Penumbra Inc (PEN) 2016 Q4 法說會逐字稿

Good afternoon my name is Cheryl and I will be your conference operator today. At this time I would like to welcome everyone to Penumbra's fourth-quarter and year-end 2016 conference call.

(Operator Instructions)

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

Thank you, Cheryl. Thank you all for joining us on today's call to discuss Penumbra's earnings release for the fourth-quarter and year-end 2016. A copy of the press release and financial tables, which includes a GAAP to non-GAAP reconciliation can be viewed under the invertors 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 harbour 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 the reference in our 10-K for the year ended December 31, 2016, which will be filed with the SEC on or before March 1, 2017.

As a result we caution you against placing undue reliance on these forward-looking statements and 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.

We anticipate the prepared comments on today's call will run about 17 minutes. Thank you very much and with that, I would like to turn it over to Adam Elsesser, Penumbra's Chairman and CEO.

Thank you, Dan. Good afternoon. I would like to welcome you to Penumbra's fourth-quarter and year-end 2016 conference call.

I'm joined today by Daniel Davis, president of North America and Sri Kosaraju, Chief Financial Officer and Head of Strategy. I will begin today's call with a few updates from the fourth quarter, a brief recap of 2016, and an outline of a few key areas of focus for 2017. I will then turn the call over to Sri, to cover the detailed financials as well as an overview of our revenue guidance for 2017.

Our total revenues for the fourth-quarter of 2016 were $73.1 million compared to $54.4 million for the fourth-quarter of 2015 an increase of 34.3% as reported. We had an operating loss in the quarter of $1.2 million compared to $1.8 million in operating income for the same period last year.

For the full-year 2016 our total revenues were $263.3 million compared to $186.1 million for the full-year 2015, an increase of 41.5% as reported. We had an operating loss for the full year of 2016 of $1.4 million compared to $4.2 million in operating income for 2015.

In the fourth quarter both our neuro and peripheral vascular businesses saw strong growth driven by several important product and geographic launches as well as an uncharacteristically strong December. These two items contributed to the strong sequential growth that we observed.

With the fourth quarter behind us, I would like to draw your attention to what we believe are some of the notable accomplishments across the company and our portfolio in 2016. Tens of thousands of patients were treated with our products in 2016, and for that we are particularly proud.

What is extremely encouraging is that we made significant strategic strides to strengthen Penumbra's foundation and to position ourselves to treat multiple times that number of patients in the future. We took a number of critical steps to help develop these markets to strengthen our portfolio and to expand our overall capabilities. We strongly believe that we are in the very early innings here at Penumbra.

Within neuro, we estimate 21,000 to 22,000 stroke patients were treated with mechanical thrombectomy in the United States in 2016, which represents only 15% of treatable patients. We dedicated our full attention and resources throughout 2016 to supporting initiatives that ensure that all eligible patients get to an appropriate hospital so they can be treated with mechanical thrombectomy.

These initiatives involve local efforts the efforts at the state legislative level efforts as well as at a national level. It is extraordinarily exciting to work with so many dedicated people in these efforts. With this collective work, we see a time in three to four years when appropriate stroke patients get treated as a matter of standard protocol as opposed to relying on luck.

As we discussed over the last year we have anticipated that mechanical thrombectomy treatment would gradually move towards starting with direct aspiration. We believe that is occurring. We have taken several steps over the last year to further solidify and differentiate our strokes offering.

We enhanced our stroke system with the introduction of our A68 reprofusion catheter and the 3-D trial data, which was presented over the summer, provided community with further clinical support for direct aspiration. In addition, just last week the Astor trial was presented at the international stroke conference in Houston. The data from this independent study further confirms that it is beneficial to use the numbers in aspiration technology front line.

Last year we also laid the groundwork to broaden our neuro franchise which will allow us to see added growth beyond stroke. We are poised to compete more broadly in the neuro coil market and our neuro access platform continues to set the standard in the field.

In peripheral vascular we believe that more than 1 million people each year in the United States suffer from some form of clot in the body. Other from deep vein thrombosis, pulmonary embolisms, or other forms of peripheral arterial occlusions. We estimate that only 150,000 of those patients are interventionally treated each year.

