Penumbra, Inc. (NYSE:PEN) Q2 2023 Earnings Call Transcript

Penumbra, Inc. (NYSE:PEN) Q2 2023 Earnings Call Transcript August 1, 2023

Penumbra, Inc. misses on earnings expectations. Reported EPS is $0.01 EPS, expectations were $0.28.

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

Jee Hamlyn-Harris: Thank you, operator, and thank you all for joining us on today’s call to discuss Penumbra’s earnings release for the second quarter of 2023. A copy of the press release and financial tables, which includes a GAAP to non-GAAP reconciliation can be viewed under the Investors tab on our company website at www.penumbrainc.com. During the course of this conference call, the company will make forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding our financial performance, commercialization, clinical trials, regulatory status, quality, compliance and business trends. Actual results could differ materially from those stated or implied by our forward-looking statements due to certain risks and uncertainties, including those referenced in our 10-K for the year ended December 31, 2022, filed with the SEC.

As a result, we caution you against placing undue reliance on these forward-looking statements, and we encourage you to review our periodic filings with the SEC, including the 10-K previously mentioned, for a more complete discussion of these factors and other risks that may affect our future results or the market price of our stock. Penumbra disclaims any duty to update or revise our forward-looking statements as a result of new information, future events, developments or otherwise. On this call, certain financial measures are presented on a non-GAAP basis. The corresponding GAAP measures and a reconciliation of GAAP to non-GAAP financial measures are provided in our posted press release. Adam Elsesser, Penumbra’s Chairman and CEO, will provide a business update.

Maggie Yuen, our Chief Financial Officer, will then discuss our financial results for the quarter. And Jason Mills, our Executive Vice President of Strategy, will discuss our 2023 guidance. With that, I would like to turn over the call to Adam Elsesser.

Adam Elsesser: Thank you, Jee. Good afternoon. Thank you for joining Penumbra’s second quarter 2023 conference call. Our total revenues for the second quarter were $261.5 million, a year-over-year increase of 25.5% as reported and on a constant currency basis. Our revenue growth in the United States accelerated to 32% year-over-year our fastest in half a decade, excluding the COVID impacted second quarter of 2020. U.S. growth was driven by our thrombectomy products in both vascular and neuro as total U.S. thrombectomy revenue increased more than 40% year-over-year. U.S. vascular thrombectomy revenue accelerated to 50% year-over-year growth and U.S. neurothrombectomy grew 20% year-over-year, the fastest growth in our U.S. stroke business in five years.

We expanded gross margins in the second quarter, consistent with our expectations and we expect to make more progress in the second half of the year. We also increased our operating profitability in the second quarter. Non-GAAP operating income was $20.3 million, representing 7.8% of revenue in the second quarter. We grew our operating cash balance by $22 million sequentially as well. Looking forward, we expect to deliver strong revenue growth, gross margin expansion and increasing profitability and cash flow over the foreseeable future. Penumbra had a very successful quarter, and we are still in the early stages of the journey to bring our proprietary thrombectomy technologies to patients in the United States and around the world. Our momentum is being driven by the extraordinary outcomes we are seeing in patients treated with Lightning Flash, Lightning Bolt 7 and RED 72 with SENDit technology in the early days of launch for each of these products.

Starting with Lightning Flash, we doubled the number of venous thrombectomy cases employing Flash in the second quarter compared to the first quarter. And we grew our total venous case volume double-digits sequentially, coming off a very strong Q1. We had another extraordinary quarter with Lightning Flash, and we have many more new customers just learning about and starting to try Flash in the next several quarters. Lightning Flash’s transformative power, speed, safety, and efficacy profile is the biggest driver of the exceptional early adoption of the product. The other important factor resonating with physicians is our straightforward pricing, which adheres to the same simple value-sharing pricing philosophy to which we’ve been committed throughout our history.

Moving to Lightning Bolt 7. Our U.S. arterial revenue grew double-digits sequentially, representing the fastest growth in this franchise since the launch of Lightning 7 in early 2021. We saw acceleration of Lightning Bolt 7 cases in the last two months of the quarter as conversion from surgery, lytics and other mechanical thrombectomy products gained momentum. That said, we are even earlier in the launch process for Lightning Bolt 7 than we were with Flash this time last quarter. As many prospective customers are waited to allow some time to pass before starting the back process for Bolt after engaging in the same process for Lightning Flash last quarter. Consequently, we think that adoption of Lightning Bolt 7 will build momentum as we move through this quarter and into the fourth quarter of 2023 and the first quarter of 2024.

Taken together, Lightning Flash and Lightning Bolt 7 have generated more pending hospital customers than during any other launch in our history. We currently have well over 1,000 active submissions in hospitals for approval of either Lightning Flash or Lightning Bolt 7. In order to be under submission for approval, a specific physician or a group of physicians must champion bringing the product into the hospitals. Importantly, the majority of these physicians represent new customers to our thrombectomy products. Even further, we expect many additional hospital submissions over the next few quarters. Historically, once the submission process starts at a hospital, we have been extremely successful in getting our products through these approval processes.

