Penumbra Inc (PEN) 2016 Q3 法說會逐字稿

Good afternoon, my name is Mariana and I will be your conference operator today. At this time, I would like to welcome everyone to the Penumbra's third-quarter 2016 conference call. (Operator Instructions)

I would now like to introduce Mr. Dan Wilson, Director and Head of Business Development for Penumbra. Mr. Wilson, you may begin your conference.

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 2016. A copy of the press release and financial tables which includes a GAAP to non-GAAP reconciliation can be viewed under the Investor Relations 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 quarter ended September 30, 2016, which will be filed with the SEC on November 3, 2016 as well as those described in our 10K for the year ended December 31, 2015, which was filed with the SEC on March 8, 2016.

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-Q and 10K 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.

Thank you very much and with that I would like to turn over the call over to Adam Elsesser, Penumbra's Chairman and CEO.

Thank you, Dan. I would like to welcome everyone to Penumbra's third quarter 2016 conference call. I am joined today by Daniel Davis, President of North America, and Sri Kosaraju, Chief Financial Officer and Head of Strategy. Let me start by stating that our strategy of building a successful healthcare company is beginning to show results. We are encouraged to see the growth and evolution of our portfolio which has been based on impactful products in areas with unmet clinical needs. Our team's focus remains on driving these and other key long term initiatives.

For the quarter, for the third quarter of 2016, our total revenues were $67.2 million compared to $50.4 million for the third quarter of 2015, an increase of 33.3% as reported. We had a net loss in the quarter of $1.1 million compared to net income of $0.9 million for the same period last year. I will provide a few specific business updates and then hand it over to Sri to cover the detailed financials.

We continue to see strong growth in both our neuro and peripheral vascular businesses. Our neuro franchise continues to strengthen as we have broadened our product portfolio. Our neuro vascular embolization and access products all saw strong momentum and we are pleased I think our progress in executing our strategy in these areas. Most importantly, our team is proud to talk to our customers about our growing range of leading products.

Regarding ischemic stroke, we continue to make strides on market development initiatives to help the roughly 80% of eligible stroke patients that do not currently get treated. We are seeing real effort to change the logistical, political and economic factors necessary to ensure that patients can be treated at the right facilities throughout the world. We have undertaken many public relations and political initiatives in most of the European markets. In addition, this past month, Penumbra hosted a series of events in New York which had an extremely broad impact for patients, physicians and the public.

Through all of these efforts, we are catalyzing a number of great action plans around the world to address this issue. It is important though to remind everyone that this effort will take many years, but it is exciting to see the beginning of real action that will lay the groundwork for future success.

Focusing on the more current market dynamics, following the launch of ACE68 and the presentation of our recent 3D trial data, we have seen direct aspiration continue to garner further support as a foundational treatment technique in mechanical thrombectomy cases. The feedback from customers about our ACE68 reperfusion catheter, validates our view that the Penumbra system is truly best in class. Our hospital and physician customers are becoming more and more aware of the fact that Penumbra has performed the mandated safety testing for our integrated aspiration system for stroke patients which led to FDA clearance.

As we had expected, our competition has ramped up their marketing and sales efforts for the standalone guide catheters. In many instances, they are offering highly discounted or free guide catheters to be used for direct aspiration with our system. It is important to be clear here. The use of a fully tested and validated system is critical and physicians are well aware that Penumbra's integrated aspiration system continues to set the standard as the best performing product in this category.

Switching to our peripheral vascular business, we continue to see great clinical success with Indigo in peripheral thrombectomy cases. As we mentioned on our last call, our efforts with Indigo are currently on working with existing customers to ensure that they have success with a wide range of cases in both the arteries and veins. These efforts are showing positive signs and will be essential in the paradigm shift of acute clot management treatment.

Our peripheral embolization business continues to benefit from our highly unique products and the bolstering of our portfolio earlier this year. Our success in the peripheral vascular space has garnered the attention of competitors both in embolization and thrombectomy. In the long run, we believe this will be helpful to our business. In embolization, it further moves the market from pushable to detachable coils, and in thrombectomy, it helps us with the effort to move away from catheter directed lysis.

As has become customary, I'd like to end my remarks by sharing an amazing experience this past quarter. As part of our efforts to bring awareness to the critical issue of getting stroke patients to an appropriate hospital to be treated, we brought together 22 patients from 22 different states for a series of events in New York City. The events were successful from a public awareness standpoint, but something remarkable also happened. These amazing patients, ranging in age from 22 to 76-years old, bravely shared their stories and their gratitude, with many of them contributing to a video for the ensuing political effort.