As we are early in the paradigm shift to treat these patients interventionally, we see many opportunities to improve visibility for the disease and to approve existing technologies for treatment. For example, next week at the Society for Interventional Radiology meeting the results of the NIH sponsored Attract study for DBT will be presented. Depending on the results the trial could be helpful in providing a clinical evidence to allow for the shift in treatment practice from anticoagulants to intervention.

As it relates to our peripheral thrombectomy system, Indigo, we have been very thoughtful in our commercial approach but since we are new to the field our work is cut out for us. Our team has invested meaningful time in physician education around Indigo and all its possible clinical uses. Over the course of 2016 we added a significant number of new customers in a measured way to allow us to focus on ensuring proper ongoing usage.

While we are encouraged with our early impact, we know significant effort is required to continue to advance our technology and commercial footprint. Finally at a corporate level 2016 was an important year for Penumbra as we grew our capabilities across several areas.

I wanted to share a few select highlights. We added almost 400 new employees including the addition of several senior leaders across marketing, clinical, IT and business development. And we added three new buildings to increase our production capacity, two of which went into service last quarter. Many of these growth and investment initiatives will continue into 2017.

Furthermore as we look ahead to 2017 and beyond, we are very enthusiastic. The significant under penetration within some of our larger patient opportunities is clearer, our portfolio is more robust and differentiated, and our organization is stronger and poised to continue to innovate and execute. Our priorities heading into 2017 remain consistent with what they have been in the past.

We will continue to focus on long-term growth for our current products in both neuro and peripheral vascular as well as opportunities to make major clinical impact in these areas and others. It is important to note that we at Penumbra measure our success on the longer-term impact that we have always championed.

And while it may not always be linear, we believe that focusing on long-term success will ultimately bear the best outcome for patients, physicians, and our stockholders. I'll now turn the call over to Sri to cover the financials.

Thank you, Adam. For the fourth-quarter ended December 31, 2016 our total revenues were $73.1 million. An increase of 34.3% reported compared to the fourth-quarter of 2015. Our geographic mix of sales in the quarter were 66.5% US and 33.5% international. Neuro and peripheral vascular represented 70.2% and 29.8% of sales respectively. As Adam mentioned, we saw an exceptionally strong December across our business.

Revenue from our neuro business grew to $51.4 million in the fourth-quarter 2016 from $39 million in the same period a year ago an increase of 31.5% reported. Our neuro growth was primarily driven by sales of our A68 reprofusion catheter which is part of our Penumbra system for ischemic stroke.

In the quarter we introduced A68 in Europe following its US introduction in the third quarter. Our neuro growth was also driven by sales of our SMART COIL which is part of our neuro embolization products for the treatment of brain aneurysms. We were encouraged to see another quarter of distributor sales related to the launch of our SMART COILin Japan.

Given increases in sales and consignment inventories in the quarter we are working to increase our overall capacity and replenish low SMART COIL inventory levels. Revenue from our peripheral vascular business grew to $21.8 million in the fourth-quarter 2016 from $15.4 million in the same period a year ago, an increase of 41.5% reported.

Growth was driven by our embolization portfolio which continues to see strong growth from the several new products introduced in Q1 of last year. We also saw strong growth from peripheral thrombectomy with the continued penetration of Indigo across the new and existing customers. Our gross profit in the quarter was $46.6 million or 63.7% of revenues compared to $36.5 million or 67% of revenues for the same quarter last year. Our gross margins remain at similar levels to last quarter's.

Now moving to our operating expense. Total operating expense for the quarter was $47.7 million or 65.3% of revenue compared to $34.6 million or 63.7% of revenue for the same quarter a year ago.

Our research and development expenses were $6.1 million for Q4 Our research and development expenses were $6.1 million for Q47 2016, compared to $5.5 million for Q4 2015. The increase was primarily due to greater compensation expense resulting from increased headcount to support continued investment in our products. Our research and development expense in a given quarter can vary based on the number of clinical trials that were actively running as well as other factors.

In Q4 we closed out clinical trials that were active earlier in the year. SG&A expenses were $41.6 million for Q4 2016, compared to $29.2 million for Q4 2015. Our spend increased primarily due to increases in headcount and related compensation expense.

We had an operating loss in the quarter of $1.2 million compared to $1.8 million in operating income for the same period last year. In the quarter we adopted a new accounting standard related to stock compensation ASU 2016-09, which will be included in the provision for income tax for the quarter. The impact from the beginning of the year will also be applied to our tax provision for full-year 2016.