We are just getting started with Lightning Flash and Lightning Bolt 7. Our commercial team’s execution of our strategy for Lightning Flash and Lightning Bolt 7 is incredible. We have a clear strategy to reach the majority of the 800,000 annual venous and arterial patients in the United States over the next five-plus years, and we are convinced computer-aided thrombectomy is the way forward. Our neuro business also had a strong quarter, and I saw firsthand this momentum at the Society of NeuroInterventional Surgery Conference yesterday in San Diego. The outstanding early results we are seeing with RED 72, with inner catheter SENDit technology foreshadow an exciting period for our stroke franchise. This early feedback suggests SENDit could prove to be the most important technology ever launched, addressing the most challenging part of stroke intervention.

Safe, fast and repeatable trackability around the ophthalmic artery to the face of the clot. We believe RED 72 with SENDit represents the premium aspiration catheter and is as differentiated in innovation for the front end of the stroke intervention as Thunderbolt could be for clot removal once the catheters track to the face of the clot. We have seen positive share shift with this technology for the last two quarters, and expect even more meaningful share shift in stroke in the quarters ahead leading to a dominant share of the U.S. stroke market over the next three to four quarters. Launching RED 72 with SENDit means we don’t have to wait for Thunderbolt to see real share gains and market growth in stroke. And this technology only furthers our enthusiasm and confidence in Thunderbolt once it is cleared.

Internationally, we are seeing early success with the launch of our first-generation computer-aided products in Europe, and we have plans to expand access to our most advanced thrombectomy products to our international vascular teams over the next few years. In addition, our international teams and partners also see enormous potential to further expand our leadership in stroke intervention outside the U.S. with SENDit and Thunderbolt over the coming years. Turning to Immersive Healthcare. I am excited about the additional progress we’ve made during the quarter working with the Department of Veterans Affairs and key private healthcare partners. We’re hitting important milestones together as we monitor the clinical success of our VR platform across myriad applications in physical rehabilitation, mental and cognitive health.

Andrey_Popov/Shutterstock.com

Before I turn the call over to Maggie, I want to say that we recognize expectations for our business are high. In fact, we had very high expectations for ourselves. We have a lot of confidence and our ability to succeed in the near term while we navigate agitated competitive reactions. We also believe in expediting the inevitable. And so, we are laying the foundation to help all patients who can benefit from our thrombectomy products. Our current year guidance is a guidepost to near-term success, but it’s just the first year within the next five-plus year journey. We are paying a lot of attention to the guideposts and success over this longer period, and I believe this visibility we have to the larger patient opportunity is clearer to us now than it has ever been, owing to the feedback we’re getting on Lightning Flash, Lightning Bolt 7 and RED 72 SENDit.

That visibility gives us increasing confidence that we will continue to deliver strong revenue growth, gross margin expansion, and significant profitability and cash flow over the foreseeable future. I’ll now turn the call over to Maggie to go over our financial results for the second quarter of 2023.

Maggie Yuen: Thank you, Adam. Good afternoon, everyone. Today, I will discuss the financial results for the second quarter of 2023. Financial results on this call for revenue and gross margin are on a GAAP basis, while operating expenses and operating income are on a non-GAAP basis. The corresponding GAAP measures and a reconciliation of GAAP to non-GAAP financial measures are provided in our posted press release. For the second quarter ended June 30, 2023, our total revenues were $261.5 million, an increase of 25.5% reported and 25.5% in constant currency compared to the second quarter of 2022. Our geographic mix of sales in the quarter was 71.4% U.S. and 28.6% international. U.S. reported growth of 32% and our international regions increased 11.7% reported and 11.6% in constant currency.

The sequential growth of 8.3% was primarily driven by continued momentum in our U.S. Vascular thrombectomy business as well as growth in neuro thrombectomy business across all regions. Moving to revenue by franchise. Revenue from our vascular business grew to $152.7 million in the second quarter of 2023, an increase of 23.6% reported and 23.7% in constant currency compared to the same period last year, driven by a 50% year-over-year growth in U.S. thrombectomy and a relatively flat year-over-year for the rest of our global Vascular business. Revenue from our Neuro business was $108.8 million in the second quarter of 2023, an increase of 28.3% reported and 28.1% in constant currency compared to the same period a year ago, driven by new products in the U.S., Europe and Asia Pacific.

Gross margin for the second quarter of 2023 is 63.8% compared to 64.3% for the second quarter of 2022 and 62.6% last quarter. The sequential improvement is in line with our expectations, driven by higher thrombectomy mix and ramping up new product launches productivity, offsetting inflation headwinds. As our second quarter gross margin still reflects some Lightning start-up costs from the prior quarter, our operation team continues to execute well to support the increasing demand and we expect further gross margin expansion in the second half of 2023. Now on to our non-GAAP operating expenses, which exclude the amortization of acquired intangible assets of $2.4 million, $1.8 million and $2.4 million for this quarter, for the same quarter last year, and last quarter, respectively.

