Penumbra Inc (PEN) 2018 Q3 法說會逐字稿

Good afternoon. My name is Gabriel, and I will be your conference operator today. At this time, I'd like to welcome everyone to Penumbra's Third Quarter 2018 Conference Call. (Operator Instructions) I would like to introduce Mr. Dan Wilson, Director of Head of Business Development for Penumbra. Mr. Wilson, you may begin your conference.

Thank you, Gabriel and thank you all for joining us on today's call to discuss Penumbra's Earnings Release for the Third Quarter of 2018. 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-Q for the quarter ended September 30, 2018, which will be filed with the SEC on November 5, 2018, as well as those described in our 10-K for the year ended December 31, 2017, filed with the SEC on February 27, 2018.

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 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, all financial measures are presented on a non-GAAP basis except for revenue and gross profit, which are GAAP measures. A reconciliation of GAAP to non-GAAP financial measures is provided in our posted press release. We anticipate the prepared comments on today's call will run approximately 12 minutes. Thank you very much. And with that, I would like to turn over the call to Adam Elsesser, Penumbra's Chairman and CEO.

Thank you, Dan. Good afternoon and thank you for joining Penumbra's Third Quarter 2018 Conference Call. I'm joined today by members of our senior management team. I will begin our call today with a review of our business, several updates from the quarter and then Sri will provide commentary on our financial results as well as an update on our revenue guidance. Our total revenues for the third quarter of 2018 were $111.8 million, representing a year-over-year increase of 33.2% as reported. Excluding the one-time impact from the MVI transaction, we had non-GAAP operating income in the quarter of $10 million compared to operating income of $0.7 million for the same period last year. Our company continues to see exceptionally strong growth driven by highly underpenetrated patient markets and our ability to consistently innovate within these markets. Multiple areas of our business are contributing to our overall growth and we continue to take steps across the entire business to position ourselves for our long-term success. I want to take a moment to reflect on our business today. In neuro, our growth is closely tied to the market growth of ischemic stroke. So far this year, the market has continued to steadily develop. In addition, there has been discussion this year about competition, which has and always will exist in this field. We are fully focused on executing on our product development and commercial strategies to improve our leadership position. In September, we announced the newest innovations to our stroke technology, which I will spend more time on later in my commentary. These advancements are important as they move us forward but they also represent the beginning of a new phase of innovation that we believe can bring further improvements to stroke treatment. We are very encouraged about the future of our neuro franchise. We are increasingly excited about our vascular franchise where we see a similar and possibly greater future opportunity. As background, a little more than 4 years ago, our peripheral efforts began with a focus on peripheral thrombectomy in the arterial circulation of the body. In a short time we moved into venous circulation with larger sizes of our Indigo System. There are over 1 million people a year in the United States alone that have some form of clot in the body, and an estimated 150,000 patients a year are treated interventionally for diseases like deep vein thrombosis, pulmonary embolism and arterial plaque conditions. The current treatment methods do not always work plus they bring potential safety risks. And it can be costly in the overall cost analysis. Similar to the brain, we believe that removing clot in the body through continuous power aspiration can bring greater success to physicians and patients. Recently, we began pursuing an additional area, the coronary arteries, where clot burdens also present problems for patients. We developed a new technology within our Indigo family specifically for this area, which we recently introduced to the market. Our experience in coronary is limited and there are significant challenges that lie ahead. That being said, we are very optimistic about the overall opportunity within our vascular franchise. Now we will outline a few specific updates from the quarter. Going back to our neuro business, as I mentioned, in September we announced the introduction of both the Penumbra JET and Penumbra Engine to our stroke system. Penumbra Jet represents a new family of catheter innovation, our seventh generation reperfusion catheter. And Penumbra Engine is our third-generation thrombectomy pump, which is our most powerful aspiration source and represents a major advancement since our first pump over a decade ago. The early introduction of the Penumbra JET Engine is progressing just as we had hoped. We believe Penumbra JET 7 is the largest highly trackable inner diameter catheter available. When paired with the Penumbra Engine, the most powerful deep vacuum available, the system provides maximum thrombus removal force. This is not only a basic principle of physics but it is being welcomed by physicians as a step forward for stroke intervention.

