Penumbra, Inc. (NYSE:PEN) Q3 2023 Earnings Call Transcript

Penumbra, Inc. (NYSE:PEN) Q3 2023 Earnings Call Transcript November 2, 2023

Penumbra, Inc. beats earnings expectations. Reported EPS is $0.67, expectations were $0.46.

Operator: Good afternoon. My name is Adam and I will be your conference operator today. At this time, I would like to welcome everyone to Penumbra’s Third Quarter 2023 Conference Call. [Operator Instructions] Thank you. I’d like to introduce Ms. Jee Hamlyn-Harris, Investor Relations for Penumbra. Ms. Hamlyn-Harris, you may begin your conference.

Jee Hamlyn-Harris: Thank you, operator and thank you all for joining us on today’s call to discuss Penumbra’s earnings release for the third quarter of 2023. A copy of the press release and financial tables, which includes a 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-K for the year ended December 31, 2022 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. 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. The corresponding GAAP measures and a reconciliation of GAAP to non-GAAP financial measures are provided in our press release. 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 third quarter. And Jason Mills, our Executive Vice President of Strategy, will discuss our 2023 guidance. With that, I would like to turn over the call to Adam Elsesser.

Adam Elsesser: Thank you, Jee. Good afternoon. Thank you for joining Penumbra’s third quarter 2023 conference call. Our total revenues for the third quarter were $270.9 million, a year-over-year increase of 26.8% as reported and 25.9% on a constant currency basis. Our worldwide thrombectomy business achieved record revenue of $179.1 million, growing 38% on a year-over-year basis. Our worldwide embolization and other revenue was $91.9 million, increasing 9.5% over the same period a year ago. Our global vascular thrombectomy business led our growth increasing 56.9% year-over-year, while neurothrombectomy grew 10.3% year-over-year. We had another very strong quarter in the United States as revenue of $194.8 million grew 30.9% year-over-year, led by total U.S. thrombectomy, which increased 42.1% year-over-year.

Our strong growth in thrombectomy this quarter, during which we did not have new product launches as we’ve had in the first two quarters of the year shows how demand is building for our computer-assisted vacuum thrombectomy and stroke products. In fact, we expect our total thrombectomy growth both in the United States and globally to accelerate slightly in the fourth quarter on a year-over-year basis and we expect growth in embolization and access to be similar to the third quarter. We expanded our gross margins in the third quarter to 65.6%. Strong revenue growth and gross margin expansion coupled with disciplined operating investments and commercial execution made the third quarter the most profitable quarter in our company’s history.

Non-GAAP operating income was a record $33.2 million representing 12.3% of revenue. We posted record adjusted EBITDA of $51.5 million or 19% of total revenue compared to $14.6 million last quarter and 8.9% in the third quarter last year. We also grew our operating cash balance by $27.8 million sequentially. Looking forward, we expect to deliver strong revenue growth, gross margin expansion, increasing profit margins and strong cash flow in 2024, 2025 and beyond. Penumbra is the largest thrombectomy company in the world and developing proprietary technologies to take thrombus out of the body, wherever it is from head to toe has always been our mission. Almost 20 years of incremental innovative successes have led to this transformational moment in our company’s history and the thrombectomy market.

We have now successfully developed proprietary computer-assisted vacuum thrombectomy products that optimize the three most important elements of clot removal: safety, speed and simplicity. Lightning Flash and Lightning Bolt 7 and RED 72 SENDit are currently driving our momentum. Because of these products, we expect to achieve an extraordinary milestone during the fourth quarter. We expect to treat more than 100,000 clot patients in the United States during 2023 alone with our thrombectomy products. We obviously still have a long way to go to help the 1,250,000 patients each year in the U.S. that have significant clot burden. But this is a notable achievement for our physician customers and our team. In vascular thrombectomy, we had a strong third quarter.

Lightning Flash and Lightning Bolt 7 delivered strong growth for our U.S. arterial and venous franchises. This success was achieved with over 1,200 total customer accounts, which we define as hospitals using either Flash or Bolt. So in some cases, hospitals are counted twice if they are using both products. As an update on the number of pending accounts, which are in addition to those I just mentioned, we succeeded in obtaining well over 650 new VAC approvals last quarter for Flash or Bolt. And these accounts are now working through the typical supply chain process prior to placing their initial orders. We expect many of these customers to order and begin using Flash or Bolt this quarter. In addition, we currently have at least 600 additional accounts that are still working through the initial VAC process and we expect most of those accounts to order in Q1 or Q2 of 2024.

