Penumbra Inc (PEN) 2018 Q4 法說會逐字稿

Good afternoon. My name is Chantel, 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 2018 Conference Call. (Operator Instructions) Thank you. I would now like to introduce Mr. Dan Wilson, Director and Head of Business Development for Penumbra. Mr. Wilson, you may begin your conference.

Thank you, Chantel, and thank you all for joining us on today's call to discuss Penumbra's earnings release for the fourth quarter and year-end 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 described in our 10-K for the year ended December 31, 2018, which is scheduled to be filed with SEC on February 26, 2019. As a result, we caution you against placing undue reliance on these forward-looking statements, and we encourage you to review our periodic filings with the SEC, including the 10-K previously mentioned, for a more complete discussion of these factors and other risks that may affect our future results or the market price of our stock. Penumbra disclaims any duty to update or revise our forward-looking statements as a result of new information, future events, developments or otherwise.

On this call, certain financial measures are presented on a non-GAAP basis. A reconciliation of GAAP to non-GAAP financial measures is provided in our posted press release. We anticipate the prepared comments on today's call will run approximately 20 minutes. Adam Elsesser, Penumbra's Chairman and CEO, will provide a business update from the fourth quarter followed by a review of the year and commentary on our key drivers into next year. Sri Kosaraju, our CFO and Head of Strategy, will then discuss our fourth quarter and year-end financial results and also introduce our 2019 revenue guidance.

With that, I would like to turn over the call to Adam Elsesser.

Thank you, Dan. Good afternoon and thank you for joining Penumbra's Fourth Quarter and Year-End 2018 Conference Call. Penumbra had a strong fourth quarter, which capped a tremendous year of exceptional growth and patient impact. Equally important, we made great progress in 2018 towards positioning our company for future leadership and success. Our total revenues for the fourth quarter of 2018 were $120.8 million, an increase of 25.8% as reported from the fourth quarter of 2017. We had operating income in the quarter of $6.7 million compared to $3.9 million for the same period last year.

In the fourth quarter, we saw our strongest sequential revenue growth of the year, which resulted in strong year-over-year growth against difficult fourth quarter comparisons, particularly in our neuro and international markets. In neuro, our ischemic stroke business in the United States saw exceptional double-digit sequential growth due to strong procedural volumes. In addition, Penumbra JET Engine has been an important step forward for our franchise. Since our launch in September, overall physician feedback has continued to be very positive and has met our high expectations.

In our vascular business, we are seeing meaningful growth, which has followed our view that this market could be as large, if not larger, an opportunity for Penumbra than neuro. As you may recall in our last 2 quarterly calls, we discussed bringing our technology to new specialist positions and adding new technology to approach new patient markets. Both of these efforts have continued to contribute to our exceptional momentum and growth. We are seeing growing adoption of our Indigo System, as a powerful tool, to remove blood clots, and we're also seeing growing use of our embolization system as a platform across a number of embolization procedures.

This quarter, we expanded geographically with the introduction of our peripheral embolization products in Japan. While this is a strategic step forward in establishing this new franchise in Japan, initially this will not impact our overall growth but will result in a shift in revenue between our neuro and vascular divisions. Sri will cover this further in his remarks.

Now I would like to look at the full year 2018 and review our business and what led to our growth. In my commentary, I will also share what we believe will lead to our continued success in 2019 and beyond.

For the full year 2018, our total revenues were $444.9 million, an increase of 33.3% as reported from the full year 2017. We had full year non-GAAP operating income of $30 million compared to GAAP operating income of $1.2 million for the full year 2017. Penumbra's impact with physicians and patients is growing. In the United States, we estimate that Penumbra's stroke products are used in the majority of all stroke interventions performed. Throughout 2018, we also steadily grew our reach beyond the brain to address patients with clot in their arms and legs. Diseases involving clot in the body can be serious and can often lead to major complications, including mortality. Late last year, we introduced new technology that expanded our reach even further to help physicians more effectively remove clot in the coronary arteries. We are proud of our growing patient impact. It motivates us to continue to work hard and to focus on meaningful areas.

There are 3 critical elements that allowed our business to accelerate in 2018: Our strong patient end markets; our innovation; and our ability to develop new areas. As we move into 2019 and beyond, we will continue to invest in these opportunities. Looking at the first critical element, our patient end markets, we saw rapid growth in the ischemic stroke market last year. In the United States, we estimate that between 36,000 to 38,000 patients were treated with mechanical thrombectomy in 2018, which we estimate to be about 10,000 more patients than in 2017. We are encouraged to see the rapid uptake in interventional stroke treatment, but more important, we see the foundation for future growth being stronger than it has ever been before.