I'd like to end my opening remarks by sharing a story about a young patient that was treated very recently with Penumbra JET Engine. This young patient gave birth to her first baby recently. Less than 2 weeks after becoming a new mother, she was in the waiting room of a clinic and suffered a stroke. She was taken to the nearby hospital and then airlifted to a hospital that performed neuro interventional procedures. The physician used Penumbra JET Engine and within 10 minutes from starting the intervention, removed all the clot. This story demonstrates the critical importance of the huge efforts underway to make sure patients get to the right place to be treated, not only because of the relatively young age of the patient, but the fact that she is a new mother. With these efforts, throughout the country and the world, someday we'll no longer be considered lucky to be treated like this young woman, but routine and expected. I'll now turn the call over to Sri to cover the financials.

Thank you, Adam. For the third quarter ended September 30, 2018, our total revenues were $111.8 million, a year-over-year increase of 33.2% reported. Our geographic mix of sales in the quarter were 65% U.S. and 35% international. Neuro and vascular represented 67% and 33% of sales, respectively. While we typically experience seasonality in the third quarter, we had sequential growth in the third quarter this year due to strong neuro thrombectomy and vascular thrombectomy performance. Revenue from our neuro business grew to $74.7 million in the third quarter of 2018, a year-over-year increase of 27.3% reported.

Our neuro growth was driven by sales of our Penumbra system for ischemic stroke. We have had strong focus on stroke across all of our geographies. Within the U.S., our commercial team has dedicated significant energy towards the launch of our new stroke technology. These efforts have led to strong neuro thrombectomy growth, which was offset by results in neuro embolization. We did not see a material impact from competitive aspirational launches in the quarter. In the U.S., we saw a faster pace of stroke market growth at the end of last year and early this year. We expect that the market will continue to grow from these heightened levels but with some unevenness. This will present tougher neuro comparables as we head into the fourth quarter. We also expect some lumpiness in the international markets due to the timing of new product and geographic launches. Revenue from our vascular business grew to $37.1 million in the third quarter 2018, a year-over-year increase of 47.1% reported. We saw increased growth across our embolization and thrombectomy products driven by an increase in new and active customers. Last quarter, we discussed our outreach to the vascular surgery community. Additionally, in the quarter, we introduced our coronary aspiration technology to a limited set of customers. We are encouraged by the growing momentum and opportunities within our vascular business. Our gross margin in the quarter was 67.1% of revenues compared to 65.3% of revenues for the same quarter last year. The increase in gross margin was due to favorable product and geographic mix. While this represents the higher end of our historical gross margin ranges, we believe we will remain range bound over the next few quarters as we launch new products and continue to be aggressive about our operational expansion.

In the quarter, we acquired a controlling interest in our joint venture MVI, in which we took a corresponding R&D charge of $30.8 million. The following comments will represent non-GAAP operating results excluding the impact of this transaction. In the quarter, total operating expense was $65 million or 58.2% of revenue compared to $54.1 million or 64.5% of revenue for the same quarter a year ago. Our research and development expenses were $9.1 million for Q3 2018 compared to $8.1 million for Q3 2017. SG&A expenses were $55.9 million for Q3 2018 compared to $46 million for Q3 2017. Our spend increased primarily due to increases in headcount and related compensation expense. Excluding the one-time impact from the MVI transaction, we had operating income in the quarter of $10 million compared to an operating income of $0.7 million for the same period last year. With the update of our third quarter results, we're also revising our 2018 revenue guidance range to $437 million to $438 million from our previously stated range of $420 million to $425 million. This guidance represents the continued momentum in our overall business and reflects multiple drivers of growth. We expect tougher comparables to impact our reported year-over-year growth rates and related to the mix of our business, as discussed, we expect some lumpiness in our international markets offset by the accelerated opportunities within vascular. And now, I'd like to turn the call back to Adam for closing remarks.

Thank you, Sri. This is an exciting moment at Penumbra. We are very focused now on 2 concurrent challenges. First, currently executing on advancing and making our products available to more and more people. And second, undertaking company-wide efforts to position ourselves for long-term sustainable growth. These longer-term efforts are both strategic and operational. Throughout this year, we have touched on some of the strategic efforts at Penumbra. On the operational side, we have been making great progress as well. We recently signed a long-term lease for additional future manufacturing space in Roseville, California. In addition, we are continuing our efforts to set up the systems as well as the structure of our company to allow us to take on our future challenges. In short, we are undertaking significant work to be ready and able to design and make available product to help as many people as we possibly can. This is Penumbra's mission and we are more energized and capable of doing this work than ever before. Thank you for joining us on the call today, and we will now answer questions.