Moving to our balance sheet. We ended the quarter with $128.8 million in cash and cash equivalents for marketable securities. Our decrease in cash was due to expenses related to our new buildings as well as increase for working capital.

Next I'll cover a few metrics on our full-year 2016. Our total revenues for the year were $263.3 million an increase of 41.5% reported compared to full-year 2015. Revenue from our neuro business was $185.5 million for the full-year 2016, an increase of 31.2% reported.

Revenue from our peripheral vascular business was $77.8 million for the full-year an increase of 74.1% reported. Gross profit for the year was $170.8 million for 64.9% of revenues compared to $124.1 million or 66.7% of revenues for the full-year 2015. Total operating expense for the year was $172.2 million or 65.4% of revenue compared to $119.9 million or 64.4% of revenue for the full-year 2015. We anticipate increased spending as we develop new products, add R&D personnel, initiate new clinical activities, and grow our IT infrastructure.

We had an operating loss for the full year of $1.4 million compared to $4.2 million in operating income for 2015. We had a benefit from income taxes in the year of $15.7 million for the year ended 2016 which includes a benefit of $17.2 million due to the impact of applying the new stock compensation standard to our tax provision. This compares to a provision for income taxes of $1.7 million for the year ended December 31, 2015.

Now turning ahead. We are introducing revenue guidance for the full year 2017 in the range of $312 million to $317 million which represents revenue growth of approximately 20% over full-year 2016. This guidance represents continued strong momentum that we see in our business and reflects normalized comps as well as unique items that we saw in 2016.

Based on our earlier commentary we expect that Q1 will see a sequential decline over the fourth quarter but strong year-over-year growth. And now would like to turn the call back to Adam for closing remarks.

Thank you, Sri. As we head into 2017, I would like to reiterate that Penumbra has built a very strong foundation for its current and future success. We have created the structures and culture to take important ideas and make them a commercial reality that positively impacts a great number of people.

This concept was clearly highly to me at a recent US sales meeting in the first week of January. As is traditional and sales meetings, we have awards for our top performers including territory manager of the year in both neuro and peripheral.

One of the winners of that distinction for 2016 gave a short speech in which he indicated that he has worked harder at this job than any other. But that he has been more motivated and satisfied at Penumbra than any previous job. He described the work highlight of his year when he awoke at 2:30 in the morning when his cell phone rang. Said a quick goodbye to his wife and raced into a local hospital. He arrived to see a family in crisis in the waiting room.

As they cried and prayed for their son and brother. He went into the Andrew suit to help in any way that he could. Within minutes the medical team using the Indigo system was able to treat a patient dying from a huge clot burden and save his life.

This story and the emotion with which it was expressed and felt by our entire commercial team says a lot about their collective character and motivation. I could not be prouder, not just of the amazing innovative products that we have developed but the dedication of our team around the world to get them used to help patients and their families.

Thank you for joining us on the call today. And we will now answer questions.

Your first question comes from the line of Mike Weinstein from JPMorgan Your line is open.

Thank you. First off guys congratulations on the fantastic quarter. Sri what do you think drove the particularly strong December, we don't think of your business as being highly elective.

But obviously, you saw a very strong close to the year. So do you have any thoughts on that, Adam or Sri?

Yes. I think in our comments Adam touched on two things. You highlighted the particularly strong December.

And we haven't seen a December like that which obviously helped contribute to the strong sequential growth as you highlighted, Mike, that's stronger sequential growth than we saw last year. We also saw some continued strength out of Japan. It's something we discussed last quarter as it relates to the SMART COIL.

But I think you're right, The observation is spot on That it was a very strong sequential quarter for us. I will turn it over to Adam for a little more color.

Yes. Thanks Mike, for the question. It's hard to pinpoint it beyond what Sri said to one particular element. End of the years, as you know, always tend to be strong.

It was just a little greater than anticipated. But there was no one particular product or item that stood out. I think just a really very uniquely, or as I said, uncharacteristicly strong finish.

Adam, can you spend a minute on the Japanese coil market? Unfortunately, I actually covered (inaudible) a thousand years ago, so I remember how meaningful the Japanese market is for coils.