The clinical evidence continues to mount. Earlier, last year, studies added evidence showing that patients treated within 24 hours of a stroke can also have favorable outcomes. We believe this expanded the addressable market. Of the roughly 800,000 strokes a year in the United States, we now estimate that about 200,000 of those patients can potentially be treated with mechanical thrombectomy. The field continues to actively explore greater application of mechanical thrombectomy as well. At the International Stroke Conference, which was held earlier this month, podium presentations discussed potential treatment benefit for further patient groups, such as those with larger area of tissue damage or large core strokes. We are seeing physicians in their hospital systems increasingly encouraged about how compelling the procedure is for patients and their communities. They are gaining momentum in their efforts and making investments in infrastructure and technology to ensure that all patients can be brought to the right place to be treated as quickly as possible. But what is most impactful are the tireless efforts of the many thousands of people that make this happen every day. We commend each one of those individuals, from EMS personnel to nurses, stroke coordinators and stroke surgeons. They are the difference-makers who continue to be the core driver of this remarkable transformation in stroke treatment. While we would expect to see more normalized levels of procedure growth in 2019, we believe it is possible to see greater growth in treatment as we did last year.

Over the past year, there's also been meaningful progress in the longer-term initiatives to improve stroke care pathways. Efforts like the Get Ahead of Stroke campaign have served to increase awareness and help effect legislative change. Colorado, Arizona, Tennessee and just last week, Virginia, have each passed or issued resolutions, protocols or laws with the intent of getting patients to the right center to be treated. Massachusetts, Florida, Ohio and New York are considering similar actions. And many more states are showing interest in these types of initiatives.

I would like to take a moment and turn our attention to another patient market, where we see tremendous ability for Penumbra to have a meaningful impact. Vascular thrombectomy is a similar, but also very different challenge than stroke thrombectomy. Diseases that are related to clot in the body are generally recognized, but their treatments are not well developed or effective. In the United States, over 1 million people a year have some form of clot in their bodies. Many of these people suffer from pain, and for many it leads to serious complications. About 100,000 people die each year from clot in their bodies. We estimate that around 150,000 people a year are being treated in hospitals with either tPA or some form of clot maceration or clot dissolution. We have dedicated the last 5 years to developing our business in this area, and we have started to see growing patient impact and contribution to our company.

I'd like to share a brief patient story that demonstrates the huge benefit of removing clot with the Indigo System. This patient had just had unrelated surgery and was still recovering in the hospital when both her legs became very swollen due to deep vein thrombosis or DVT. She could not be given tPA because of her recent surgery. Her son is a technician in interventional radiology suite at the hospital. In order to relieve the swelling and avoid additional complications, Dr. Naumann decided to treat her worse leg with the Indigo System using one of our advanced clot removal techniques for DVT. The procedure was extremely successful, and Dr. Naumann removed the large amount of the clot causing the DVT. Right after the procedure, the patient asked if it could be done on her other leg as well. As it turned out, several days later, treating the second leg was not necessary. As it becomes more and more routine, this type of clot removal treatment with the Indigo System will have a significant ability to help a great number of patients suffering from clot in all parts of the body.

The second critical element that has allowed our business to accelerate is innovation. In 2018, we designed, developed and launched several significant products that have advanced our neuro and vascular franchises. We have continued to innovate at a rapid pace, even as we have scaled our business. We have a great deal of confidence at Penumbra that we can continue to provide more and more innovative products in the future across all of our patient markets. I believe our development team, known affectionately at Penumbra as [Pengineers], are the most talented, prolific and dedicated development professionals in the business. Their work now and in the future will enable significant advances for patients for many years.

The third critical element that has contributed to our business is our ability to develop in new areas. Over the last year, we have added additional drivers to our business by expanding into new patient markets and new geographies. We have strengthened our core business and built the foundation for new business areas to grow into 2019 and beyond.

Finally, the most profound part of 2018 for me personally has been the people of Penumbra. I have had the immense pleasure to work with, visit with and travel with employees throughout the company of all ages and backgrounds. Over the past year, I have watched our team contribute in extraordinary ways, and this gives me deep confidence that we will continue to execute and achieve anything we set our sights on. I remain confident that we can help a great number of people suffering from serious medical conditions well into the future.

I'll now turn the call over to Sri to review the financials.

Thank you, Adam. For the fourth quarter ended December 31, 2018, our total revenues were $120.8 million, an increase of 25.8% reported compared to the fourth quarter of 2017. Our geographic mix of sales in the quarter were 67% U.S. and 33% international. Neuro and vascular represented 61% and 39% of sales, respectively. We ended the year -- we ended 2018 with very strong overall momentum in our business, particularly in the U.S.