Total operating expense for the quarter was $146.6 million or 56.1% of revenue compared to $132.4 million or 63.5% of revenue for the same quarter last year and $140.7 million or 58.3% of revenue last quarter. Our Research and Development expenses for Q2, 2023 were $21.5 million compared to $19.6 million for Q2, 2022 and $20 million for last quarter. SG&A expenses for Q2, 2023 were $125.1 million or 47.8% of revenue compared to $112.8 million or 54.2% of revenue for Q2, 2022 and $120.7 million or 50% of revenue last quarter. We recorded operating income of $20.3 million or 7.8% of revenue in the second quarter of 2023 compared to operating income of $1.6 million for the same period last year and operating income of $10.4 million or 4.3% of revenue last quarter.

While we continue to invest in long-term growth and effectively allocate resources and investment to support new product launches, I’m very pleased with our team’s great execution and expect our operating margin expansion trend to continue in the second half of 2023 and beyond. Turning to our cash flow and balance sheet. We ended the second quarter with a cash, cash equivalents and marketable securities balance of $221.1 million and no debt, which is an increase of $22 million from the last quarter. The sequential increase in cash is driven by an increase in profitability and improvements in working capital turns. And now, I’d like to turn the call over to Jason to discuss our guidance.

Jason Mills: Thank you, Maggie, and good afternoon, everyone. We increased our 2023 revenue guidance to a range of $1.05 billion to $1.07 billion, which represents 24% to 26% growth over 2022 total revenue. We continue to expect growth in our global Vascular business to be slightly above this range and growth in our global Neuro business to be below this range for the full year 2023. From a quarterly perspective, we expect growth in the United States to accelerate modestly from the record 32% growth we posted in the second quarter, while we expect our international growth to be mid-single digits in the third quarter due to seasonality and a challenging year-over-year comparison and reaccelerate to double-digit growth in the fourth quarter.

In sum, we expect our global revenue to grow in the range of 23% to 25% in the third quarter on a year-over-year basis, accelerating to 30% cost growth in the fourth quarter. Moving down the income statement. We expect both gross margins and non-GAAP operating margins to expand further as we move through the second half of 2023. We continue to target over 70% gross margins within a few years and over 10% operating margins by the end of 2023 with further expansion expected in subsequent years. I will now turn the call back to Adam for closing remarks.

Adam Elsesser: Thank you, Jason, Maggie and Jee. I know I speak for the entire Penumbra team when I say that we are at a defining moment in our company’s history, a moment almost 20 years in the making, where we can see clearly now how our innovation with computer-aided thrombectomy can help almost everyone with blood clots in their arteries and veins. We fully understand how much work we have to do going forward. We have studied and learned from the best companies before us who have taken on market development and done it the right way. I can promise the following, myself, our entire Penumbra team, the physicians we will work with and the hospital systems are ready to take on this challenge. We are going to keep on trying until we reach our highest ground. The next five-plus years will be hard work, but the most exciting part of the Penumbra journey. Thank you. Operator, we can now open the call to questions for the next 40 minutes.

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Q&A Session

Operator: [Operator Instructions] Your first question is from the line of Bill Plovanic with Canaccord. Your line is open.

Bill Plovanic: Great. Thanks. Good evening. It’s an impressive quarter. I’m trying to figure out where to start. But I think in the U.S. neuro, can you help us understand – I mean, it sounds like the RED 72 with the SENDit is really surprising even you internally. Just kind of what’s really going on there in terms of that adoption and then an update on the Thunderbolt? Do you expect to have that trial enrolled by the end of the year? Is that kind of still on track or you get that out end of the year and then launch it in ’24?

Adam Elsesser: Yes. Great questions, Bill. Thank you. Yes, the good news, I won’t say that Red 72 with SENDit is surprising us. We’ve been in neuro for a long, long time. So, we know it pretty well. But it is obviously very heartening for us. As you know, we have spent the better part of 20 years tackling this issue, the idea of trying to navigate catheters of the right size up to the intracranial circulation and up to M1 and beyond when necessary. And we’ve had some great products. We’ve had some struggles, obviously, a few years ago, but to have a product now that can track better than anything we’ve launched even in the updated XTRA FLEX is really exciting for the team and heartening. And frankly, the physicians have embraced it, because if you can’t get there, Thunderbolt doesn’t matter.

You have to be able to get there in a routine way, and that’s a critical part of the procedure. I’m glad you asked about the Thunderbolt. Let me give you a little bit of an update. As I’ve mentioned in the past, the time line for that has been pushed out a touch. There are two reasons. The first is — and we’ve mentioned this at the first sort of roughly 100 patients enrolled, took a little longer to enroll due to the required 8-hour window, but we have seen enrollment accelerate now as the trial has progressed, that’s a really good sign. The second reason, the FDA asked us to modify the safety end point from all serious adverse events of 24 hours to symptomatic ICH at 24 hours. This request and change has not stopped enrollment in any way, but it does increase the sample size a little by about 75 patients.