Can you remind us of your go-to-market strategy in Japan and the, let's call it, the early success at this point is encouraging? We loved you to spend a minute on what you are doing there and how we should think about it.

Yes. Mike, a good question. I think the fundamental -- there is not a fundamental different between a the way our coil is being seen and viewed in Japan versus any other market.

The fundamental difference is just our relationship -- that we have a distributor relationship as opposed to direct selling. So in the United States and in many other world markets coils are not sold into hospitals, they are consigned.

And so, that process when we have a direct sales force delays the revenue to a company in Japan we are selling it to the distributor which sort of highlights that sale a little faster. And then once they get enough then we see a little bit of a kick down in their reorders as they go through that process. So that is why we are calling that out.

We were pleased to see the success of the coil continue and so they needed to continue to stock, sort of, the next round of [centers]. So that's, obviously can't continue beyond that.

Go ahead.

I've just on market size, just a quick one. If you -- most of the third-party research would have it slightly at under $100 million end user market for coils.

Perfect. That's helpful. Adam, I want to spend a minute on peripheral thrombectomy. They say is going to be a topic we're talking a lot about hopefully, positively next week.

Can you just share with us your thoughts on the success of Indigo in the arterial system versus the Venus system? Were you -- how is it viewed today, obviously we've gotten a lot of feedback from clinicians about its particular use in those two applications. One, I'd like to hear where you think it's particularly successful and two, is there anything you're going to share with us today on where you're trying to innovate and make clot retrieval removal in the peripheral vasculature even more successful beyond just aspiration?

Great question. So on arterial -- in the peripheral side we go after clots both on arterial side and the venous side. Arterial side which shows up mostly in the legs but not exclusively, is much more similar to what we've done for over a decade in stroke.

And that, as I think, allowed us to have pretty quick success out of the blocks with our product in the arterial side. The venous side the clot burdens are much greater. And that requires a sort of different approach, a different tips and tricks, and different sort of mindset.

That's the primary reason that we developed our larger CAT8 size. Which as you know, is pretty large and has the capacity to suck out an awful lot of clots fairly quickly. As we go further into this field, just like we have done with stroke, we are on much later generation 10 years into it.

We will continue to look to make our products better and better. I use the term perfect, particularly as we go into next week with the presentation of [Attract].

Regardless of attract outcome we are committed and believe that the idea of removing blood clot in your leg in the veins in your leg is a good thing. And we are going to continue to make our products better and better.

I think we're really good right now. I think physicians that have used us have found it remarkably successful. But just like we've done in stroke we're never done at developing and thinking how to make this procedure better and better.

We show us anything new this year?

Not on this call.

I had to ask. I'll let some others jump in, thank you, guys.

Your next question comes from the line of Bob Hopkins of Bank of America. Your line is open.

Thanks and good afternoon. Can you hear me okay? So first of all, just to echo Mike, great 2016. Congratulations on a fantastic year.

I want to follow up on a quick issues. First on the guidance for 2017, it's sort of an obligatory question. I think I know the answer but I'll ask it anyway. Obviously your forecasting a deceleration in growth in part because of the larger numbers. I'm just curious though, this is maybe a little below what I thought you were going to guide to.

I assume that's just because of the higher 2016 base and just some conservatism.

Or is there something you want to point to in terms of 2017 from a competitive perspective or something you think the street should be aware of, as we go about modeling in 2017. Or is this just conservatism?

Thanks Bob, that's a great clarifying question and I'm glad you asked it. So one thing is clear as you listen to our commentary and watch the course of last year.

I think you've sensed we've gained a lot of enthusiasm about the markets were in some of the new opportunities. The momentum of our business, again if you look at sort of from a sequential nature continues to be quite strong and as we had hoped and expected. I think there are a couple things that contribute to your question around -- if you're just looking purely at the growth rates.

One, we are now fully normalized as it relates to our comps that we're going into for 2017. What I mean by that is, we had a big comp in neuro that we passed in 2016 and recently passed in the back half of 2016 for peripheral. Two, as you recall and some of our prior calls, we always try to be very transparent about items that happen in a quarter that we think might be not be necessarily repeatable. And we've tried to call those out in great detail.

But as you think about those items and as I've said the idea of repeating 2017 you should think about that as well. A combination of those three things, the (inaudible) momentum, the comps, and then the items that we thought were unique in 2016, I think that's how you can reconcile the growth rate that supply.