(Operator Instructions) Our first question comes from the line of Larry Biegelsen from Wells Fargo.

What stood out, let me start with the international, Adam, that's what really stood out to me here. Growth accelerated again, I think if I'm looking at the numbers right, about 38% growth outside the U.S. So can you talk a little bit about what you're seeing there? Is it neuro or peripheral that's driving it? Which markets? I heard your -- was there anything one-time in the quarter that drove that growth? And I heard your comment about lumpiness, so what maybe just thinking beyond Q4 of the sustainability of that growth? And I have a couple of follow-ups.

Sure. Thanks, Larry. Let me start and then I'll let Sri answer some of the specific sort of financial number questions. We are -- to sort of address the question of what is that. We are much more -- our business internationally is much more neuro than peripheral right now. So a lot of that was on the neuro side. We are -- still got a lot of room to go in many markets with our peripheral business. So that's still yet to come. And it obviously has been, and continues to be, a strong part of our business. As it relates to this specific sort of quarter-by-quarter things, I'll let Sri address some of those questions.

Yes, Larry, I think your observation on the trends are right. As we went to the back half of the year, we experienced a pick-up in our international growth, if you looked at a year-over-year basis. Remember, we acquired our international distributor in Italy. But as you look forward, I think you're absolutely right to pick up on the lumpiness comment. Most of our international growth thus far has been going in to new geographies, bringing in new products, most of that's been neuro until now, and looking at sort of increasing our penetration in some of those markets. Some of our international sort of commercial structures utilize distributors. So where those are the case, you generally see some lumpiness depending on the timing of those launches. So that's really what we're commenting on that as we move forward, we might see some of those effects carry forward, which might see -- might show in manifesting itself in lumpiness.

That's helpful. Let me just ask my two follow-ups right now. So in coronary, Adam, can you talk about your plan there? And why you're so optimistic? And then just lastly, Sri, the implied Q4 guidance is 17% to 18% growth, I think, consensus is modeling about 21% growth in 2019. Can you talk about some of the puts and takes we should think about in 2019? And if you're willing to kind of comment on whether you're comfortable with where consensus is in 2019?

Great. Larry, let me address the first question about the coronaries and then I'll let Sri address the guidance question. The product -- we have used the product in a number of cases. As I told you earlier in the year, we announced that we were getting started. We talked about it being a very careful really introduction or early-stage to make sure that it was helpful and was finding its right place in an otherwise very sort of developed area and procedure. The response has been really amazingly positive. That being said, there are some hurdles. There's data that is out there that talks about sort of a different category of product but it happens to have the same word aspiration associated with it. So we have to navigate through that. And we also really don't know this group of physicians, these are obviously interventional cardiologists. We don't have those relationships as a company yet. So there is some work ahead for us to do and it's going to take some time. But the product itself in many of the cases, in most of the cases I should say, the response and the reaction has been extremely positive.

And Larry on your question on 2019 and Q4 just touching on 2019 first, as we go into the end of this year and into the beginning of next year, not a lot has changed in how we see our business. Our business has strong momentum. I think the drivers that we continue to talk about that help support the growth of our business and the considerations tend to be the same. And so not much has changed in how we see it.

Commenting on Q4 particularly, the main thing I'll highlight is really around the comps and we touched on this last quarter but really, they're more acute as we head into Q4. Our Q4 last year had sequential growth of almost 15%, which is the highest sequential growth we've seen as a public company. So really, an extraordinary quarter that we're sort of comping against, but if you look at what the guidance implies, it implies that we are continuing to grow sequentially. So back to my point on we're continuing to see strong momentum in our business. The only sort of comment that is -- maybe can be considered somewhat new is our comment on the mix. The overall doesn't change. The mix relative to the comments we said on international which is mostly neuro and then being offset by the strength that we're seeing on the vascular side, that's really the only sort of difference that I'd highlight as we go forward.

Your next question comes from the line of Robbie Marcus from JPMorgan.

Sri and Adam, I was hoping you can talk about -- you mentioned on the call that you didn't see a whole lot in terms of competition. Maybe help us understand how your -- the new

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So sort of losing share that's happening? What are the factors that's resulting from that?