Before we review our results, I would like to share 2 items to note as we discuss our reported growth rates within neuro and vascular. First, as discussed previously, beginning in the fourth quarter, we faced challenging year-over-year comparisons, given the acceleration in the stroke market as well as international launches in the prior year.

Second, as Adam mentioned, in the fourth quarter, we launched our peripheral embolization business into Japan with our long-term distributor partner. With the launch of our peripheral embolization products, physicians are expected to move to our branded peripheral coils from our neuro embolization coils, which are also indicated for peripheral use. The primary financial implication of this change -- in this change in revenue classification from our neuro division to our vascular division. Revenue from our neuro business grew to $74 million in the fourth quarter of 2018, an increase of 9.9% reported compared to the same period a year ago. Our neuro growth was primarily driven by sales of our Penumbra system for ischemic stroke, which benefited from continued strong procedural volumes and the strength of our differentiated portfolio.

In the United States, we saw exceptional double-digit sequential growth in ischemic stroke, which was driven by procedural volumes and the launch of Penumbra JET Engine. We see our international opportunity in ischemic stroke as extremely robust. However, we expect to see some quarterly unevenness due to launches in new geographies and launches of new technology in existing geographies. Outside of ischemic stroke, as we look forward in our neuro embolization business, we expect the brain aneurysm market to continue its historic growth in the low single digits.

Revenue from our vascular business grew to $46.8 million in the fourth quarter of 2018, an increase of 62.8% reported compared to the same period last year. Our vascular growth was driven by strong results from our thrombectomy and embolization businesses. We saw greater-than-typical growth internationally this quarter due to the previously discussed launch of our peripheral embolization products in Japan. Our gross profit in the quarter was $78.7 million or 65.2% of revenues compared to $63.7 million or 66.3% of revenues for the same quarter last year. Our gross margin follows our prior commentary around product mix as well as new product launches and investments in capacity expansion.

Total operating expense for the quarter was $72 million or 59.6% of revenue compared to $59.9 million or 62.3% of revenue for the same quarter a year ago. This is the first full quarter where we consolidate the results of MVI, which will result in a slight uptick in our expenses going forward.

Our research and development expenses were $10.9 million for Q4 2018 compared to $8.4 million for Q4 2017. SG&A expenses were $61.2 million for Q4 '18 compared to $51.5 million for Q4 2017. Our spend increased primarily due to increases in headcount and related compensation expense. We had operating income in the quarter of $6.7 million compared to operating income of $3.9 million for the same period last year.

We continue to expect to invest in the growth of our current business and also in the development of potential new areas. We ended the quarter with a strong balance sheet with approximately $201 million in cash, cash equivalents and marketable securities.

I will end with a quick recap of our full year 2018 results. Our total revenues for the year were $444.9 million, which represents an increase of 33.3% reported compared to our full year of 2017. Revenue from our neuro business was $294.3 million for the full year 2018, an increase of 26.6% reported. Revenue from our vascular business was $150.6 million for the full year 2018, an increase of 48.6% reported. Our gross profit for the year was 65.7% of revenues compared to 65.1% of revenue for the full year 2017. We had non-GAAP operating income for the full year of $30 million compared to a GAAP operating income of $1.2 million for 2017.

Today, we are introducing revenue guidance for full year 2019 in the range of $525 million to $535 million. This guidance represents our current views and takes into account components of our business, including our markets, product introductions, competition and currency. We believe we have more potential drivers of growth in our business than prior years. Regarding the progression of the year, historically, we have seen Q1 revenue to be sequentially flat. However, last year, we saw a strong sequential increase due to an accelerating stroke market and international launches. We expect our first quarter revenue this year to be slightly above our fourth quarter, and we remind you of the difficult year-over-year comparison. Additionally, we expect to see summer seasonality in Q3, as we have historically experienced.

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

Thank you, Sri. As we look -- as we now look to 2019, we are excited to continue our important work. We remain steady and focused on what has always driven us, and that is making better and better products to help more and more people. We have begun several major initiatives to invest in our people and infrastructure to support these efforts. Last year, we added more talent and depth to our team and secured additional space. We also continue to evolve the structure of our team to support our growth. Recently, we announced the addition of 2 new outstanding individuals, who will be invaluable additions to our board structure. As we look forward, we believe we can contribute as a health care company in even more significant and profound ways.

Thank you for your attention and time today. We'd now like to open the call for questions. Thank you.

(Operator Instructions) Your first question comes from the line of Jason Mills with Canaccord Genuity.

Great. Can you hear me okay?

Yes.