Okay. That's fair. It doesn't sound like there is anything structurally or unique that you guys are anticipating a 2017 that folks haven't been thinking through or learning about. Okay.

That's super helpful. And of course the other thing I wanted to talk about a little bit more was on Attract. We've frankly been pretty surprised at the physician calls that we've been doing in terms of the feedback and how critically important this study is to the universal radiology community.

A lot of the doctors we're talking about are talking about the potential for a fairly significant impact on their business. Some guys telling us you can see a four and five fold increase in the number of procedures. I guess my question to you guys is, in your view how do we put Attract into perspective, maybe one easy way of asking the question is what are you assuming in your guidance? And if Attract is a really positive study does that guidance go higher?

I'm just trying to think about Attract and its potential impact if it's positive as so many of the physicians we talk to seem to think it will be?

Bob, good question. And I think first of all, let's not get too far ahead of ourselves. The data hasn't been presented. But if the trial is positive, and it will start, no doubt, to add as a catalyst to change the paradigm that many of these physicians look at when they think about DVT.

From not doing any invention to doing an intervention. So that will be positive. Remember, you know, we weren't in the trial. Our product wasn't available during the trial when it enrolled. So we are not part of it. So we are always going to be playing a little bit of catch-up as a company to the folks that were in the trial.

And we will see a little bit of a delay in that just like we saw several years ago when we had a big trials in stroke and we played that role. With that being said, we feel very confident that our products will be able to be used effectively, are used effectively now and will continue to evolve to be even better and better. I just think it's hard to get the exact sort of growth rate around us.

And I also think we have to be cautious as it relates to us, that we are going to be playing a little bit behind because of the issues I talked about. And Sri may comments on the specific numbers for a second.

On the tail of your question, Bob, on the impact got to guidance. Our view is generally to provide the guidance based on what we see sitting here today. So as Adam mentioned we don't get to know the data.

We're hopeful that it's helpful but we haven't factored anything into that. Any other thing that we don't sit here seeing today.

Okay. That's helpful. One last thing you provided some numbers in terms of the US.

1 million cases out there where there's some type of clot that could be removed. And you mentioned 150,000 being treated today.

150,000, I assume that's the license market, the drug you are talking about. Do you have a sense as to how many mechanicals thrombectomy cases are being done today?

So of the best data that we can put our hands on says it's roughly a little less than half of those 150,000 have some form of device. Many of those devices also use [lytic] as well, as opposed to remove the class directly like we do or macerate it or change it's form. And a little more than a half are, as you indicate, our catheter-directed license. Again that was -- we don't know any of the breakdown in the track study but that was sort of the broad definition in Attract of intervention which included catheter directed license in some form of other intervention.

Wonderful. Very helpful. Thanks, guys.

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

Hey, guys congrats on the strong year and a good quarter. Thanks for taking the question. Can you hear me okay?

I wanted to follow up on some questions asked earlier. Are you guys willing to quantify the one-time benefit from 2016 from recalls and things like that -- competitor recalls?

And then on the 2017 guidance will you comment on some of the cadence of growth? It sounds like you said for Q1 it would be down sequentially. So the consensus is about $72 million which is down $1 million sequentially.

Are you comfortable with that? Can you comment on peripheral versus neuro growth? And lastly the stroke market, it looks like a grew about 35% in 2016 from the US patient standpoint. What are you guys expecting for 2017? Sorry for all the questions. I will repeat any of you miss them.

All right. We will give it our best shot here, Larry. Starting with I think -- I will go in reverse order on stroke growth.

So the numbers that Adam had talked about in his commentary of 21,000 to 22,000 patients is over 17,000 patients treated in the US last year. So I think we've generally talked about a similar absolute number of patients treated in terms of growth. And we've also touched on in prior calls, our idea and I think the popular view that the CAGR for patients treated grows at a roughly 20% growth rate.

You touched on peripheral versus neural growth going forward. You know, as we break down the components of our business neural obviously, stroke is the biggest portion of that -- of neural and even of the business. And we just touched on the key driver which is the stroke market growth.

There are smaller parts of our business that are early and have some more -- some higher growth prospects to it and neural for example the SMART COIL launch which we are starting to see. And then peripheral as you touched on. There's growth associated with that.