Robbie, you cut out a little and so we only heard the beginning and the end of the question. Could you mind giving a quick repeat so that we get the question right?

Just quickly in case I drop out again. What are you seeing in terms of competition? And your new products that are obviously maintaining your market share, how are they being received in the market?

Okay, got it. So it's very early still in the introduction of JET 7 and JET D and Engine. But the response overall has been exactly how we hoped. The product is -- the JET 7 is highly trackable, JET D is designed for more distal occlusions. The reaction to Engine is amazingly positive where the power the Engine provides has allowed people to have faster cases, more complete clot removal. And so we're very, very pleased. Like anything when you have a launch like this, there is always going to be sort of case-by-case views but if you take the overall reaction and the overall feeling about this product, I will tell you it's one of our more successful launches with our stroke products. So we feel great about it.

Competition, as I went out of my way, I think, to say is never going to not be here. We have had it for many, many years whether it was competition with other mechanisms or competition directly with catheters that we've had for the last 3 years and we still have it. So my comment was that we didn't see anything that had the ability to sort of fundamentally change our strategy and our success in the leadership position that we are currently in. But that's going to continue to evolve over the next several years as we continue to innovate and do new things and other people try to do the same. But right now, and for the short term, we can certainly see that we are in a really good position in JET 7, JET D, Engine has been exactly what we hoped it would be.

And looking out over the next year, are there any data sets or legislative wins that might come that can help drive further penetration in the market?

Yes, it's a great question. I'm not aware of any significant data that will come out like DAWN and DEFUSE that sort of had that ability to sort of reenergize the thousands of people that are working on making this happen where stroke is properly done and people deliver to the right spot. So I don't -- I'm not aware of a trial that is impending in its announcement. That being said, on the legislative front, it is continuing to progress. Where states have either passed rules or legislation, you can track the success that happens in that state and the ability to treat more people. And I think that success will continue to fuel the energy around the legislative action. It is something I am not qualified to predict when various state legislatures will pass certain laws. That's beyond my capacity but the energy around those efforts is only accelerating, not decelerating. We're seeing less opposition and more sort of desire to sort of figure out a way to do this so that it can be easy for the states to implement. So I am more bullish than I've ever been on the efforts to drive these markets. There are too many people doing too much to make it happen but as I've always said, that doesn't always directly translate to a linear growth curve. But if you look at this over the next several years, it certainly bodes well for patients in the stroke market and certainly, companies that are trying to help them.

Thanks. And if I could sneak in one last question. Can you quantify what kind of volume benefits you're seeing from the late wake up stroke guideline changes earlier in the year?

You know, it's a great question and one that I wish I could give you a definitive answer. The data, it's really not able to be collected so sort of anecdotally, we talked to centers, those who were already pretty active. They may talk about getting a few more transfers. It's hard to quantify that and it's hard to know if that is the single thing driving this or it's just adding fuel to everyone to continue all the local efforts that are happening. It's been a great thing for the field regardless and I think if you look at going forward, it certainly will be a relevant thing, I think mostly on the transfer side from centers that otherwise might not have transferred those patients.

Your next question comes from the line of Bob Hopkins from Bank of America Merrill Lynch.

So this is my first Penumbra call where I'm not going to ask a stroke question. I want to start with peripherals since the numbers are so great and I apologize I've been on a few calls, so Adam or Sri, maybe can you go in a little more detail on the exceptional growth in peripheral this quarter. Was that both Indigo and coiling again this quarter? Or was it more pronounced with Indigo? And just wondering if you could maybe enlighten us on how well things are going on peripheral? I know you've talked about this in the past but if you have any updated thoughts on how we should think about the market opportunity for Indigo and your latest in how we quantify that? That would be really helpful.

Bob, thanks so much for bringing that question up, it's -- I think it's a great thing to focus on. We have always been -- have always viewed this opportunity as very interesting to us. I think in Adam's commentary, he sort of replayed some of the higher level metrics as it relates to the market, 1 million people in the U.S. a year have some sort of clot in the body and today, about 150,000 a year are being treated in-hospital. So there's certainly opportunities on those that are getting treated who aren't necessarily being treated with mechanical thrombectomy today and then opportunities on those many, many more who aren't even in the hospital being treated. It's a business we started seeing growth in around the time of sort of 3 or 4 years ago, our IPO or slightly there before. But you're seeing in the last few quarters, a more meaningful uptick in growth. Last quarter, we highlighted that we were getting to the vascular surgery community after some years of work in trying to access or figure out how to access that community best and now, we talked about a new technology within the Indigo line geared towards the coronary arteries. So albeit small, that's just yet another sort of opportunity that we're looking at capitalizing on in the future. So the opportunity is quite bright, we're starting to see some results in some uptick in growth. And we're really excited about it.