This request was not related to anything specific to our trial or device, but seems to be made in order to make our trial consistent with other stroke trials that are currently being run. And to our knowledge, those trials have also been pushed out for potentially similar reasons. We’re finalizing the details with the FDA. And soon all that’s done, we’ll formally update this. But it might add another 12 months or so. That said, that allows us the time to really penetrate the market with 72 and SENDit, which, again, we don’t have to wait for Thunderbolt to do that, and we have the opportunity to take significant share, but equally importantly, or as importantly, grow the market with this premium product. So I think it’s set up for a really good run.

And you didn’t ask this question, Bill, but I know you will have it as your first follow-up. So I’ll – if you don’t mind, take the liberty of answering it first, and that is this slightly new timing, does not impact our projected numbers at all for 2023, 2024 or 2025. So, I wanted to make sure that I preempted the question.

Bill Plovanic: Good. Well, you preempted half the question. As you think of ’23 guidance in the raise, it reflects the quarter not much more. And I’m kind of wondering how do we think about – what are you including in the bottom end of the range and the top end of the range given the outperformance in the quarter and at least to our numbers, it doesn’t seem like you’re adding much in for the back half of the year? Thanks for taking my questions.

Jason Mills: Yes. Thank you, Bill, for the question. It’s a good question. So the first thing I’d say is that in our first two calls so far this year, we’ve raised our revenue guidance by about $60 million. I think that’s about three times the amount our results exceeded consensus expectations cumulatively over these first two quarters. But if you look forward, I think it’s worth noting a couple of things. Our updated guidance sort of – what our updated guidance accounts for and anticipates as well as maybe what it doesn’t fully factor in. First, we’d expect our U.S. business will grow faster in the second half of the year compared to the first. We did mention that in our prepared remarks. That’s largely driven obviously from Flash, Bolt and SENDit.

It also reflects our expectation that growth in peripheral thrombectomy, both in the U.S. and globally, will accelerate in the second half of the year. The last thing I’d say is we’re excited about what we’re seeing in the hospital submission process with an unprecedented number of largely new accounts pending. The timing, obviously, of these processes is variable. It can take anywhere from a few months to up to nine months plus. And I would say we have been appropriate about how we’re factoring this into our guidance at this stage. And overall, we think we have a lot to look forward to the balance of this year and into the next year.

Bill Plovanic: Thanks for taking my questions.

Jason Mills: Thanks Bill.

Operator: Your next question is from the line of Robbie Marcus with JPMorgan. Your line is open.

Robert Marcus: Oh great. Thanks for taking my questions. Maybe to start on peripheral vascular. Looks like U.S. was up 50%. The rest of the business was flat. Maybe you could just walk through what’s going on there trend-wise? Is there a headwind or slowdown in coils, anything outside the U.S. to point to the vascular business was a little bit below the Street. So just trying to understand great U.S. growth, but what happened to the rest of the vascular business?

Jason Mills: Yes. Thanks for the question, Robbie. Well, overall, we think the vascular business had a really strong quarter. Obviously, the U.S. – you mentioned the U.S. Peripheral thrombectomy business was up 50%. The U.S. total thrombectomy business, stroke was up over 40%. Internationally, there are obviously both coils and thrombectomy is really generally fairly early. We have Lightning 12 and Lightning 7 just getting started internationally, and there’s a lot of work to do. I wouldn’t say there is anything untoward going on. We just don’t have all of our premium products internationally. And in the United States, it’s really expected to drive that growth. So I think, the guidance reflects what we expect from our vascular business, really strong accelerating growth, especially driven from the U.S. market.

Adam Elsesser: Yes. And to be honest with you, we look at that as the opportunity as we bring these products, particularly Flash and Lightning Bolt 7 and RED 72 with SENDit and Thunderbolt, to those markets, because then we’ll have the opportunity to have a similar growth continue in the international markets. So, it’s really driven by the innovation and the technology that has always defined us.

Robert Marcus: And then maybe to just hit on some of the sequencing. You gave us, I believe it was 23% to 25% growth in third quarter, correct me if I’m wrong, and greater than 30%, in fourth quarter. That’s lower and higher than what the Street has for third and fourth quarter. So maybe just walk us through some of the puts and takes there and your confidence in that greater than 30% number in fourth quarter? Thanks a lot.

Jason Mills: Yes. Thanks for the question, Robbie. And we did point that out. As you know, we don’t typically guide quarterly, but we thought it was important to recognize the third quarter, I think the way that the third quarter had been sort of modeled from a consensus perspective, underappreciated the momentum in the United States, and the international markets was just a little bit too high. So, that’s the put and the take in the third quarter. I think where – we expect to get the growth, not just next quarter, but for a while as the United States market, I think that’s where folks want to see our growth, because that’s where Flash and Bolt are exclusively at this point. And in the fourth quarter, the comps on a year-over-year basis internationally are just not the same as they are in the third.

So as we mentioned, expect double-digit growth. So again, that’s compounded with the U.S. business that we’ll still have plenty of momentum, obviously, as we’ve said coming out of the second and the third quarters.

Robert Marcus: Great. Thanks for taking my questions.

Jason Mills: Thanks Robbie.