Therefore, we expect the majority of our potential customer base will have Flash or Bolt on their shelves during the first half of 2024. Once these products are available and starting to be used, our work shifts to going deeper with training and increasing the use of CAVT in cases that currently use open surgery or lytic as the primary mechanism. So far, the reorder rates for both Flash and Bolt are as high as any product we have ever launched in thrombectomy. In the stroke thrombectomy, we are gaining share from our already majority position. RED 72 with SENDit Technology is still early in its adoption curve as many hospitals work through the submission process for this product as well. We currently estimate that we have over 55% share of the U.S. stroke market for aspiration catheters compared to 28 other aspiration catheters that are competing against each other in the rest of the market.

Looking forward, we believe our new technology for both the front end of the stroke procedure, namely trackability with RED 72 SENDit coupled with our innovation for the back end of the procedure, clot extraction with Thunderbolt can drive our share to 70% plus over the next several years. The two questions we get asked the most by investors are. First, are we ready to meet this moment of opportunity in thrombectomy? And second, what specific work is Penumbra doing to bring CAVT to the other 90% of patients who aren’t receiving thrombectomy today. The answer to the first question is, yes, I am confident that our team understands the serious work ahead and is able to meet the moment and think bigger than ever before. Now without sharing competitive information, let me outline the specific areas of work ahead.

Our work is focused on three areas: innovation, internal readiness and implementation of market access work modeled after the historical best companies work for long-term sustainable growth. First, our innovation pipeline is robust. We are hearing from our physician customers as well as hospital systems that computer-assisted vacuum thrombectomy is the future standard for thrombectomy. Over the next 18 months, we plan to launch 4 new CAVT products in the United States. Coupled with Flash and Bolt 7, we expect our CAVT portfolio will drive both market share and market growth in DVT, PE and arterial. In addition to these new products coming in the near term, we have made significant advancements with next-generation technology that could expand both the scope and dominance of our CAVT platform over the long-term.

We will talk more about these developments in the future. But for now, I will say that these technologies will be integrated into our CAVT platform and will be able to provide unique benefits to our physician customers and their hospitals, including further optimizing patient outcomes and physician use. The second area is internal readiness. We have already started serious work on efficient manufacturing at scale, which includes raw material acquisition, stable supply chain and efficient capacity utilization. We have also started the work to bring even more efficiency and scale to our customer and sales field support teams, enabling faster order processing time and [indiscernible]. And of course, we are focused on evolving our commercial team, particularly in vascular.

Currently, our team has a lot to focus on, launching 2 new transformative products in thrombectomy plus continuing to grow with our current coronary thrombectomy product and our market-leading embolization portfolio with an appropriate investment that we believe marries well with our movement to stronger profitability. We will evolve the commercial team over the next 2 quarters, putting a team in an even stronger position to take advantage of the opportunity in 2024 and beyond in thrombectomy. Third, we are starting to implement a strong market access program. Based on best-in-class historical programs focused on our computer-assisted vacuum thrombectomy platform. Internally, we refer to this work as the Penumbra CAVT initiative and it is being led by senior leaders across the organization, including Dr. Jim Benenati, our Chief Medical Officer, and Dr. Ben [indiscernible], our Associate Chief Medical Officer working closely with senior leaders in the clinical specialties of interventional radiology, vascular surgery, interventional cardiology and neuro intervention.

Together with leaders in our reimbursement clinical and commercial organizations and in concert with external partners, we believe this initiative will substantiate the advantages of our CAVT platform over the long-term. With the important work we are doing in innovation, internal readiness and market access, we are well on our way to bringing computer-assisted vacuum thrombectomy to all hospitals treating patients with blood plots across every vascular bed from head to toe in the United States now and internationally as these products become available in the years to come. Indeed, in the United States where we have Lightning Flash, Bolt and SENDit, our thrombectomy business will comprise about 67% of our domestic revenue in 2023 and we expect this to grow to over 70% in 2024.

By contrast, our thrombectomy franchise outside the U.S. will represent approximately 55% of our international sales in both 2023 and 2024 and after which we expect our new CAVT portfolio products will influence our international growth as it is in the U.S. today. Our growth potential over the next several years is significant with our commercial focus on thrombectomy globally, plus where there are opportunities for profitable growth and embolization and access. And we are in the early stages of strong operating leverage while we still make the important investments focused on these 3 areas. The road ahead won’t be a straight line nor will it be free of challenges, but if we continue to do the right things, think bigger and work purposely.

We can help many more patients while stewarding a growing profitable business over the next several years. I’ll now turn the call over to Maggie to go over our financial results for the third quarter.

