like it implies a low double-digit growth rate is implied in guidance for the Neuro portfolio. Is that math fair? And is that kind of how you all are internally thinking of the split between the peripheral and Neuro growth through the year?

[Jason Mills, Executive Vice President of Strategy]

Hey, Brandon good to hear your voice. It's Jason. So I'll take that one, and then maybe Adam can add on, if he wants to. So we don't obviously break out the growth expectations between Vascular and Neuro. And so the commentary was meant to help sort of on a – both a year-over-year and a quarter-over-quarter basis. I think it sounds like you heard and understood that guidance from an overall perspective pretty well. We also commented that, the back half of the year we expected sequential growth to be larger. And we highlighted products on both the Vascular and the Neuro side. And so I think those comments about the overall business, obviously, given we were highlighting products in both franchises apply respectively.

[Brandon Vazquez, William Blair]

Okay. That's helpful. And on the Vascular side, this business just continues to perform really well. I was curious, if you could kind of give us on the – in the field what's kind of different than a year ago? A year ago, the business was growing really well on both a year-over-year basis and a sequential basis. And it seems like in the last maybe two quarters, it's really inflected to the positive side, and it's gotten even better. What's kind of changed out in the field in the last couple of quarters? And I guess, part of the question is trying to understand, what's changed and how durable is that change?

[Adam Elsesser, Chairman & Chief Executive Officer]

Yeah. Brandon thanks. It's a great question. A couple of things have changed and maybe it's sort of a combination of all of this. The first and most obvious, of course is, the launch of our new catheters in Lightning. The combination of those really with the technology in those catheters to allow them to perform the way, they do track as well as have sort of the larger lumen with the smaller outer diameter has been hugely valuable. And then combine that with Lightning, which both, for blood saving, but most -- as important ease of use for the customers, the feedback has just been extraordinary.

So the product has really evolved. As you know, we take on these areas like, blood clot in the body. And we just keep innovating and innovating, until the cases become easier-and-easier. And this is a big step forward in that technology.

You combine that with the focus around a need for single-session treatment, where the patient wouldn't have to go to an ICU or a monitored bed for a period of time like, when they are treated with lysis. And the need for that during the pandemic last year, I think gave -- a more attention to the need to remove blood clot in single-sessions.

So I think it's a combination of those things. I also -- there's other companies who are doing the same thing with different technology that is bringing more-and-more awareness. When you add it all up, I think people are just now focused on the idea that, there are a lot of folks who have blood clots in their body. And what we were doing is not as good as what we can do.

And so we have a lot of optimism. As it relates to how durable, I think it's quite durable, and as you know, from our history where even though Lightning and CAT7 and 12 are really a huge step-up, we're not done innovating.

And so we want to keep pushing this, and pushing this to the point where removing blood clot becomes a relatively straightforward and not a significant procedure. And we think we can get there. So yes, I do think this is going to be durable for quite some time.

[Brandon Vazquez, William Blair]

Got it. Thank you.

[Jason Mills, Executive Vice President of Strategy]

Yeah. Thank you.

[Adam Elsesser, Chairman & Chief Executive Officer]

Thanks, Brandon.

[Operator]

Next question, we have Bob Hopkins from Bank of America. Your line is open.

[Bob Hopkins, Bank of America]

Hello. Thank you and good afternoon. Just want to follow-up on, two things, if okay. The first one is on China, and you guys had put in some disclosures of a pretty robust amount of revenue from China in the fourth quarter.

I'm just curious, as to kind of how that played out in the first quarter? Did you see sort of the same level of revenue? And then maybe, if you could just talk about the outlook for China broadly this year would be great.

[Adam Elsesser, Chairman & Chief Executive Officer]

Yeah. Thanks Bob. It's a great question. As we announced -- when we had that announced quarter the deal we signed with Genesis is really a multifaceted deal that -- around five of our Neuro products. And we think it has a great potential for us over the next number of years.

But we also -- as I said in the prepared remarks today, it's the beginning. It's -- we think there's more we can do even than that in China. So yes, we had another good quarter with China. And we think going forward we will continue to see that playing an important role for us. And we're excited about it to bring this technology first with these products in neuro and then across our larger portfolio to that country.

[Bob Hopkins, Bank of America]

So, two other things on that. One is just going back to the 2019 Analyst Day, you guys highlighted a lot of new opportunities. I mean, China I realized as something that was going to be over many, many years, but you did highlight it as a multi-billion-dollar opportunity. And that's what I'm trying to dig here a little bit and understand when that could become a more important part of the story? So I guess, just to drill down a little bit more to the degree, you're willing to disclose do you think you'll see continued improvement off of that Q4 base? I mean, did you see that in Q1? Would you expect that for the rest of the year?

And then the other thing I'd love to hear your thoughts around this. On the stroke side you had talked about a couple of things this year, some new product launches and then a paradigm shift. I assume we have yet to hear about the paradigm shift.

[Adam Elsesser, Chairman & Chief Executive Officer]

Yes. So, great questions. So we're not going to start calling out specific numbers in our markets, but the business needless to say for us in China, we think is quite substantial. And again, quarter-by-quarter we're not going to call out those specific numbers, but it performed again this quarter. We called that out in the prepared remarks and was not insignificant benefit, but not dominant. The rest of the business also performed. So I don't want it to be considered either/or.

As it relates to stroke we -- as soon as we can, as soon as it's sort of appropriate from a competitive landscape, I cannot wait to share the products that -- the product that I have alluded to as part of a paradigm shift. But for obvious competitive reasons, which I think everyone would understand as you know we have something like 15 companies now competing in stroke. We're going to wait to share that until the last possible moment, but it's coming. And I feel as confident as ever about it. And I think it will be really, really important for patients.

[Bob Hopkins, Bank of America]

Perfect. Thanks for taking the questions.

[Adam Elsesser, Chairman & Chief Executive Officer]

Yes. Thanks, Bob.

[Operator]

There are no further questions at this time. Mr. Dobson, I turn the call back over to you.

[Stephen Dobson, Investor Relations]

Thank you operator. On behalf of our management team, thank you all again for joining us today and for your interest in Penumbra. We look forward to updating you on our second quarter call.

[Operator]

This concludes today's conference call. You may now disconnect.