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

Larry Biegelsen: Good afternoon. Thanks for taking my question and congrats on a nice quarter here. Adam, just two clarification questions upfront. The Thunder delay of 12 months, what’s the basis there? So filing – was it filing by the end of ’23, does that pushed out to filing now end of ’24?

Adam Elsesser: Yes. We’ll get all the specifics – timing of that out when I told you when finished up with the – but generally, I wanted to quantify it with the extended of about 12 months. The most important thing, again, really, really want to stress this. We are not with – the performance, and you can see it in our numbers for the second quarter in a row, the performance of our neuro business is not waiting for Thunderbolt. We have this unbelievable premium product that is capturing share. It is the talk of SNIS that we were just at. So, we are in really, really good shape. And then on top of that, when Thunderbolt comes, we get to deal with the other part of the procedure, not just getting there, but making sure that in every case, we can get the clot out.

So I want everyone to be very, very clear. And I’m – appreciate your question, Larry, that the setup for us the ability to go after both parts of this procedure now are critical. And I think everyone knows how important trackability is. It was a topic for quite a while around us in our stroke gathers. So, the fact that we have a product that is doing such an amazing job in taking such share leading to my comment, that I think we’ll get the dominant share is great. And then to add Thunderbolt on top and to see how that will continue the growth curve of our stroke businesses is a great sign. So, thank you for the question.

Larry Biegelsen: Yes. Adam, I’m just wondering to follow-up on Robbie’s question, embolization has been a good business for you, growing mid-teens at least. What is going to do this quarter? And I’m wondering if the sales force is perhaps distracted launching two products. And just – I just want to sneak one in on vasc, it seems hard to get to – how vascular is going to grow faster than neuro for the year, given the first half, neuro has grown so much faster than Vascular? Thanks for taking the questions.

Adam Elsesser: Yes. Really good follow-up questions. The first one on the coils, we’re already in a majority market share with coil. So by definition, that is going to slowdown compared to the beginning of the two most significant launches in our company’s history. So, I think the numbers are fairly obvious when you do that. And don’t get me wrong, everyone is proud of our coils. They do great work and have a significant clinical benefit. But just by definition, that’s going to happen. The question around vascular, I think we answered it in the script. We have way more hospitals coming on board with Lightning Flash and Lightning Bolt than we already have. We’re closer to the beginning, I made a pretty specific comment that we have well over 1,000 submissions in the U.S. alone for Flash and Bolt.

We are way – and these are mostly new customers and that process as it plays out, will obviously drive. And then this is folks who have seen it, use it once, going through the submission process at the hospital. The scale of this is different than any other product we’ve ever launched in our company’s history. And I just wanted people to understand that. And that means it’s – it might not happen in one day, but it’s happening. And I got to give – it’s a testament to the sales team for doing the work to get that going, but it also to just extraordinary innovation that is driving that many new customers to want to use this product. So, I think when you do the math around that, the question around vascular growth takes care of itself.

Jason Mills: Yes. The only thing I would add is just from a number standpoint, Larry. I think vascular globally was about 58% of our total revenue. That will climb in the third quarter a little bit, perhaps slightly below 60%. And then we likely will be over 60% of our business vascular globally in the fourth quarter.

Larry Biegelsen: Thanks Jason.

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

Margaret Kaczor: Hi, good afternoon everyone. Thanks for taking my questions. I wanted to really follow-up on two pieces. So one, get a sense of the scale, I guess, of the 1,000 active hospital submission for approval for Flash and Bolt. And I’m not sure a few people are willing to give us what number of hospitals, I guess, you’re at today, relative to the hospitals that you’re targeting and that 1,000 plus as we look out versus the potential accounts, right? And then a similar question on the adoption curve of those maybe that have trialed Flash and Bolt. Can you give us a sense of kind of their scale? Is it month – this month 1, try a few cases, kind of put it to the side, bring it on? Or is it kind of inflection has reached relatively quickly just as we go on throughout the year, it will give us a sense of growth?

Adam Elsesser: Yes. Really great question. Let me do my best to sort of answer it. The answer of how – what is well over 1,000 submissions mean? The best way to talk about it is it’s we’re closer to the beginning of this launch than we are to the end of this launch, okay? That’s the right way to sort of put it in a frame. We have more to go than has already been accomplished. How fast somebody ramps up? You can’t really – other than maybe one or two cases, you can’t really use a product without it being formally brought on through this process. So that’s the gating item. And so, we have a lot to go to get that going. Once somebody does bring it on, so far, our experience has been that it’s a pretty sticky business. And I think that’s partly what is driving new customers that we haven’t had before to be so interested, because word of mouth, physicians talking to physicians, sharing their experiences that has been very sticky.

So, you tend to have a lot of physicians wanting this to happen as fast as possible so they can start to get using this. And that is why you hear the confidence we have about not just the rest of this year, but going into the prior – the future years as well. We just have not had an experience like this with – where the innovative – the technology itself is driving a scale of adoption or interest like we have seen.