Maggie Yuen: Thank you, Adam. Good afternoon, everyone. Today, I will discuss the financial results for the third quarter of 2023. Financial results on this call for revenue and gross margin on a GAAP basis, while operating expenses and operating income on a non-GAAP basis. The corresponding GAAP measures and a reconciliation of GAAP to non-GAAP financial measures are provided in our posted press release. For the third quarter ended September 30, 2023, our total revenues were $270.9 million, an increase of 26.8% reported and 25.9% in constant currency compared to the third quarter of 2022. Our geographic mix of sales in the quarter was 71.9% U.S. and 28.1% international. U.S. reported growth of 30.9%, and our international regions increased 17.4% reported and 14.3% in constant currency.

The sequential growth of 3.6% was primarily driven by an increase in our global thrombectomy business of $16.6 million or 10.2%, offset by a decline in our embolization and other businesses of $7.1 million or 7.2%, primarily driven by EMEA seasonality, timing of immersive healthcare milestones and our distributor customer’s mix. Moving to revenue by franchise. Revenue from our vascular business grew to $171.4 million in the third quarter of 2023, an increase of 38.9% reported and 38.5% in constant currency compared to the same period last year, driven by 50.2% year-over-year increase in U.S. vascular trombectomy. Revenue from our neuro business was $99.5 million in the third quarter of 2023, an increase of 10.2% reported and 8.5% in constant currency compared to the same period a year ago, driven by strong performances in Europe and U.S. Turning to gross margin.

Gross margin for the third quarter of 2023 is 65.6%, compared to 63.3% for the third quarter of 2022 and 63.8% last quarter. The sequential improvement is driven by higher thrombectomy product mix, improvement in labor efficiencies and stabilized supply chain environment. Our operations team continues to execute to support the demand, while focusing on these production initiatives that will result in future production efficiencies. While we will accelerate our productivity and scalability investment in the next few quarters, we expect these investment costs will be offset by product mix and continued productivity improvement in the near term, which will enable further margin expansion in 2024 compared to 2023 overall. Now on to our non-GAAP operating expenses, which excludes a onetime expense associated with the acquisition of IPR&D of $18.2 million for this quarter.

And the amortization of acquired intangible assets of $2.4 million for this quarter, the same quarter last year and last quarter. Total operating expense for the quarter was $144.5 million or 53.3% of revenue compared to $127.5 million or 59.7% of revenue for the same quarter last year and $146.6 million or 56.1% of revenue from last quarter. Our research and development expenses for Q3 2023 were $21 million compared to $21.3 million from Q3 2022 and $21.5 million from last quarter. SG&A expenses for Q3 2023 were $123.5 million or 45.6% of revenue compared to $106.2 million or 49.7% of revenue for Q3 2022 and $125.1 million or 47.8% of revenue last quarter. We recorded operating income of $33.2 million or 12.3% of revenue in the third quarter of 2023, compared to an operating income of $7.8 million or 3.7% of revenue for the same period last year an operating income of $25million or 7.8% of revenue last quarter.

We continue to invest to support volume growth and long-term projects that allow us to continue to scale the organization into the future, while creating a balance on disciplined spend in the present. We believe it is worthwhile to highlight our adjusted EBITDA, which excludes a onetime expense associated with the acquisition of IPR&D of $18.2 million and stock compensation of $14.1 million, $12.8 million and $9.7 million for this quarter, last quarter and the same period last year, respectively. We posted record adjusted EBITDA of $51.5 million or 19% of total revenue compared to 14.6% last quarter and 8.9% in the third quarter last year. Turning to our cash flow and balance sheet. We ended the third quarter with a cash, cash equivalents and marketable security balance of $248.9 million and no debt, which is an increase of $27.8 million from the last quarter.

The sequential increase in cash is driven by an increase in profitability and improvements in working capital turns. And now I would like to turn the call over to Jason to discuss our guidance.

Jason Mills: Thank you, Maggie, and good afternoon, everyone. For the fourth quarter of 2023, we expect total company revenue growth to accelerate to 28% to 31% year-over-year, which correlates to the midpoint of our annual guidance range of $1.050 billion to $1.070 billion for full year 2023. We expect global thrombectomy revenue growth to accelerate sequentially from the third quarter and expect our geographic mix of sales between the United States and international markets to be similar to the third quarter levels. I will now turn the call back to Adam for closing remarks.

Adam Elsesser: Thank you, Jason, Maggie and Jee. As CAVT becomes recognized as the future of thrombectomy, our team appreciates the serious and important work ahead. I outlined the initial phase of that work during my earlier remarks. With this opportunity in front of us, we are all in as we proudly accept the challenge to meaningfully change the number of people who benefit from our innovative technology. Thank you. And thank you, operator. We can now open the call to questions.

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Q&A Session

Operator: [Operator Instructions] And your first question comes from Robbie Marcus with JPMorgan. Your line is open.