Yes, this is Adam. I'd just -- I'd add one thing. We've outlined sort of the difference between this and stroke now for a while where with stroke, so much of the effort is just getting the patients to the right hospital but we are fully penetrated in those hospitals. Here, it's really the opposite, as Sri indicated. Many of these patients are already being treated interventionally already, we just need to do the hard work sort of really traditional work that a med tech company would do to educate and train the physicians. It's made slightly more nuanced or complicated because you really are looking at very different medical conditions. You're looking at the arterial side in the leg, sometimes arterial arm work, pulmonary embolism, deep vein thrombosis, all of those are different issues. And even though they involve clot, they're treated differently, the size of the vessel is different, the techniques are different. So it's just a time-consuming process. And I think what we're starting to see is the benefit of that amazing work and I give a shout out to our commercial team and the guys in the field who have really done an exceptional job over the last few years of being out there with the physicians, being there for cases, training them to do it. And I think we're starting to see the benefit of that for patients in those areas.

And Bob, just one thing to add and I missed it in your question, you'd asked sort of between -- within that business, the opportunity within thrombectomy and embolization. We're also seeing great results in growth on the embolization side of that business too. So I just wanted to make sure that was clear.

Okay, thank you for that. And then just one follow-up on kind of very much related, could you maybe help us understand the path forward on coronary? Like what needs to happen here? Is this an area where you need some robust clinical data? Or is it more like you've experienced so far, where it's just sort of getting out there, showing the product to physicians? Just help us understand the path forward on coronary?

That's a great question, Bob. I don't know if we can definitively answer that now. I think I can tell you what we think we know. I think it's a little of both. It's certainly for the next phase really just making sure that all the experiences that we've had in the first phase are continued to be had by physicians and I think that will be a big part of the sort of short-term success of that product. But ultimately, obviously having data to show that it's beneficial to remove clot in the way that we are suggesting or the way that our product does, which is really different than what other people have done, where we're really taking it out very, very quickly and allowing the physician to get on with, in many cases an underlying treatment, is beneficial. And it also saves time and likely saves money as well. So we have our work cut out for them -- us to do that but I think even before we do that, there is an opportunity just through experience to drive the use of that product.

Our next question comes from the line of Jason Mills with Canaccord Genuity.

Can you hear me okay, Adam?

Yes, we can, Jason.

So I had other questions I sort of threw out because I think the discussion around vascular is so interesting. And as Bob was asking his questions today, I sort of ticked down a list of things I'd like you to comment on if you don't mind. Right, wrong or otherwise, Adam, folks initially look at Penumbra and see the stroke business and sort of gauge you relative to your performance in stroke. And so using that as a theme, could you talk about, I'm just going to list a few things here, how the vascular opportunity landscape sort of environment compares with stroke to give investors that are listening maybe a level set for how to compare the opportunity and the challenges that you'll face in stroke or in vascular relative to stroke? So as I think about the full target addressable market, you sort of delineated a number of things, coronary plus arterial, venous. It seemed to add up to something more than stroke, maybe comment on that. A lot of questions about competition in stroke. Well, maybe talk about juxtaposition in vascular. What the requirements are, for example, in doc training and receptiveness of new technologies, the salesforce requirements that you have to put forward into the market in vascular versus stroke and the reimbursement landscape? Sorry for the length of the question but I think you get the gist. As people look at you and see stroke, maybe it gives them the minute version of how your vascular business sort of compares on a number of those different assets -- or facets?

Yes, well, thank you Jason. And given that you asked a lot of questions, I don't think I can give the minute version but I'll do my best with trying to address it. There's no question that if you add it all up, we believe, if you're focused on U.S. numbers for now, that the TAM, the total addressable market, is larger, which is why we made that comment that it's a potential larger opportunity. We don't know that definitively because we're all guessing on the stroke number a little but there is a fairly serious amount of data around who is treated on the peripheral side and of course, when you add in the coronary.