Each patient expressed their story with powerful emotion and a strong sense of purpose, creating a very emotional and heartfelt experience. Whether the story was of a young mom of a wonderful five-year old daughter who now gets to share all of life's moments with her, the man who dedicated his life to selling medical devices only to be treated in a life-threatening moment with a brand new medical device, the paramedic who was on duty when he had his stroke, or the college student who had a stroke during an early morning run at school. These and the other stories impact all of us. I know the entire Penumbra team is moved and motivated to work extremely hard to make sure everyone gets this treatment.

There is a growing sense that everyone together, patients, physicians, industry, emergency services, and hospitals, will make the change necessary to make sure everyone possible can be as lucky as these 22 patients.

I'll now turn the call over to Sri for more specific details on the quarter.

Thank you, Adam. For the third quarter ended September 30, 2016 our total revenues were $67.2 million, an increase of 33.3% reported compared to the third quarter of 2015. Currency fluctuations did not have a material impact to our results. As such, we will only be highlighting our reported changes in our commentary today.

Our geographic mix of sales in the quarter was 66% US and 34% international. Neuro and peripheral vascular represented 71% and 29% of sales respectively. Revenue from our neuro business grew to $47.5 million in the third quarter of 2016 from $36.3 million in the same period a year ago, an increase of 30.9% reported.

Our growth in neuro continues to be driven by the growth in the ischemic stroke market. We also saw additional growth driven by our broader portfolio in neuro embolization and access. While we did observe the effects of the summer slowdown, particularly in Europe, we saw continued strength related to the launch of the smart coil in Japan which began last quarter with our distributor partner. We would expect to see more normalized usage related sales in Japan to follow post our launch.

In neuro access, we continue to see some tailwinds from competitor recalls which we believe will be short term in nature.

Revenue from our peripheral vascular business grew to $19.7 million in the third quarter of 2016 from $14.1 million in the same period a year ago, an increase of 39.3% reported. As we discussed on our second quarter call, our year over year comparison this quarter now includes last year's launch of the largest sizes of Indigo, CAT6 and CAT8, as well as our Venus indication. As it relates to Indigo, while it is still early, we did see positive impact from our focus on existing customers. Our sales team is working diligently to help support their physician customers to realize Indigo's full potential. As we have said before, these efforts will take time and we may not see them be immediately reflected in our near-term results.

In peripheral embolization we continue to see the positive effects of our new Lantern micro catheter and its ability to dive new growth for our embolization portfolio. As a reminder, Lantern was introduced earlier this year along with the POD packing coil.

Our gross profit in the third quarter was $42.9 million or 63.8% of revenues compared to $33.5 million or 66.4% of revenues for the same quarter last year. We expect our gross margins over the next several quarters to be around these levels as we move though our new launches and capacity expansion initiatives. In this quarter we also saw the impact from product and geographic mix.

Now moving to our operating expense, total operating expense for the quarter was $44.2 million or 65.8% of revenue compared to $31.3 million or 62.1% of revenue for the same quarter a year ago. As we have previously mentioned, we expected our operating expenses to grow faster than our revenue for the year. Many of our marketing and infrastructure initiatives have begun to take hold in the back half of this year and will continue into next year.

Our research and development expenses were $6.5 million for Q3 2016 compared to $4.6 million for Q3 2015. The increase was primarily due to greater personnel related expenses resulting from increased headcount to support continued investment in our products as well as increases in product development, testing and trial expenses. SG&A expenses were $37.7 million for Q3 2016 compared to $26.8 million for Q3 2015. Our spend increased primarily due to greater personnel related expenses resulting from increased headcount, and increased marketing related expenses.

We had a net loss of $1.1 million in Q3 2016 compared to net income of $0.9 million in Q3 2015. Moving to our balance sheet, we ended the quarter with $141.8 million in cash and cash equivalents and short-term investments.

I'll end with a brief comment on our revenue guidance. As you recall, last quarter we updated our revenue guidance to $250 million to $255 million. We believe we will end the year at the high end or slightly above the high end of that range.

And now I would like to turn the call back to Adam for closing remarks.

Thank you, Sri. This past September we crossed our first anniversary as a public company. We have been humbled by what we have been able to do and remind ourselves of our daily mission by listening to the countless stories from patients who our technology has helped. As we pass this milestone, we are confident in the neuro and peripheral vascular portfolios that we have built and the opportunities that remain ahead of us to impact a large number of patients.

To further that mission, we have invested in our manufacturing capacity with the addition of three new buildings to handle our current growth, two of which are expected to come into service at the end of this quarter. We are investing in new senior management hires as well as dedicating time and effort to empowering our next generation of leaders.