And I think if you look at our last few quarters in peripheral you get a sense for what the comp adjusted environment looks like. Now one comment in the peripheral number, we've had some very attractive growth rates on the embolization side which has a lot to do with new products that were launched in January of last year which we'll cross this quarter, meaning Q1. So hopefully that helps you on your question on the peripheral and neural growth.

The cadence of growth, you're exactly right with our comments about the sequential nature. Sequential decline over Q4 that we anticipate in Q1, we're not going to comment specifically, Larry. I think you appreciate of some of the specific numbers.

I think you got the idea correct and a lot of our thoughts as we think about the fundamentals of the business haven't really change. So we called out the things again that we thought contributed to the higher than anticipated growth we saw in Q4. And also, I think as you might recall as we went through last year, typically in Q3 we see a little bit of a seasonal slowdown in regionally, in parts of Europe and also in scheduled cases here in the US.

And now, if I remember right your last question was on quantifying the one-time items in 2016. And again, on that we haven't generally broken those down. I think we talked about in Q3, the one time nature of SMART COIL launch in Japan with our distributor as well as some of the recall related benefits.

We don't see there was a lot of lasting effect for the recall tailwind that we saw when we started talking about in Q2 to Q3. So not much of that in Q4. But we would more so point to the Japan SMART COIL launch is still consistent but the strong December is the other point in Q4.

So, hopefully that answered all of your questions. But let us know.

Sri, that was impressive, thank you. Two more easy ones. FX about $3 million to $4 million by our math, can you confirm that? And any update on 3D, was it files you put into launches this year and does anything assume in the guidance? Thanks for taking all the questions.

Larry, thanks. Let me address. I will let Sri address the FX question.

We've been, for obvious reasons, we are not going to comment on our timing around 3-D whether it is related to launch or filing of any of that. We have in the past said that we expected sort of the back part of the year, we certainly stand by that statement again. But I'm not going to give you more specific information.

As it relates to whether 3-D's in our guidance or not. I mean let me reiterate what I've said, that we strongly view the stroke field as moving toward direct aspiration first.

And that therefore we have always said that we support the need for multiple modalities to deal with tenacious strokes. And that having a tool like 3-D will be helpful. But it won't be material to our fundamental business.

Because we think that the number of need -- the number of times you need a [stent retreiver] in an adjunct capacity is declining. So it wouldn't be material one way or another. I would give it to Sri to address.

Larry, on the FX thing I will go back to what we had mentioned on Bob's question. The way we view it as sitting here today and seeing what we have in front of us. And so that goes for everything from a product standpoint, from a currency standpoint. We do our best with sort of the place we are sitting in and not really trying to take views on things that relates to things that we don't know.

Thank you for taking the questions.

Your next question comes from Jason Mills of Canaccord Genuity. Your line is open.

Thank you. Hi, Sri and Adam. Congratulations on a great quarter.

So I apologize in advance for the long question but you probably expect it from me at this point. Sri, on the guidance so taking into account your answers to all the questions that have been posed to you already. So if you think about your business in sort of five buckets.

In the neuro you have three big ones: stroke, aneurysms, and access and then in peripheral you have thrombectomy and embolization. When we take your guidance at 20%, would you, if we think about over/under that 20% overlaying across those five businesses based on what you said, in stroke with 20% tailwind of the market, your belief we're moving towards first-line aspiration, certainly seems the case in our research that would tend to be biased toward the upside of that 20% overall guidance number. For aneurysms, given the comp and the more normalize comp maybe a little lower and then Access, given the is ASPs in that business etc., maybe a little bit lower.

Then in the peripheral business, certainly thrombectomy depending on the track could be significantly higher than that rate and embolization has been tracking well above that rate. So, could you may be using my long question as a guide, to comment on the over/under in those businesses relative to the overall growth rate, is a different way to guidance question?

Yes. Without saying over/under on those maybe we can just talk through it a little bit to help. So on the stroke side of things I think you are absolutely right.

The focal area for us as we been talking about is on the market growth. That really is the key thing that we've been talking about. Adam has touched on several calls about some of the things we are focusing with our time and resources.

As we had discussed patient growth at a 20% CAGR, I think you highlighted something very important in that. As you think about dollar market growth rates. As we move, as we've expected, towards direct aspiration which is a cheaper alternative, that does have an effect on the market growth rates. That does affect us in a positive way to the extent direct aspiration is coming from stent retriever front line usage. Obviously, it doesn't do anything to us if it is going from slumber to adapt.