Competition right now, there's not other devices for the most part. There's a few small companies really just getting started, which again, is helpful and good to see that energy being put around clot in the body right now. But that isn't really the primary energy and focus of our folks other than to be happy to see that, that energy is being put in by others. As I've said in the past, competition really comes from sort of an old view of using tPA to dissolve clot for the most part. And that's what we're sort of competing against in our mind. Training, I alluded to. Training is not fundamentally hard. It just requires physicians to dedicate a little time and energy to it. There is some slight technique differences between the various parts of the body and the various types of clots that they're taking out so that requires a decent amount of time and focus. We are building up that capacity whether it's an in-service training within hospitals or more regional training, meetings that both physicians and technologists can go to. And you mentioned sort of sales force, we certainly envision that the sales force will continue to expand. It has to meet the need of this growing business for the last several years and we expect that will continue. We don't expect that to be a limiting factor but having a -- the capability of doing this really hands-on work and really direct touch with customers is going to require that to continue the way it has over the last few years.

And then finally, on the reimbursement front, without getting into all the codes and so on, we really are in a favorable spot with reimbursement. That is not something that is in fact, that really cuts in our favor versus against us. Using mechanical thrombectomy for the most part in the peripheral is -- has a higher reimbursement than tPA. But it also comes with an overall cost savings potentially. When you take out extended stays in ICU and so on that many tPA-drip patients require. So I think we're really set up for this. I think that's why the business has done so well and as we continue it, it's really just the hard work ahead. And as I said, our team that has been doing this for the last 3 years deserves a huge amount of credit because they have been -- they're tirelessly taking this topic on with their customers and hospitals and it's really -- it's been very impressive to see and frankly, motivating to watch their success because patients are clearly benefiting and that brings a lot of good feelings to folks within their hospital communities.

Notwithstanding my convoluted question, that was a very clear answer so thanks for saving me on that one. I'll try to make my last one a little bit easier. It's -- either Adam or Sri, Sri, you've talked about in the past about the number of incremental procedures in the stroke market in the United States year-over-year, what we saw last year 6,000 or 7,000. This year initially you gave guidance of around that. It seems like it's tracking to something more than that. I guess, generally speaking, the question is, would it surprise you at some point over the next couple of years if those -- if the stroke market actually accelerated? And given the number of patients that don't get an intervention, which seems to be egregiously high still to this day, notwithstanding the clinical data. What are the most -- the largest governing factors or hurdles that you're seeing today to go from let's say, 35,000 or something thereabout this year to 100,000, which would still be in our view, not the entirety of the market?

Thanks, Jason. I'll start and maybe we'll let Adam sort of comment on your last part of the question on some of the governing factors to sort of accelerate us from here into some of the bigger numbers you mentioned. But just the basis, yes, I think you're -- the numbers you had mentioned, just sort of where we've come from are consistent with our thoughts. Our thoughts are we were somewhere in the 28,000 patients treated in the U.S. with some form of mechanical thrombectomy. That's generally grown by the same number of absolute patients a year over the last 3 years. On our last call, we commented that we felt the pace of that growth was actually trending higher in the first half of the year. In our comments today, from those heightened levels, we feel like we've sort of grown sequentially in the third quarter from there. It's hard for us, we're triangulating a lot of information and a lot of data on these numbers to kind of put it into a sort of a quarterly box to look at it each 3 months. We typically like to look at it on an annual basis just given what's driving this market. The local efforts tend to be a little uneven, as we've mentioned. So our sense is that we are trending above those historical levels and moving in the right direction. And maybe I'll turn it over here to Adam to talk about from these levels, how do we get into bigger numbers.

Yes, thanks, Sri and Jason. Thank you for the question. I really have 2 observations. The absolute sort of best thing that can happen is if states were to continue passing laws directing patient flow the way some of the states have, that is already now proven to work in those states and the more states that do that, the faster that happens, the better for patients within those states. So that remains by far, the -- in the U.S. anyway, the path that we are hoping for and investing in to make that happen. Before that happens, before we sort of see that a lot of states do that in the sort of a wave, which I still believe is a number of years away, it is going to rely on just the work being done in community after community to try to get past the current rules, find ways around them, negotiate, compromise with all the various hospitals and ambulance services and so on to make sure that this happens.