And finally, we are investing in the technology and infrastructure to enable us to scale with this growth. As we have discussed many times, this work will take our effort and focus for years to come. It is important to note however that we are also dedicating significant time and resources to thinking about other areas in which we can profoundly impact people suffering from other medical conditions. We are employing the exact same philosophy, metrics and discipline that have guided us from the very beginning. We are not afraid to think expansively. We look forward to discussing these ideas and opportunities as they take shape.

Thank you. Operator, we can now open the call to questions.

(Operator Instructions). Mike Weinstein, JPMorgan.

I wanted to start, Adam, by saying first off, great quarter. But this is going to be the first really tough comp on your peripheral vascular business given the thrombectomy launch last year and how well that did. But you still managed to grow that business close to 40% this quarter. So could you just spend a little bit of time on the health of that business and maybe shed a little bit of light for us on the businesses within the peripheral piece and thinking about thrombectomy versus embolization? Thanks.

Sure, and I appreciate the opportunity to talk about that. To start on the thrombectomy side, I have to tell you, in all of the time I've done this, it is one of the more satisfying and exciting opportunities and things that we have done. We have seen really amazing success in the beginning of that thrombectomy business. It's a wide range of cases as we've talked about in the past. We're not focused on one particular artery or one particular location, we're looking at removing clots basically throughout the body other than the coronaries and the brain with this product. And that's exciting. But with that comes an awful lot of work. And as I've described on the call, we are focusing on making sure that physicians and their labs have real success. They learn the tricks and the nuances of doing these cases successfully as they continue to broaden their appetite in doing this. It's going to take some time, but it is off to really a great start and I think we will continue to see great success.

On the embolization side, very different dynamic. We launched our product into a fairly competitive and relatively mature market for detachable coils. And the -- our product is very differentiated. It's much larger and much softer and that has allowed us to just do very, very well as we continue to make that product available to a wide range of physicians. So I think the health is great, I think the opportunity in both to continue this, have success and grow, is quite large. And I'm pretty excited about it.

Adam, could you spend just a few minutes on where you're investing? The business is growing extremely well, but we also see that you're investing and we don't have a lot of great insight into whether that's going into sales force, into marketing. Where are the dollars going and can you give us a little bit of kind of insight maybe in terms of anything in the pipeline that you're ready to talk about? Thanks,

Well, I will comment on this. Obviously, I'm not going to detail the exact expenditures, but I will tell you that in order to do what we have done and have the kind of growth, we've had to invest in a pretty wide range of things. I've detailed a little bit about that already on this call. We brought on, we are bringing on three buildings, two of them ready to come into service this month. We are building the technology and infrastructure to support this around systems as well as distribution. As well as what I mentioned at the very end, we are constantly looking at new areas where we can have a big impact.

So I would not single out any one particular area. We are trying with I think the same discipline that we have always had to really thoughtfully pick the areas that we think we can have a big impact and then make sure that we do those areas and spend the money appropriately in those areas very well.

Yeah, and maybe just to add on that, Mike, its Sri. If you look at our income statement and the detail on the operating expenses, our operating expenses grew over 40%. Much of that, actually equally in SG&A and R&D if you look at the year over year growth in those expenditures. And to come back to the four central themes, you have select hires in many of the functional areas, you have the marketing and clinical trials that are beginning to support some of our products, and you have some of the key technology initiatives that will be important for us to scale our growth. And those are generally longer term projects that most companies go through as they get to our size and look to grow. There's also one added one, when we talk about capacity expansion, moving into new buildings, there is some capital required in order for us to do that. There's people involved in hiring to get ready for our production capabilities to expand, so that's another very important and key initiative that we're going after as well.

Excellent, guys. I'll let some others jump in. Again, congratulations. Thank you.

Bob Hopkins, Bank of America.

Thanks and good afternoon. So appreciate the opportunity to ask a couple questions. Sri, I'll start with you just in terms of a guidance question. And then Adam, I have a question for you as well. So Sri, could you just give us a sense as to the impact of the kind of competitive recalls this quarter and maybe what you'd expect in Q4? And then also I was wondering if you could comment just a little bit on the Q4 guidance because it looks like it suggests a slightly down quarter in terms of revenues sequentially and I'm just wondering kind of what would be the factors that would drive that, why would it be down sequentially?

Yeah, great. Thanks, Bob, good question, and love to clarify it. I'll start. So the guidance would suggest essentially a flat sequential quarter. And just to put some context around that, I think as you heard in our commentary today, we feel very excited and enthused about the way the portfolio is progressing and the opportunities in front of us as we get into the back of the year and into next year.