With that move in trend obviously it's going to become more competitive. And that is again, another theme we've spoken a lot about and we all have spent time discussing on prior calls. So we would expect with that move there comes, albeit with a benefit to us with that move, there comes competition as well.

Some of the other areas, the only other one I want to touch on is on the peripheral side. You know as you think about that growth rate there obviously are two large businesses within that for us that contribute to growth. The embolization side which has had very strong growth this year again by benefit of a couple new products, Lantern and the Packing Coil which were launched earlier in the year.

So we saw a very helpful benefit from those new products in 2016 as it relates to the growth rate. The peripheral thrombectomy side, I think you can understand how that has grown post sort of the adjusted and environment when we launched our larger sizes with her Venus indication.

That commercial strategy around that, we've talked on the last few quarters about our focus, in particular a couple quarters ago. We talked about the focus on existing customers and balancing that commercial strategy and what lies in front of us obviously, what of everyone is highly anticipating is attracted and what it could do to potentially accelerate the paradigm shift. So that's a little bit of an unknown to be perfectly candid until we get through it and we have a little bit of an experience beyond it in understanding what that does.

But I think we've also touched on we weren't in that trial so naturally there will -- though it could be beneficial there will be some work that will have to do before we can see some benefit. So I hope that's helpful, Jason without giving you the over/under.

Yes. Thanks for humoring me going through my [little convention there]. It was helpful.

Adam, a bit on the stroke market in general. And I guess it's analogous, potentially analogous to your thrombectomy business. And clearly as you discuss the history of the latter you talked about how you leveraged what you learned developing Penumbra and then [Ace] to develop Indigo and so a two part question.

What struck me last week at the IFT meeting relative to a couple years ago when the attendees very rarely talked about stroke and certainly a lot of them didn't talk about interventional stroke in a positive light. Quite a paradigm change just being at the meeting this year versus a couple of years ago. And clearly, that business for you has more than doubled the thrombectomy business.

So as you think about where you are in the stroke market and in your prepared remarks about initiatives that you think can still augment growth and penetration of that market how do you think about Attract in other studies in peripheral thrombectomy? Is it potentially similar in the impact, obviously depending on positive or negative, to what we saw happened in ischemic stroke a couple of years ago with Mr. Clean, (inaudible) etc? Maybe talk about the similarities or analogies between those two markets and what you think portends going forward?

Well, Jason Thank you. You wrapped up a number of sort of questions in there. Let me address sort of the big -- that last question around Atract, and what does it mean. There is a few similarities and a few differences between what happened with the number stroke trials that came out several years ago and Attract.

The big difference is that Attract is only one study. And I think one of the reasons we saw such a huge sort of overwhelming level of energy and excitement come out of the stroke world two years ago is that we had many studies all show the same thing at the same time, which is pretty rare.

That being said, as you indicated we were in sort of a world in which there had been some folks that were skeptical of the treatment until we had the data.

With Attract even though it's only one study I think we are seeing and hearing a different level -- a different attitude. I think you have most of the folks that I certainly talk to and I think most folks would agree, are very excited they're not skeptical they are waiting they are sort of ready to use this as a tool. Even though it's only one study we may see a lot of energy coming out of it.

So I think that there is some similarities there, albeit there is sort of a fundamental difference. I think the other big difference between the two that could be interesting to watch is that most of these patients that would be now candidates for interventional treatment, assuming again it tracked is positive, are already in the hospital. They are already being seen by somebody and therefore the interventional treatment does not require sort of a wholesale change of the pathways of care or the systems of care, the way that we are having to do that in stroke.

And so that's good for the patients that they can get access after. It also though doesn't have the same sort of catalysts.

You now have been at a number of stroke meetings, the energy and passion that I've alluded to a number of times, I get to experience around stroke because they have so much work to do ahead of them. I think accelerated it out of the box even faster than anything we've ever seen because you have so many sort of passionate people because of the work that they have to do to get the patients to the right place.

So it is hard to do a direct line by line comparison. I think a lot of the lessons that we learned as a company will come in handy on how to be helpful to the medical community. Again, both in talking about how to make sure patients are getting the right care and also on our capacity to continue to add better and better tools.