There are several notable areas on which I could query you, Adam. I'm going to focus on 2 and hope that others fill in the rest -- stroke and one area we don't talk a ton about, but was discussed quite prevalently at the recent AANS, CNS and ISC meetings with respect to intracerebral hemorrhage evacuation endoscopically. So on the stroke side, just a couple of ones I'll kick off, and then ICH, I just wanted to get your thoughts on the 2 trials you're sponsoring and your sort of overall thoughts on the eventual commercialization of products there and the opportunity long term for revenue contribution from ICH. On the stroke side, the sequential growth that you mentioned in the U.S., specifically, seemed to be the strongest of the year, not only for the whole business, but for U.S. stroke specifically and I would like for you to confirm that. And then secondly, more macro question, Adam. The 10,000 incremental procedures that the market saw in the U.S. this year over the last, is that sort of the capacity for -- of the market in terms of year-over-year increases in your view? Or do you see some of these programs and increasing investments across the country at stroke centers allowing for the market to sustain even more year-over-year nominal procedural growth than that potentially? And then the last stroke question is China. I think your competitors drive a lot from China in stroke, and you just signed a distribution relationship with a new distributor there. I wondered what your thoughts would be with respect to Penumbra's opportunity in China.

Thank you, Jason. I hope I can remember them all. So let's start with stroke. And before I sort of get into some of the nuance question -- or answers around capacity and all, maybe I'll let Sri confirm the numbers specifically in terms of the sequential growth numbers and then I'll pick it up from there.

Yes. Well, the business and the momentum across both businesses, but particularly stroke, continues at a very strong pace for us, Jason. And just to dig into the neuro number, if you parse through the commentary we had, there was some classification movement between neuro and peripheral because of the launch in Japan. But one thing we did comment on, which you picked up on, was that in the U.S., our stroke business grew sequentially double digits, which is a pretty big rate of growth for us. That, just to expand on that, translates to over 30% year-over-year growth. We don't typically talk about those numbers, but given sort of some of the nuance in neuro, it was important to point out our stroke business continues to do very well, but I'll let Adam touch on the other questions.

Yes. So building on that specific growth, we are as confident as we've been around our stroke business and the tools that we're adding to physicians to be able to attack this. The launch of JET Engine has been very successful, not just in the catheter part of it but in the engine part of it. We are really seeing an understanding of the importance of the power of the aspiration source and what that can do for physicians in the way they treat these patients. So that has gone extraordinarily well.

As it relates to the capacity of the market, let me just sort of remind you our comments around the growth last year and what we expect this year. We don't know and do not have the ability to sort of look out in -- with certainty and say that we're going to have another sort of 10,000 patients. That could happen, and I had said that in my prepared remarks, but it really is the -- we're still relying on all these local efforts to drive most of that growth. And as we saw last year, it was not even by quarter-to-quarter. The fourth quarter of 2016 and the first quarter of 2017 were particularly strong and then we saw sort of a more normalized growth, so we don't know for sure. I believe that the growth, the ability of our market in the U.S. particularly to absorb growth is quite high. I don't think that's the limiting factor.

I think the limiting factor is really getting the patients to the hospitals. I think we -- and I've said this before a lot, I think we have enough physicians, we have enough capacity, that may not be true at every single center that is doing this, but across the board, as a whole, I think, the market can handle whatever growth is delivered to it by the work that's being done. So I think that, that is not the biggest worry, it's just getting the patient to the right place. Briefly, on China, it's very early. Obviously, that is a market that we think we can be very helpful. There are some -- we're early on and just getting started. And so it's a little too soon to start predicting specific numbers and success there. But obviously, if we can help bring that into it, that would be very helpful.

I think I misspoke, just to go back, I -- when I was talking about the growth -- exceptional growth, I think, I said Q4 '16 and Q1 of '17, I, obviously, meant Q4 '17 and Q1 of '18, I apologize, [you're off]. Moving to ICH briefly and our Artemis device, I think it was really exciting to see the level of interest and dialogue and conversation after International Stroke Meeting joint section before. That's really the first time we've seen that level of engagement and discussion. I think we are seeing the result of the MISTIE trial, which was -- were presented, which -- that showed the MISTIE endpoint, the real benefit there since it was a different procedure than what we do, is it validated the need to get most of the clot out. And I think that really becomes the most important thing, it's our thesis, it's how a product is designed, and it's being used in the field and it's quite successful. So -- and it does it in a way and in a manner that is as atraumatic and -- on the brain as possible. So I think all of that was good news for us. And I think, it provides us with a potential success story going forward. As I've said in the past, this is going to take some time, some education.

We are running, as you mentioned, 2 trials, the MIND trial being sort of the premier, randomized trial on that one. As that takes time to enroll, we are very optimistic, but I still think we're several years off from seeing a significant commercial impact. But for those patients who are being treated today, I think we're pretty confident, and we think this is some beginning of some foundation for some success in the future here.