Unidentified Analyst: Hi, this is actually Lilly, I’m on for Robbie. Thanks for taking the question. Two quick ones, I’ll ask them together. Why not raise the guide by at least to be – is that just conservatism? Or are there other dynamics we should be keeping in mind for the rest of the year? And related to that, reiterating the guide implies a softer fourth quarter than what the street was thinking. So what’s the driver of that? And how should we be thinking about the fourth quarter? Thanks so much.

Jason Mills: Yes. Thank you for the question. I’ll take that. This is Jason and then Adam can jump in if he likes. First, I would say the expectation that our business will accelerate to the fastest pace of the year, 28% to 31% year-over-year growth is really a positive reflection of the momentum we have right now. This guidance takes into account many things, the progress and timing with the new customers getting approvals and placing their first orders, timing of the new products and market development initiatives. But let me give you just a little bit more context on our guidance. Our thrombectomy business worldwide, as you saw, grew 38% in the third quarter. Our guidance anticipates global thrombectomy to accelerate to 40% plus growth in the fourth quarter.

It also anticipates our U.S. thrombectomy business will grow even faster than this in the high 40% range. That said, while our embolization and access businesses are market-leading franchises, they are in more established markets. So we expect growth here will be in the high single digits, which is similar to the third quarter. As we move forward, more and more emphasis, as you can probably hear across the organization will be on thrombectomy, where markets are underpenetrated and where we have a platform technology with CAVT that we believe will be the future standard. So overall, we’re excited about where we’re going.

Operator: The next question comes from the line of Larry Biegelsen with Wells Fargo. Your line is open.

Unidentified Analyst: Hi, it’s Lei calling in for Larry. Thanks for taking the question. One for Adam. Adam, recently talked about 20% sales growth outlook for 2024. Can you just comment on your confidence on that outlook? And what are the key drivers on the back of your strong Q3 report? And if I may have a follow-up on that, you previously expected to exit this year with mid-60% gross margin, low double-digit operating margin. You obviously already got there in Q3. So if you can comment on how to think about that exiting the year and into 2024. Thank you.

Adam Elsesser: Yes. Thank you, Lei. Let me start with the ‘24 guidance. We are very confident in what I said at your conference as at least 20%. Our plan is to give formal guidance on our fourth quarter call, which is our typical pattern. And at that point, we can give the nuance around that specific guidance. But obviously, if you hear what we’re saying about the business and how it’s setting up, we’re obviously very confident in that at least 20% number. As it relates to the profitability margin, I will comment briefly, and then Maggie can comment more specifically. It is really important for us to run a profitable business and to increase that profitability that has been something we’ve prided ourselves in a long time.

And now more than ever, I think the world is agreeing with that. The profitability is a very important measure. You heard it in the prepared remarks, we’re setting ourselves up to run this to be more and more profitable. But Maggie can be more specific.

Maggie Yuen: Yes. I feel really good about our profitability trends. I think more important to note is we are reaching a sustainable level of profitability, both in gross margin and overall operating margin. We will continue to invest in investment in a number of initiatives. But as you mentioned earlier, with the trend of increasing thrombectomy product mix, we continue to scale and leverage the overhead. We expect to continue to see gross margin and overall margin expansion moving forward for next quarter and in the longer term. Thank you.

Operator: Your next question comes from the line of Margaret Kaiser from William Blair. Your line is open.

Unidentified Analyst: Hi, everyone. This is [indiscernible] on for Margaret. Thanks for taking the questions. So kind of another one in terms of the Q4 guidance. Obviously, you mentioned that 30% plus heading into the quarter and the 28% to 31% guidance today. So – just wondering if anything has changed or maybe that implies any rate of seasonality. And then just what that assumes in terms of the rate of VAC approvals in Q4 relative to last quarter?

Jason Mills: Yes. Well, thank you for the question. Nothing has changed. As you can hear, at the beginning of the year, we talked about our guidance being $1 billion. So it’s come up quite a bit through the year. And – last quarter, we gave an accurate assessment of how we thought the second half of the year was going to play out, and nothing has changed from that. If anything, I think you’ve seen the growth and we started to talk a little bit more, I think give you a little bit more specifics around our business from a thrombectomy versus embolization perspective, which gives you a sense, I think, the strength is coming perhaps even more from the thrombectomy business globally. And then obviously, in the United States, it’s even stronger. So if anything, I think that’s the change in disclosure that shows the strength in the business and the momentum.

Unidentified Analyst: Awesome. Very helpful. And then just as a follow-up in terms of the progress on the THUNDER trial. So I know I mentioned last quarter kind of the requirement to change the safety endpoint there and adding approximately 75 more patients. Noticed that there were a bit more patients added to the clinical trials website. So just wondering if there were any additional modifications to the trial design there or – just maybe if you could speak to Thunderbolts performance on some of the patients enrolled thus far. Thanks.