Thank you. Just one quick one for Sri and I'll get back in the queue. On gross margins you talk about the capacity you've added during the midst of adding, that will depress those margins to some extent.

Could you talk about how you're thinking about your gross margin cadence for this year and maybe recalibrate us with respect to what your long-term gross margin targets are? Thank you and congrats.

Thanks, Jason. On the gross margins question I think our fundamental view on sort of long-term hasn't changed and we're quite confident over the long term we could get gross margins to where peer med-tec companies are. I think as we touched on earlier in 2016, some of the rationale for seeing gross margins in the area we've talked about today with regards to Q4 and that being the area that we think gross margins will stay at for a little while.

And just to give you a little more color, as we talk about all of these dynamics that we are experiencing with growth markets, with things moving our way from a competitive standpoint, with recalls and potentially new products coming -- for us there is a tremendous opportunity ahead and the goal and the focus is to have products and have adaquate capacity. I touched one of my comments on the neuro side with regard to SMART COIL is due to the success of that product and the success we had in December that we're having to replenish inventory levels.

So, being that aggressive around capacity and having product will obviously could come with some costs. For us we're focused on rising against that opportunity and driving the growth rate. So that's where our focus is going to be for 2017.

Thank you.

Thanks, Jason.

You next question comes from the line of Joanne Lynch from BMO Capital Markets. Your line is open.

Good evening. I have 15 questions and they are all multi-part questions.

We tend to get sort of focused on what's happening in the United States but your international growth rate has been tremendous. Could you give us an idea or some color on how you're approaching those markets adding feet on the ground and products?

Sure. So really you have to look at each country individually. And let me sort of rather than go through country by country, sort of talk about it philosophically as to how we approach it.

With stroke, we are relatively available in the countries that we sell in. The work there is two fold. One, to continually bring our newest technology to the countries. That sometimes lags a little behind what we're able to do in the US. So we have a lot of work in front of us always to sort of catch up with our newest products technologies.

In the second is really each country has slightly different avenues to drive or to create a solution to the issue of getting the patients to the right places. You know, in the US there is an awful lot of energy that has been put in locally, county by county but also in the state initiatives. You know, that is different in different parts of the world.

And so what we've done is try to invest in a thoughtful strategy, engaging politically in the appropriate countries where we can be helpful. And that there is a desire to move in that direction to try to deal with that. It in the rest of our business, in particular in the peripheral side, we still have work to do to grow our products availability and sort of our footprint.

So we will continue to look at that, again each country is different. Each country is a different cost structure and a different thought process around the paradigm shift in peripheral thrombectomy and we're relatively in tune to those markets and we'll continue to pursue that.

And as a follow-up, you don't really like to talk about new products in the pipeline but can you give us an idea of how you think about investing in research and development and how we can anticipate hearing about new products over the next 12 to 18 months when you plan to roll them out? Thank you.

I will share our mindset around how we think about new products at the most high conceptual level. Because I have done this, I think a little bit in the past.

We look at really three fundamental things when we take on a project. The first is, does it matter? Is there a significant opportunity to help a lot of folks? And that's really the most fundamental question first.

The second is, do we at Penumbra think we can do this? And that brings in a lot of questions around our thinking. Do we have the technical skills? Could we go hire technical skills? Do we have a shot at doing this?

And that brings with it the question of resources. How much will it cost, is it within our capacity of the Company to take something like that on? And then the third is the commercial aspect. If we were successful with doing all that, could we commercialize it? Do we have the ability and the bandwidth and resources to make sure that there is a commercial capacity and opportunity? So relatively simple things but we're, over the years that we are doing this, we've been very rigorous in applying that thought process to that analysis.

In terms of giving you some preview around cadence of products and all of that, we are not going to do that and it's also not how we think about it. Products aren't sort of measured out in sort of a predictable cadence. You know that is not just how we think about what we do here.

Sometimes they come in several at a time. Sometimes there will be longer periods between them. And I don't think it's -- development doesn't work in sort of a planned logical case that way.

It would be nice if it did. But it doesn't work that way.

Thank you very much. Congrats on the good quarter.

Thank you, Joanne.

There are no further questions at this time. I will turn the call back to Mr. Dan Wilson.

Thank you, Cheryl, 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.

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