Margaret Kaczor: Okay. And then you’ve referenced yourself kind of the 30%-plus growth as we get into Q4. I know the comps obviously this year are easier than they will be in ’24. But how should we think about that? Because you’ve got the Street at mid-teens, all the commentary you’re saying is so positive, right, both on vascular and neuro. And it just feels like it’s a pretty rapid deceleration, which is not what the commentary is suggesting. So maybe just clear up those two comments versus opportunity? Thanks.

Adam Elsesser: Yes. It’s still summertime. So I hope you don’t mind it. I’m not going to give guidance for 2024 in the middle of summer for 2023. I think you can take our commentary and what we’re sharing about what we have in front of us as the best sign of our confidence. To quantify that down into a percentage is a tough premature at this point. But, that’s not in any way to not be enthusiastic about all three of those products that we’re currently launching.

Margaret Kaczor: Okay. Thanks. I had to try.

Adam Elsesser: I appreciate the effort.

Operator: Your next question is from the line of Joanne Wuensch from Citi. Your line is open.

Unidentified Analyst: Hi, good afternoon. This is Anthony on for Joanne. Thanks for taking our questions. I think last quarter, you called out supply as maybe a headwind or gating factor to Flash update. Just curious if that was the case this quarter again. And then just as a quick follow-up, can you just talk about adoption trends you’re seeing with Flash and peak PE cases versus DVT? Thank you.

Adam Elsesser: Yes, great question. Thank you. We did not have to really focus on supply. I mean don’t get me wrong. The operations team is working incredibly hard to ensure we don’t have that issue. And I very – particularly at the beginning of the quarter, I said we didn’t expect that to limit us. The real – and we’re hoping to keep ahead of that curve going forward, and the team is working diligently. As it relates to PE versus DVT, we’re not really seeing a difference. There are, obviously, competitive reactions and physicians who are going to have different viewpoints to start. But what we’re seeing is both of those areas, whether it’s PE case or DVT case are incredibly successful and physicians are responding to that. Some might start with one and then navigate to the other and vice versa.

There is not a trend that I would yet point out. That one is better or different than the other at this point. And I don’t expect that to be the case given the sheer volume of cases and the success we’re seeing.

Unidentified Analyst: Great. Thank you.

Adam Elsesser: Thank you.

Operator: Your next question is from the line of Matthew O’Brien with Piper Sandler. Your line is open.

Matthew O’Brien: Great. Thanks for taking the questions. Maybe just to tease out this back half acceleration because as I look at the stock down about 5% in the aftermarket, I’m sure some of its Thunderbolt, but probably more on the vascular business, even though the U.S. was awesome. So because we have a bigger second half ramp. And Jason, you know all about the big second half ramps and concerns you around those what’s assumed as far as hitting the Q3 acceleration, Q4 acceleration with the vascular business in terms of these active submissions and converting them to users or existing hospitals bulking up their utilization?

Jason Mills: Yes. I’ll maybe take the front end of that, Matt. Thanks for the question and then Adam can clean up after me. The third quarter growth – pretty strong range. The guidance, obviously, in the third quarter, at the top end 25% off those – a pretty strong third quarter of last year. So, we think that, that will be driven by the United States, it’s hard to accelerate off of the growth in the United States that we put up in the second quarter. We think, we can at least do that growth and maybe show some acceleration in the third. And we also commented and you asked about it, and I’ll turn it to Adam to answer more thoroughly about the submission process. But when I say we’ve been appropriate with respect to what we factored in, I think that you can read that to mean that we’re being appropriate.

We’re not factoring in things that we don’t have control over timing or other things, notwithstanding that, when the submission process starts, we have a history of having a high degree of success getting through positively.

Adam Elsesser: Yes. I don’t – I think you answered that really well. I don’t have anything specific to answer other than – we’ve always looked at our guidance and done it as very realistic, and making sure that we’re giving the complete information around this. That’s why we’re sharing you the number of submissions in hospitals for both Flash and Bolt and some of the commentary around SENDit, because that also is going to be a pretty significant part of our neuro growth for quite a while.

Jason Mills: And just lastly, I’ll just add on to those comments. Usually, as you probably know, Matt, the fourth quarter or the third quarter internationally tends to be a bit seasonal and in the fourth quarter, the strongest quarter, that’s reflected in this guidance. We – as a matter of fact, put our expectations for growth internationally for both the third and the fourth quarters, that’s reflective of that sort of normal seasonal trends. And what we know about our business internationally can comment it with what we expect in the United States from those three products we’ve talked so much about on this call.

Matthew O’Brien: Got it. Appreciate that feedback. One more, quick one. Just – and everybody is talking about looking ahead in terms of all these new active centers that are reviewing – the new products, but what about ones that have adopted that have got through the VACs, what are you seeing in terms of utilization trends? And then specifically reorder rates. Are you seeing 90-plus reorder rates from these accounts?