Your next question comes from Robbie Marcus with JP Morgan.

Sri, maybe I can start with you and just try and dig into some of the puts and takes for next year. There's a lot of good things, there's a couple headwinds, but I want to make sure people understand maybe the cadence throughout the year you gave us first quarter, given there are a couple of moving pieces. And if you can just touch on the thoughts about the deceleration in growth rate for next year, and what's really driving that? And how much is conservatism with unknown market growth and how much is more appropriateness?

Sure. So Robbie, as we sort of touched on in our comments and even in the first question from Jason, the momentum of the business continues to be robust and is moving along the path that I think we have sort of expected and talked about even a year ago today when we started talking about entering 2018. If we look at the guidance, the 18% to 20% growth over 2018, where we saw an acceleration in stroke, where we saw really robust vascular growth in the back half of the year and where we saw currency, at least, for the first half of the year to be beneficial to us, we'll face that headwind in the first half of '19. But those are the things that we go up against. But as we've always said, if we break up between neuro and vascular, in neuro, we're very tied to the market growth in stroke. And as you've heard, the market accelerated in 2018. We've thought about a more normalized growth. We think the last 3 years, that's an average of 6,000 to 7,000 patients, so that gets you sort of a high-teens market growth in the U.S. That gives you a good benchmark for our business. We also talked about the aneurysm business growing in low single digits. So that all gives you a pretty good guide for how we think about our neuro business and you can, obviously, sort of back into how we see vascular to get back to the 18% to 20% growth. But I also -- just to add one more thing, I mentioned that we see more potential drivers in the business and that's just the current business, more areas that can contribute to growth gives us more confidence that we can keep the sustainable growth going into '19 and beyond.

And Sri and Adam, maybe if I can just ask the topic du jour. Coming out of the JPMorgan Conference, it sounded like you hadn't really seen much in way of competition from Medtronic and Stryker on the aspiration side. Any updated thoughts in what you're seeing there? And I'm assuming you still feel very confident in being able to counter any competition that comes your way?

Yes, Robbie, it's Adam. I -- let me maybe sort of frame how we see competition maybe a little differently from the specific comment that we haven't seen competition yet. First of all, obviously, we respect and have a great deal of respect for our competitors. They have helped push this field and grow this field and, certainly, pushed us to make better and better products. And we never take them for granted or lightly. But we've always had competition. So we were on this call at this exact time last year, we were talking a lot about competition. We had just had a bunch of companies get on labels, having sold off-label for a bit, and we're still facing that same competition. I think what has happened is it's validated more and more that aspiration first is critical, and I think that's been helpful. But to say we haven't faced it, we face it every day, and we're going to face it every day going forward. The companies will continue to launch new products, there'll be new companies coming, and we have remained very confident that between our extraordinary work and, I specifically called out our engineering team for doing extraordinary work, that they deserve another shout out. They've done really amazing things and what we have done in the past and what we have coming gives us a lot of confidence together with our really first class, world-class commercial team, I think, puts us in a position to continue to be in the leadership position, particularly as the field moves toward aspiration first.

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

First question, Sri, just for you. I was just curious, in the fourth quarter, could you quantify the amount of revenue that was reclassified between neuro and peripheral? And then maybe just give us a sense as to what the neuro growth rate would have been if the reclass didn't happen?

Yes. That's, I think, a very good question. And to try to help on that a little bit, just to give context, that market, the peripheral embolization market in Japan, is not a huge one. We would characterize the inpatient market opportunity to be sort of sub-$50 million, just to give you some order magnitude. We had a share and a position there, obviously, utilizing our neuro coils, which were indicated for peripheral use that -- obviously, the reason and rationale to go with our branded peripheral products is to make additional headway and progress in penetrating that market. But just to give you a sense of sort of the size of the market, if we were to sort of think about normalizing for that effect, we would have seen our neuro business have a sequential -- a sequentially up-quarter over Q3, and we would have seen our vascular business have a year-over-year growth consistent with the last few quarters. So I think with that, you can have some -- those several comments around the market and sort of the effect sequentially and year-over-year some sort of context for what that might be worth.

Okay. I was just trying to get it's -- just trying to get a sense for relative to that 11% on a constant currency basis, how much higher that would have been in neuro overall? Is that a number you're willing to give?

Yes. I think, with the comments I gave, I think you could easily back in the math that would put you in the high-teens. That's just for sort of the actual results in the quarter. And I'll sort of remind you, we mentioned 2 things; we mentioned it was the sort of a classification between neuro-peripheral, but also the comps. We had a pickup starting in Q4. Our neuro business in Q4 grew 31% and you remember accelerated to 42% in the first quarter. So we're going up against some challenging comps in Q4 and then particularly also in Q1.