And my only observation on that topic is we're now 3.5, 4 years into watching this start to happen and I can tell you that it feels like the passion and the energy and the topic isn't going away. And it could've gone away but it sort of had a year or 2 of energy and then sort of a sense that it was too hard to change and therefore, we saw sort of a slackening. We haven't seen that. In fact, we've seen the opposite. The level of interest, everywhere I go -- I spend, as I think all of you know, a lot of time in the field. Everywhere I go, the physicians involved in treating this disease are talking about that topic. And that's only getting more and more pronounced. So I have a lot of faith that we'll continue to see that uneven growth driven by those local efforts but the real thing will come when states sort of all fall in line and start to pass the laws.

And your next question comes from line of Isaac Ro from Goldman Sachs.

First question on gross margin, Sri maybe for you. I think you talked on the prepared comments about being a little bit range bound on gross margin due to new product ramps and then I think operational expansion. So on the new products, are you talking about the ramp of previously announced new products? And then on the operational expansion side, I'm just curious, are you nearing full capacity for some key products and if so, which ones are those?

Thanks, Isaac. I think just to provide the background of your question, we did mention that the 67.1% gross margin that we saw this quarter in Q3 was at the higher end of what we've seen historically. We sort of attribute a lot of that to the product and geographic mix that we saw in the quarter. And now to your specific questions on sort of what is that, is it a combination of newly launched products or soon-to-be-launched products? The answer to that is it's both. We launched the JET Engine really towards the end of the third quarter and didn't see a lot of the impact of that in the third quarter and we continue, as we talk about, to work on new products that we hope to be talking to you about soon. The operational expansion is also something to consider. Towards the end of Adam's commentary, he mentioned our expansion by signing a new facility in Roseville, California. That provides us a significant additional footprint to capitalize on our opportunities in front of us. We've expanded quite a bit here in our campus in Alameda and that gives us a pretty significant flexibility and pretty significant economic flexibility on tapping into that growth. So we're pretty excited about that and given the opportunities that we're talking about today, both on the neuro and peripheral side, I think it's clear that we're in 2 highly underpenetrated markets and we've done a lot to try to get in front of being prepared to see those markets grow and see our position grow. So for us, it's a wise investment to make and the right time to make those investments and we'll again, as always, look to see greater financial performance out of that over a longer period of time.

Great and just a follow-up on competition. I think you've mentioned it's still early but I'm interested in what you -- there has been competition for a while but the new -- to the extent competition is new or evolved, it's still early to assess but I'm interested in how you expect customer behavior to play out. There's been a lot of speculation around whether or not some of your key users will trial other options for the first time? And concurrent with that, maybe your view on how pricing will evolve over the next, I don't know, 12 months?

Yes, thanks Isaac. Let me sort of address it. I don't think there is anything dramatically new here. As products have come out over the last 3 years, including catheters during that period of time, people have tried them. We saw some of that. We'll continue to expect that. How long that happens will really depend on the -- how good those products are. We have not yet seen a lot of competitive price issues. I think that is always subject to come up in the future. I think we have a lot of tools and ability to do quite well in those discussions. So I think overall, we feel pretty good about where we fit within the competitive marketplace. I will tell you in my mind having the best products has always been really the best competitive advantage and that's what I think we do today. But as I said in my prepared remarks, that we're not done. There's a lot of room to do more work within the stroke world and particularly, in mechanism of aspiration and I think we are fairly confident that over the next several years, there will be the ability to add tools that give us an [advantage] and really help physicians and ultimately patients.

Your next question comes from the line of Joanne Wuensch with BMO Capital Markets.

Can you hear me okay?

Yes.

Excellent. I want to continue talking a little bit about the peripheral market and the strength that we're seeing there. Is there way to sort of peel that apart and talk about, is it product-driven? Have you built out your sales force? Or is this just sort of open market that is -- you're providing something new into?

Yes, it's a really good question. So it's a market as we sort of mentioned where there is a large number of patients that are getting intervened on already. That intervention involves typically the use of tPA and dripping slowly tPA over the course of a day, 2 sometimes 3, usually when the patient is in the ICU to monitor them so that they don't have a hemorrhage. That's the traditional sort of treatment today. And so that's what we're competing against. That's what we sort of have to go and educate physicians about. And then the work that we're doing ahead of us is really just the very specific work of each subset of diseases. There are clot in the leg, clot below the knee, on the arterial side, clot even in the foot or the arm. Those are treated very differently than a deep vein thrombosis on the venous side where the volume of clot is dramatically different and sometimes comes with more chronic clot. And then, pulmonary embolism is really a separate thing, too, in and of itself.