Adam Elsesser: Yes, it’s a great question. Let me try to answer that. The answer is the reorder rates for this product are obviously extraordinarily strong. Without that, you wouldn’t have all of these new customers that otherwise never wanted to ever use our thrombectomy products. That’s being driven by the excitement that people who are using the product today and talking about it. So, the two are linked. There is still room – and this is I think you all know this, having watched, been in this field for a long time. You have multiple physicians and in our particular area, you have multiple subspecialties of physicians up to three different ones in every hospital. So when a hospital gets the product in, it doesn’t mean that in some cases, it does, but not always every single physician and all three subgroups are now starting to use it.

So, there is still room in addition to the new places coming for are significant opportunity over the next period of time to drive additional usage within the hospitals that have already been approved.

Matthew O’Brien: Got it. Thanks.

Adam Elsesser: Thank you.

Jason Mills: Thanks Matt.

Operator: Your next question comes from the line of Pito Chickering with Deutsche Bank. Your line is open.

Pito Chickering: Hi, good afternoon. Nice quarter. You quantified how much the U.S. vascular grew some 50% year-over-year. How much of that grow sequentially from the first quarter? And then you guided to U.S. growth accelerating largely in the third quarter. Again, from a sequential perspective, how much we consider the U.S. vascular market growing from 2Q into 3Q?

Jason Mills: Yes. So we didn’t quantify the sequential growth. What we said was actually, we did – in such that we said U.S. venous in total grew sequentially strong double-digits. And U.S. arterial also grew double-digits. So that’s the vast majority of it. We had another strong quarter in coronary as well. It didn’t grow quite as fast, but on a year-over-year basis, it was double-digits as well.

Pito Chickering: Okay. Great. And then on margins, given margins done nicely for this quarter with the strong revenue growth. Can you provide any updated guidance on how we should think about exit rate for the fourth quarter of this year?

Jason Mills: Yes, I’ll start and then maybe with respect to your latter part of your question. We, indeed, as I said in my prepared remarks, expect to be above 10% pro forma operating margins as we exit this year. And I think importantly, that is not a place we see it stopping. We see continued expansion subsequent to that in 2024 and beyond. Maggie, what would you add to that?

Maggie Yuen: No, I think you sum it up well. I mean, with continuing favorable mix and volume leverage and continue to scale, that’s the trend we’ll continue to see throughout the year.

Pito Chickering: Great. Thanks so much.

Operator: Your next question comes from the line of Shagun Singh with RBC Capital. Your line is open.

Shagun Singh: Great. Thank you so much. I just wanted to ask the 2024 question perhaps in a different way. I’m just trying to figure out what year two looks like versus year one? You have talked about this being a multiyear launch. You’ve talked about at least a 5-year runway. So as we think about year two, and it does also seem that there’s a process to get the product on board. So as you think about year two, do you expect growth to be stronger, similar or below ’23? Just anything that can help us handicap the opportunity better would be helpful?

Adam Elsesser: Well, first of all, thanks for the question. And as importantly, thank you for giving me the heads up that you were going to ask that question and try to frame it a different way. I’ll repeat the answer. It’s still summertime in 2023. So, we’re not going to obviously answer that in the kind of specifics. What I really want to sort of maybe summarize the comments we’ve made this quarter around what’s ahead of us is not to sort of differentiate between what’s behind us and what’s ahead of us. But just to explain the level of interest deep into our subspecialties at a place in a way that we have not ever seen before in any product we’ve ever launched. And that’s pretty exciting, because it means that the products are working, they’re doing work.

When you go to – for example, a vascular surgeon, who has done open surgery on the arterial side for years and years and has never wanted to even listen to our prior generations. And now is intrigued when they see both and does one case and then tells us that they’re going to convert over to everything. That’s not happening. That’s not normal. And it means that there’s a lot ahead of us, and that’s an exciting moment for us. How do we quantify that between 2023, 2024, 2025 and going forward? It means we have a lot of work ahead. We have to do the work. We have to get in the hospitals. We have to make sure we have that. All of that is positive, and it puts us in a really good shape. So, I apologize for not being able to quantify it for 2024 yet.

Obviously, we will at the appropriate time. But we’re in a really good spot, and we’re pretty excited about it. We know we have the work to do – but this is – these launches are different, all three of them than things we’ve had before.

Shagun Singh: Got it. And then just a question on margins. I was just wondering how you’re thinking about getting to beyond the plus 10%, so maybe plus 20%. And perhaps you can help us think through margin expansion this year and in the future years, do you expect it to be more linear? Or should we think about it differently? Just any directional color would be helpful? Thank you for taking the questions.

Maggie Yuen: Yes, thanks for the question. So in terms of margin, I think in Jason’s portion, we confirmed or continue to target 70% gross margin in a few years. So, I think between ’23 to ’24 and beyond, we are on a pretty good pace to directionally continue to see the same expansion. And that’s also translates to the operating margin trend as we continue to scale pretty well and have infrastructure in place to allow us to scale and allocate resources effectively. So, I think what we have seen so far in terms of margin expansion trend, we can continue to expect that going forward in the next year.

Shagun Singh: Thank you.

Adam Elsesser: Thank you.

Jason Mills: Thanks Shagun.

Operator: Your next question is from the line of Sam Durno with BTIG. Your line is open.