Yes. No, I definitely recall that and see it, big, big difference in comps in terms of Q2 and 3 versus Q4 for '18, given what happened last year. So that's helpful color though. And -- but just also -- just one other clarification, looking at your public disclosures, the last 2 quarters, it seems like the stroke business was growing in the 40% range globally and obviously much tougher comp this quarter. But I was just curious if there's any kind of help on what the stroke business grew this particular quarter? And again, I realize there was a tough comp. It sounded like most of the change, if you will, was outside the United States?

Yes. You nailed it, Bob. I think you got it spot on and that's why we thought to help -- if we were to sort of dissect that for you geographically in stroke and in neuro. In stroke, we said in the U.S., we grew year-over-year, albeit against that of Q4 comp, over 30% this quarter; and internationally, because of a couple things, the one that we just talked about with moving some of that focus into the peripheral embolization launch in Japan, but we also were launching, in Q4 and Q1 of last year, ACE68 in Japan. So we have a few things that all sort of lead up to the difficult comps within neuro and international specifically, but I hope some of those comments help give a flavor of not just in stroke in the U.S., but overall neuro. If you sort of adjusted for that, we would be in a comparably strong position.

Okay. So just to be clear, that 30% was U.S. ischemic stroke year-over-year?

U.S. That's correct.

Okay, okay. And then lastly, just real quickly, you made this comment about more growth drivers in 2019 versus 2018. And I just want to, like, what exactly are you referencing there?

When we -- if we just turn back the clock and think about our commentary going into '18, a lot of it was around stroke market, and we talked about the anticipation of new products in the stroke portfolio and to a lesser degree, on the vascular side. I think what's clear is, within stroke, again, you have the markets. I think, we feel like there's a lot more foundation set for us to see longer-term growth. Adam touched on some of the additional states that have made announcements, including Virginia just last week. And on the product side, the continuation of sort of expanding and building our robust portfolio there. Outside of stroke, we continue to work on things in neuro outside of stroke as well. On the vascular side, I think it's now pretty clear. We've been talking about vascular for a little while, but the results are now really starting to show why we've been so enthusiastic and optimistic about this area. We went so far as to say we think it could be a larger opportunity potentially than neuro for us. There are -- there's a lot of commercial progress. There's also product development. Clinical -- clinically, we have the EXTRACT trial that could help us move into PE, pulmonary embolism market. And then you go into geography, there was a question earlier about China and Japan. We just talked about expanding our peripheral business. And by the way, our vascular business outside the U.S. is very small. There's a great long-term opportunity there and all that is just what we would consider our existing business. There are new areas that we're continuing to work on that many things we have yet to discuss. So I think you can even tell in my answer how much there is and how enthusiastic we are about it.

Your next question comes from Larry Biegelsen with Wells Fargo.

Just a couple on kind of new opportunities for me. So first, Adam, can you talk about the contribution you're seeing from CAT RX, the coronary opportunity and your expectations for 2019? Along that vein, I'll just ask my follow-up question. On MVI, you assumed controlling interest last year. Could we start to see some clearances in 2019 from that technology? And just along the same lines, you talked about investing in new areas. Are there new product launches can we expect in 2019? I didn't hear anything about that on this call.

Sure. Thanks, Larry. Let's start at the beginning, CAT RX. It's definitely, as I said on some of the prior calls, the product is working. We're gaining a lot of confidence in its value to interventional cardiologists in those particular procedures. It did have some value, I wouldn't say, it's sort of notable or material at this point, but I do think that it will continue to have, and we'll see some of that success play in '19 and hopefully beyond. So we'll start to talk about that maybe a little more as we progress in the year. MVI, it's -- I'm really not prepared to go into a lot of details at this moment on this call, but let's just sort of sum it up. As I think for those who know us, we wouldn't have likely bought a controlling interest in that enterprise if we did not feel that we were -- we had a lot more certainty around that than we are used to, and so we're pretty excited in the progress we've made. And then beyond that, we're certainly -- I'm not prepared on this call to go into any more details.

All right. One last question, Adam. On the international, it's clear that in U.S., ischemic stroke was strong in Q4, the above 30% growth, but international seems to have been weighed down a little bit by some of these issues. Can you tease out as to how temporary those issues are? Do you expect kind of a bounce back in international ischemic stroke in Q1 or if some of these things kind of take a few quarters to play out?