But there are some things that we talked about as it relates to the third quarter. One, the smart coil launch in Japan, and it's a very similar dynamic to what we're experiencing here in the US when we talk about getting coils on the shelf and the consignment process, but the nuance as we do it in Japan with our distributor partner, when we send product here, we're recognizing the revenue. And so that is a meaningful item to point out for folks in the quarter.

Two, you mentioned recalls. It's across two parts of our business, the neuro access side where it wasn't, as we talked about last quarter, it wasn't that we had necessarily a product to substitute, it gave us the opportunity to engage with our customers. We always thought that would be a short-lived opportunity and that is likely the case. And two, there is also a recall on the neuro embolization side that one of our competitors has talked about as being past. So clearly that was also a short-term opportunity.

On the peripheral side, we've talked about our focus on existing customers and our reps are focused on that and there's some context around how we're thinking about our strategy on that side of the business. So hopefully that helps with some of the context, but just to reiterate, we feel very good about the way things are going and the progress that we're making.

Thanks for that. And then is there a way to quantify those things? The situation in Japan and some of the competitive issues just so we can understand the impact on Q3 versus Q4?

Yeah, and we haven't quantified those historically, Bob. I think I'd just ask you, if you look at some of the numbers, the international numbers that we break out, you'll certainly get a sense of the moves in those and appreciate the order of magnitude that we're talking about. And I think on the coil and access side, we haven't quantified those, but again, you'll get a sense as you dig into some of the numbers of what those orders of magnitudes are.

Okay, thank you. And then Adam, real quickly, I was just curious, I?m not sure if you have this data, but since the trial date earlier this year, are you guys getting a sense either anecdotally or maybe you can quantify it, what percentage of the cases out there are now using aspiration alone and is that climbing from Q2 or climbing from year over year? Just your sense on that trend in the marketplace and how it's playing out.

That's a great question. You know, it's really hard as you know from past conversations, to really get an accurate assessment of that breakdown. I can tell you that wherever we go and any of the conferences and so on, the conversation is really all about aspiration right now and its role in this. And that to me is really fundamentally exciting to hear. I think the 68 has really catalyzed those conversations. The product is really performing incredibly well. And I think you can, you know that and I think everyone sees that in the various meetings. To put a number on it is pretty hard for us to do. Obviously none of the companies report in a way that we can have an accurate assessment of that.

Great, I appreciate you guys taking the questions. Thanks.

Larry Biegelsen, Wells Fargo.

Hey, guys, thanks for taking the question. I'll stay with the guidance outline of questioning. Sri, it looks like this year the new guidance is high 30s, 37% to maybe 39%, something like that. Can you talk a little bit about maybe some of the headwinds and tailwinds in 2017? The street right now is I think at about 24% growth, so any color would be helpful.

Yes, thanks for the question, Larry. So I think as we look at going into the back half of the year and next year, some of the drivers, obviously we have now a multi-product portfolio. And behind that are some very interesting growth markets. It was important as we entered this year, it's as important as we go into next year. These are pretty long term, long tail markets that we're involved in.

Too, is the differentiated products that are in the portfolio and our ability to drive leadership from those. And the headwinds, again, I think are very much the same. The markets, these are market development initiatives that need to drive the growth in these markets. Adam touched on that in pretty good detail and has for the last several calls about the action that's being taken to really push the market development efforts. And that will continue to be a multiyear effort to push forward the field of stroke in particular. But as we talk about peripheral thrombectomy and other fields, it's equally the same.

And too, is the same execution around competition that we've been facing for quite a while is certainly not going away and we'll continue to face that next year.

I think as you look at the fourth quarter, to give you some sense of what it looks like as we head into next year, some might be able to look at that to get a better sense of what next year looks like. But again, we're confident, we're excited it's going the way that we expected, and at this time we're not going to comment specifically on 2017.

That's fair. And then just a couple of product related questions. Any update on where you are with the 3D stent retriever in terms of filing and next steps? And Adam, it sounds like Boston Scientific was pretty excited about or optimistic about the ATTRACT study which will be presented in February of next year. But your product isn't in that trial. Do you think physicians will extrapolate to Indigo if that trial is positive and how are you guys thinking about ATTRACT at this point? Thanks for taking the question.

Yeah, thanks, Larry. We'll start on 3D. As you know, I've indicated that we would hope to see 3D available to us sort of in the back half of next year and nothing really has changed on that front. So I don't have a new, any new update or information. As it relates to ATTRACT and the specific DVT or deep vein thrombosis, we are I think equally optimistic as Boston Scientific. We obviously don't know what the data is and obviously are hopefully, very hopeful that it's positive. As you know, the trial does not specific a technique or device, but is really the larger mechanical thrombectomy. So it isn't a question of will doctors extrapolate the product, it is an NIH funded study that is about the larger procedure and not a specific device. So we feel very, very hopeful and comfortable. We think it will be an exciting moment in the field to see that kind of movement assuming the product, the trial, is positive.