So the work -- the patients are there. The patients are in a case where they need some form of treatment whatever location, whatever medical condition they're suffering from, requires some form of treatment. It's not going to just resolve itself. So what we're offering is a more cost-effective, higher reimbursement plus lower ultimate cost together with usually a much faster and less difficult for patients. They don't typically have to spend several days in ICU and all in all, hopefully a better experience. So when you add that all altogether, we're offering, we think, a better solution. Again, early in the development, we're still on our earliest products. We expect to see, just like we have in our other areas, additional tools and additional innovations to come from us to help treat the wide range of conditions that we are seeing in the vascular side.

And if you apply...

Joanne...

Yes, sir.

Sorry, go ahead.

No, no, you.

On the sales comment, just to comment on that, your question on that. The sales team has been established and quite effective for some time. They're juggling a lot of different opportunities. There's, unlike stroke where we cover all the potential customers, there's many, many customers yet to be covered that are opportunities for us. There are opportunities within the existing customer base to introduce them to all the different avenues that Indigo and our embolization portfolios can deliver. So there's really a number of different vectors of growth and a lot that our sales team has on their plate to deliver on, to execute on.

Okay, so my follow-up was, if what drove the neurology or neurovascular market was data from MR CLEAN and then DAWN, do you have a similar type of data set which drives peripheral for several years? And then similarly, are you collecting that kind of data to drive cardiovascular intervention?

Yes, it's a great question, Joanne. And the answer is yes and no, depending on each area. We already have collected single arm data on the arterial side and presented it. That's been quite helpful. That actually happened a year plus ago. We had announced that we are running a trial for pulmonary embolism that we'll hopefully complete at the end of 2019. So that will, I think, be helpful as an important data set. And we'll continue to do that where we think it's necessary as the field continues to evolve. Unlike stroke, we had built a credible business before the big stroke trials, and the stroke trials that proved that patients clinically got better certainly accelerated that growth. Here, I think at the beginning of this field, people know that they need to get clot out. So we're not having to prove that in the same way. So really what we're doing is proving that this procedure or the one we suggest with our product is easier, faster, more cost effective. And that is not something that is as easily proven across all of those boards, across all of the sub-medical conditions sort of in one comprehensive data set. So it really comes down to sort of experience. And don't forget, we're comparing through the use of inter-arterial tPA, which in and of itself has never had a trial proving its benefit for these patients. So I think a lot of the work will come from just experience and training, but we do have some data that is coming in the future.

Your next question comes from line of Glenn Novarro from RBC Capital Markets.

Two questions. First, Adam, can you talk about the COMPASS trial? And are you seeing any benefit from that trial in your business? And are you seeing physicians starting to switch to aspiration based on those results? And then quickly, Sri, can you talk about the benefit or I'm sorry, probably a headwind is my guess for currency in the third quarter? What it should be in the fourth quarter? And then what was your constant currency revenue growth rate in the third quarter?

Well thanks, Glenn. Let me address the question first as it relates to COMPASS. COMPASS was a fantastically run trial. As you know, we didn't run that trial. It was independently run by a group of physicians and the -- it has not yet been published but we do expect it to be formally published hopefully soon and that, I think, has had a big impact certainly on some customers. Everyone knows about it. I think it has had an impact on the field fairly dramatically because we spent a good portion this year talking about all of the stroke players entering the market with aspiration tools. So I think aspiration is well-established as a primary mechanism. All the companies have one and are talking about it exactly that way. So I don't think the question of the use of aspiration is really mentioned ever by people. There are still preferences but there is no real debate anymore whether the use of aspiration as a primary mechanism is valid. And I think COMPASS, together with the other trials before them, really have answered that question.

And Glenn, on your question on currency, in the third quarter, it was a pretty small impact, about $100,000. A little over $100,000 and as it relates to sort of looking forward, we generally don't sort of break out or quantify that. But I'll just say as it relates to our guidance, it's one of the many factors that are inputted into thinking about our guidance update.

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

Thank you, Gabriel, thank you all again for joining us today and for your interest in Penumbra. We look forward to updating you on our fourth quarter call.

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