Yes. Thanks, Larry, for the question and that clarification. Look, our international stroke business is very strong. We spent a lot of time last year talking about the nuances of [ACE68] launch and all of that, and so what we said then is now turning out to be true. And I think, really, for the most part, those are the nuances that created this sort of moment. There's nothing about -- our international stroke business that's different than the U.S. products. We're one generation behind in a lot of those markets. But beyond that, we're moving quickly. The same issues apply where aspiration is gaining ground in many of these markets, and we feel extraordinarily well positioned to benefit and help those markets and their patients. So I don't think there's anything to read into it other than the nuance of this particular quarter and potentially next.

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

Can you hear me okay? A couple of things. You mentioned that Virginia System of Care has come online and you mentioned a couple of other states. Can you walk us through, once these guidelines are established in these states, how long it takes to sort of transition those patients into a more productive continuum or cycle of care?

Yes. It's a great question. And let me clarify, we sort of lumped all those states in with a list of things that they had done from protocol changes, resolutions as well as laws. Virginia passed a resolution, which really is the first step, it's not necessarily going to see a major change by law yet. It's really a resolution of sort of -- for lack of better way of describing it, support, that they want these patients to be treated. And that will -- I think is really the first step in moving towards the next phase of the legislative process. What we wanted to demonstrate is the growing support. We're now getting some bigger states added to the list. They are reaching out to this -- to get ahead of stroke team, and we're really, I think, seeing some of that momentum. To answer this specific question, how long does it take to start seeing that benefit, we really only have a few states that we can sort of look at. And I think it depends on the state and size of the state and some of the complexities. Smaller states, Arizona, we have had over a year of that benefit and it -- we saw notable change in the number of patients being treated. Tennessee is still in the first sort of 6 months of that, so it's a little premature to sort of report on some of those numbers. But I do think it will take a while, but the overall point of this was, there is real momentum, the conversations, the energy around this in the various states, the list of states are growing. So we are very heartened by it. And we think over the next 3, 4 years, we're going to see a big transformational change.

And my second question. One of the things which haven't heard yet on this conference call is about your stent retrievers, 3D, and if there's anything you can comment on how that is going. And a couple of physicians that we've spoken to have mentioned that other companies are "packaging" their stent retrievers and their catheters. If you can think about how to position your products in that environment, that would be helpful?

Yes, listen. We -- there are a lot of things we, obviously, don't call out every product by saying our stentriever is, as you know, a sort of new generation stentriever, where we specifically design to sort of trap and hold the clot. It's not really sort of the hollow tube design, the older design that our competitors have. There's been -- was a paper out of Germany that showed our product working really, really well in comparison to others. And I think that's been worth pointing out and helpful. But the bottom line is, we're not selling sort of individual tools like that. We're selling the larger idea that if you start with our aspiration tools, whether you use it in combination or as a bailout, you'll have huge success using aspiration as the primary, if not sole, mechanism in your case. And so that's always been our focus. To answer your question around sort of packaging in kits or bundles and whether it's physically packaging them together or pricing them together, we have always competed quite well in this market, in the world of packaging and pricing and sort of holistically thinking about it. There's nothing about competitive behavior that has been different or unexpected and not able to be responded to by us. And so we feel perfectly good about where we are sitting in that regard.

Your next question comes from Isaac Ro with Goldman Sachs.

Adam, I wanted to maybe ask you and, Sri, if you could explain a little bit upon the assumptions you're making for your top line guidance this year, specifically with regards to how you're dissecting your expectations for patient growth in the core stroke opportunity for the U.S.? I know you gave some commentary earlier in the Q&A about procedure growth versus treatment growth, and it would just be helpful to get a sense of how you're thinking about the overall market, a lot of moving parts between competition and what you guys are doing, so maybe that as a starting point will be much appreciated.

Sure, Isaac. I'll start and Adam can jump in if I don't get all your questions. But as you alluded to that, we break down neuro and vascular. We're guiding to a top line of 18% to 20% following the roughly 26% reported growth that we had in Q4. The market growth drives a lot of our thinking and is the most sensitive to our results. If you look back the last 3 years, last year, we added 10,000 more patients treated in the U.S. and the prior 2 years before that was around 5,000. There's a lot of different reasons for the acceleration. The local efforts, some of the state initiatives we feel are more longer-term influencers of growth and, obviously, we had the data on extended window, which opened up new population and expanded the addressable market in terms of patients we think we can treat. So when we think about 2019, it would be great if we continued at that pace of growth, but I think we are looking at it, given the -- most of the core drivers are in the local efforts, which have been that way since the last 3-plus years, we think about it -- a normalized rate as kind of -- if you were to think of the average of last 3 years, you're at sort of 6,000 to 7,000 patients more in 2019, which translates to sort of a high-teens market growth. The other things, everyone's focused on sort of move to aspiration and competition, we obviously feel good about each of those, but I think the market growth is more the key driver. And there are other parts of neuro. We talked about the aneurysm market kind of growing in the low single digits. So that gives you a good perspective of neuro and by implication, vascular to get to sort of the overall top line number that we're guiding to of 18% to 20%.