Thank you very much for taking the questions.

Jason Mills, Canaccord.

Hi, Adam and Sri, can you hear me okay? Sorry about the background noise, I'm in an airport. So I'm probably missing some, Adam, but this year with the launch of CAT6 and 8, you had POD, you have ACE68, among a few others. It was fairly robust new product launch year for you. You touched on a few that potentially next year, 3D is one of them, but how should we think about what those products contributed to your growth this year relative to underlying market growth which kind of fortunately for you is quite good relative to other medical device markets. But maybe dichotomize those a little bit to give us a baseline for market growth next year.

And then also perhaps beyond what you said about 3D, could you give us a sense for not only new product launch plans, but maybe haven't been on our radar screen to date, but also clinical data. You benefited I think some from some clinical data from the 3D trial this past year. What besides the trial that Larry mentioned in peripheral thrombectomy in terms of data should we expect next year if any?

All right, well let me try to get -- there's about six questions there, so if I don't --

I'm good at doing that.

I'll try to knock them all out. Obviously this year we did have a number of product launches. And the sort of fundamental question is, how much did that contribute? If you look at a lot of them, they were next generation products. They were products like 68 that wasn't additive to a new area or new disease, it was simply our I think constant ability to stay in the lead with the best possible product in the field. So that has always been part of what we've done and we will always continue to do that.

As it relates to the thrombectomy portfolio particularly, there we are just getting going as you know with a year into the newer, bigger sizes. And as I've talked about, there is a lot of nuance to those cases where you're dealing with acute clot in different size vessels whether it's the vein or the arteries. And so there will be obviously continued need to improve in those areas as well.

Data. We don't have any information to give you right now as to particular data, when or where it's going to be announced as it relates to any of these portfolios. We have said that particularly on the peripheral side, that there are certain trials that will be done over time, they're not imminent, as we begin to really understand what we are looking for and measuring as it relates to acute clot management. But we've got a number of people highly engaged in that. The physician community is really incredibly excited to take on that work with us and I can only say stay tuned. But it's certainly not imminent.

Thanks, Adam, for all the color and thanks for dealing with my long question. I'll try to ask a shorter one now. In terms of you mentioned some competition with the guide catheters in ischemic stroke and off label usage due to lack of safety data. But are you seeing any impact on the ASPs within the market, whether it be on the stent retriever side, which is an area you don't participate in, or in aspiration specifically? I'm sure their ASPs are lower, but have you seen any impact on yours either in the US or Europe?

Yeah, we have not seen an impact on our ASPs. I did comment particularly about really what I see as a pretty robust effort to take on what we have done here. And I will tell you, I am incredibly proud and really pleased with the reaction to our work that we have done over the years to really make sure that the products are properly tested and safe and I think we really couldn't be prouder of that.

That being said, guys, and Jason you know this, we started out in this field with these, our competitors, already there. And we have done really I think quite well over the years competing whether it's through really great technology that we've offered the field or just in the sort of daily selling competitive dynamic. And none of that has changed. We feel, again, very strong. Our team I think is the best sales team ever put together in medtech and I couldn't be prouder of them.

Thanks for the color, Adam, I'll get back in queue.

Joanne Lynch, BMO Capital Markets.

Good afternoon and thank you for taking my question. I'm also sitting in an airport. Two questions. The first one has to do with your research and development investments and how you think about moving products through the pipeline and then into a commercial stage. Do you think about them just in the peripheral and/or vascular area or how do you think about adding another leg to the stool?

Let me briefly address that. I've in the past talked about that a little bit. And I think I commented as well in my closing remarks. We are always looking, and really have from the very beginning, if you think about our trajectory, started out with a first product in neuro vascular, we expanded within that portfolio to three other areas, and then I always described it as sort of jumping the fence into a brand-new area, peripheral with one and then expanded to a second within that.

So that is a good model for one to think about how we think about it. But the most important thing is to think about areas where we can have a noticeable positive impact on people who may be suffering from a certain condition. So I use the term that we think expansively and I -- that was purposeful. At the same time, with that we have been very, very disciplined and use a very sort of strong metrics to guide whether we do something or not. And none of that is changing from what we've done all along.

Okay, Thank you very much. I'll end it there.

There are no further questions in queue. I will turn the call back over to the presenters.

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 next call. Thank you.

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