Earnings Call Transcript - PEN Q1 2021

Operator, 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. 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 and CEO

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 are 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. 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. 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. 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. We are also excited about 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. We have plans to build on this 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. 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. We expect to see growth in these regions going forward.

Maggie Yuen, CFO

Thank you, Adam. Good afternoon everyone. Today I will discuss the financial results for the first quarter of 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 and 49.1% in constant currency compared to the same period last year. In the quarter, our Vascular performance was driven by growth in both thrombectomy and embolization franchises with growth across Europe and the 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 a 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. I am 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 was $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 investments in commercial resources, and we have also seen domestic travel and other in-person activities gradually increase over the last few quarters. 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 for the same period last year. We ended the first quarter with cash, cash equivalents, and marketable securities balance of $242.6 million. The usage of cash in the quarter is attributable to the product recall and raw material purchases for new product launches.

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.

Adam Elsesser, Chairman and CEO

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 will miss you. Thank you. And now we'd like to open the call to questions.

Operator, Operator

Your first question comes from the line of Robbie Marcus from JPMorgan. Your line is open.

Robbie Marcus, Analyst

Great. First off, congratulations on a really nice quarter. Adam, I have two questions to ask. It seems like you have some good momentum coming out of the first quarter. I’d love to get a sense of how that progressed and, more importantly, how you exited and the trends into the second quarter so far. Also, many were concerned that after XTRA FLEX was pulled in the fourth quarter, you might lose a significant portion of those sales. Could you address what you’ve observed in stroke around the world and whether users have migrated and remained within the Penumbra platform? Thanks.

Adam Elsesser, Chairman and CEO

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 rhythm versus the pandemic. 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 there's been a lot 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 has continued to perform really well. 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, Analyst

Great. Thanks, Adam.

Operator, Operator

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

Larry Biegelsen, Analyst

Hi, Adam. Can you hear me?

Adam Elsesser, Chairman and CEO

Yes, Larry.

Larry Biegelsen, Analyst

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 and CEO

Thank you, Larry. In my prepared remarks, I mentioned that we expect to have the RED62 product available in a couple of months. RED62 is smaller than the other catheters, and we believe it will significantly contribute to the growing interest in treating more distal strokes. Currently, some technologies face limitations in addressing these types of strokes, and we think RED62 will be crucial in enabling treatment for more of them that may currently go untreated due to these limitations. Regarding other sizes in the RED Series, I mentioned that we will introduce additional catheters following RED62, but I didn't specify a timeline for them. They will come after the timeframe I provided for RED62. We believe that RED62 will be important, but it is not intended to replace the larger catheters that will follow.

Larry Biegelsen, Analyst

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 and CEO

Yes. No, that's a really good question. 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. 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. 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. Let's hope they're pretty successful. I think patients will benefit.

Larry Biegelsen, Analyst

All right. Thanks for taking the questions.

Operator, Operator

Next question is from Margaret Kaczor from William Blair. Your line is open.

Brandon Vazquez, Analyst

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. We highlighted products on both the Vascular and the Neuro side. I think those comments about the overall business, obviously, given we were highlighting products in both franchises apply respectively.

Brandon Vazquez, Analyst

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. 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 and CEO

Thank you for the question, Brandon. Several factors have contributed to the positive shift. The most notable change is the introduction of our new catheters alongside our Lightning technology. This combination has significantly enhanced performance, allowing for better tracking while maintaining a larger lumen and smaller outer diameter, which our customers have found incredibly valuable. The feedback has been overwhelmingly positive, indicating that the product has advanced substantially. We continually innovate in areas such as blood clot removal to simplify procedures for healthcare providers. This represents a significant technological advancement. Moreover, there is an increasing demand for single-session treatments that eliminate the need for patients to be monitored in an ICU or specialized care unit, especially highlighted during the pandemic. This awareness is growing due to the efforts of other companies with different technologies as well. Overall, there is now a greater recognition of the prevalence of blood clots and the potential for our solutions to improve treatment outcomes. We are optimistic about the durability of these changes. Historically, while Lightning and CAT7 and 12 have marked significant improvements, our commitment to innovation continues, and we aim to make blood clot removal a straightforward procedure. We believe we can achieve this, and we anticipate these advancements will remain relevant for a considerable time.

Brandon Vazquez, Analyst

Got it. Thank you.

Jason Mills, Executive Vice President of Strategy

Yeah. Thank you.

Adam Elsesser, Chairman and CEO

Thanks, Brandon.

Operator, Operator

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

Bob Hopkins, Analyst

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 and CEO

Thank you, Bob. That's a great question. As we announced during the quarter, the deal we signed with Genesis involves multiple aspects related to five of our Neuro products. We see significant potential in this partnership over the coming years. Additionally, as I mentioned in the prepared remarks, this is just the beginning. We believe there's even more we can achieve in China. We had another strong quarter there and expect China to continue to play a vital role for us moving forward. We're excited to introduce this technology initially with these Neuro products and then expand it across our broader portfolio in that market.

Bob Hopkins, Analyst

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 and CEO

Yes, those are great questions. We're not going to specify exact numbers for our markets, but we believe our business in China is quite significant. Quarter by quarter, while we won't be providing specific figures, the performance this quarter was once again noteworthy, and it contributed positively, although it wasn't the sole focus. The rest of our operations also performed well, so I don’t want to create a perception that it’s either one or the other. Regarding the stroke sector, we plan to share details about the product I mentioned as part of a paradigm shift as soon as the competitive environment allows. There are approximately 15 companies competing in this area, so we'll wait until the last moment to reveal this information. I feel very confident about it, and I believe it will be extremely beneficial for patients.

Bob Hopkins, Analyst

Perfect. Thanks for taking the questions.

Adam Elsesser, Chairman and CEO

Yes. Thanks, Bob.

Operator, 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, Operator

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