Super helpful. And then maybe, Sri, just a follow-up. And if, Adam also chime in on that question. Just on gross margin, last year, obviously, it was in a pretty narrowband, but a little bit of oscillation quarter-to-quarter. And just given the exit run rate there for the end of 2018, can you just help us think through key gross margin considerations for this year between all the things you're doing with mix, the [centage] currency might matter, the production ramp that you guys have in the new facility, it'll be just helpful on the gross margin line?

Sure. So on gross margin for the year, we were up 60 basis points for the year. It -- as you heard our commentary throughout the year, we've always talked about being in the mid-60s. The place that we are and the investments we're making, there are a couple of things, flavors of that, that will pressure or keep gross margins where they are, the capacity expansion to keep up with this growth. We've invested pretty aggressively. And on our prior call, we talked about taking more space outside of our campus in Alameda for expansion growth. Second, with new product launches, we had a number of them in 2018 and, obviously, as we start with new products that weighs us on a little bit before we get a little more maturation in some of our production of products post launch. And geography plays in it to some degree as well. This quarter, we launched our peripheral coils in Japan and that's -- we've touched on the product mix as being an influencer, particularly between last quarter and this quarter. So the expectation is, we'll be in this sort of area, but we also believe and that's -- as we look out next year, but we also continue to believe that over a longer period of time, we could make some serious progress in gross margins. But right now there's a whole heck of a lot of growth that we're trying to invest in and focus on first.

(Operator Instructions) Your next question comes from Glenn Novarro with RBC Capital Markets.

On vascular, even after you adjust for the reclassification, vascular was still stronger than what we expected. So Adam, can you point out or point to or -- anything that can help us understand why vascular continues to come in better? Is it -- you opened up some new accounts and some bigger users have come on board, is it new reps or better rep productivity? Any color would be helpful. And then have a follow-up.

Yes. Thanks, Glenn, for asking that question. I think it's really pretty simple. When we went public 3.5 years ago, we talked in the little time we had left in all meetings about this opportunity and what we thought we could do. We've been trying in, again, limited time we have to talk about this, as a real important opportunity for both patients and the company's benefit. The pathway here is different. With neuro, all of our energy is now spent beyond continuing to make better and better products, all of our energy is spent trying to get patients to the right hospital. In the U.S., particularly, the patients are already there and they're already being treated. So our only goal or effort is to convince physicians that removing the clot, as opposed to dissolving it or macerating it or doing something else with it, is the most important thing and that helps the patient. And we've just been going at this sort of month-by-month, year-by-year, we started with one set of physicians, we're moving into the second, there's a third with interventional cardiologists who do some of this work, and that's the pathway. So everything we sort of said for the last bunch of years is now coming to be true. And so we're seeing the benefit and the success that, that brings. We're really happy to see that. We're excited for the patients that are benefiting. And we are not wildly surprised. We can't predict exact numbers on a quarterly basis, but we're -- this is what we had hoped would happen.

Okay. Sounds like it's just really good blocking and tackling. My follow-up is, vascular really is starting to look like it's going to be a second leg of growth for the company. And I think in Sri's comments you talked about growth being kind of similar to 2018. My question is, why can't growth be stronger, given the market is so much bigger and your penetration is so low?

Glenn, just to clarify, I think, look, last 2 quarters before this when we were growing year-over-year in the sort of mid-40%, our growth really accelerated in the back half of 2018 as we got to new physicians, vascular surgeons as an example, and as we launched new technology to get to different areas, like we discussed in the Q2 and Q3 calls. So we will face that as we go into '19. Unlike stroke, if you think about what drives our growth, we spend a lot of time answering some questions on this call on neuro about how our growth is tied to the market growth, which is getting patients to the right place to be treated. As Adam mentioned, it's a little bit different here. The initial market to target are the 150,000 patients that are in the hospital being treated, and it's our ability to take those cases and be involved in working with physicians to educate them on all the different avenues and diseases where Indigo can be used. So there's our first generation of tool with very little clinical data. So this is very much up to the strong commercial efforts of our team that are knocking this down and allowing us to see the growth that we're seeing. So it's hard to be able to sort of forecast that out too far for you, but I think, what we can say is, we feel like we're in the very early innings. We're starting to see a real acceleration in that business, and we're quite excited about it.

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

Thank you, Chantel. 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 first quarter call.

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