Ryan Zimmerman: Hi. Can you hear me? Okay. It’s actually Ryan on Sam’s line. I’m at SNIS, so I was calling in on his line.

Adam Elsesser: Yes, we can hear you. Yes, we can hear you.

Ryan Zimmerman: Oh, good. All right. Hi guys. So a couple of questions. I’m here listening to all the clinical sessions and it’s clear you’re competing for patients in these trials with Thunderbolt. And just Adam, I want to understand kind of your view on cyclic aspiration today versus maybe what it was a year ago or kind of as you embarked on this endeavor. Has it changed? Or has it not changed in terms of the opportunity in the market for cyclic aspiration relative to maybe things like large bore aspiration and kind of what you think that can do when Thunderbolt does eventually come to market?

Adam Elsesser: Yes, it’s a great question and an appropriate one, given that you’re right in the middle of SNIS right now. Let me just – a couple of terminologies to make sure we’re all on the same page. And then I really, really want to – because this seemed like the third or fourth question that is being asked. And I’m not sure why – what I’m saying is not registering. Cyclic aspiration is something different. We don’t do cyclic aspiration. That’s turning a pump on and off. It means nothing. It doesn’t have any real effect. Modulated aspiration is very different and that’s what Thunderbolt does. It’s also what Lightning Bolt does. And obviously, we’ve treated like 1,000 patients now with Lightning Bolt. And it’s – as I just said, it’s extraordinary.

It’s amazing technology that is changing people’s thoughts about treating patients after years of doing something else. So – there cannot be any misunderstanding about my level of enthusiasm and excitement about modulated aspiration to get clot out of the body. I want that to be crystal clear. Now there’s a question – as neuro of Thunderbolt large bore aspirations, large bore aspiration catheters have been around for a while. None of them are – in my understanding are actually cleaner, they’re either in a trial or they have a guide catheter or an indication that are being used off label. Because they’re in a trial. There’s a bunch of those trials going on. Those are typically guide catheter sizes where they’re trying to push them up to the M1.

You can ask around whether that’s currently inside or not, I think the answer is fairly, obvious. So let’s focus on the most important thing to start a stroke case. You got to get there. You got to get there. We now have a technology that brings appropriate sized catheter up to the clot faster and easier than any other product we’ve ever had or anyone else has ever had. That should be something we’re excited about. At the same time, we’re also excited about Thunderbolt and the results of that, and we can’t wait for that to come out, because we already know both in the trial and obviously, with Thunder – Lightning Bolt being used so much how it works. That’s learning process. It doesn’t happen immediately. It will take a little longer for Thunderbolt.

But in that time period, we don’t have to wait to do what we’re doing, which is taking significant share and likely growing the market at the same time. And I was just there yesterday, I apologize for missing you. But the level of enthusiasm is at an all-time high. It’s back pre-pandemic levels of enthusiasm. We had meetings with physicians who are talking about going into the community and doing the work necessary to drive this. And in a large part, it’s around idea that access getting to the clot with an appropriate size catheter like RED 72 with SENDit is the answer. So I want to – there is a terrible misunderstanding if anyone thinks I’m – what I’m saying about Thunderbolt is a negative. Thunderbolt is great. It’s also nice to have something equally great that does something else which is RED 72 with SENDit.

Ryan Zimmerman: Crystal clear, Adam. Thank you for saying that. Last question from me. You talked about pricing and the benefit you’re getting in vascular for Lightning. Or you talked about the benefit you’re getting on SENDit with RED 72. Can you give us any color in terms of the pricing benefit relative to, say, a volume mix assumed in your guidance given that you are getting some premium on price for these technologies when we think about guidance for the remainder of the year?

Adam Elsesser: Yes. It’s a really, really good question, and I’m glad you asked it. I mentioned pricing really for a slightly different reason, we just have a simple system. We got a price. It’s easy, everyone knows it. And we’re hearing that, that is a valuable, a valuable way to conduct business. That being said, we’re always – always have been priced fairly, and that’s been our reputation out there, and that stays our reputation. And I think that’s important because you’re in business for a long time, your reputation and how you conduct yourself and what price you charge is fair. That being said, obviously, there’s a small premium for our products. We talked about this for the new products. It’s a little bit mitigated because like the Flash, you don’t need a separator.

And so, the vast majority of our guidance and success in the past couple of quarters is being driven off increased usage of the products, not pure price. And the reason that’s important to say that, one, it’s true, but more importantly, it’s sustainable. Price has a short shelf life to it. And it’s not something that we’ve ever will take an appropriate price when necessary, but we want to grow our business with sustainable share gain and market growth, which is very different than a short-term one-year bump full price.

Ryan Zimmerman: Thanks, Adam.

Adam Elsesser: Thank you.

Operator: Given the time your final question on today’s call is from the line of David Rescott with Baird. Your line is open.

David Rescott: Oh great. Thanks for taking my question. And congrats on the strong quarter. Maybe I’ll start off, Adam, on your comments around an expectation for a dominant share in the U.S. stroke space within the next three to four quarters. I guess one more basic question. Should we assume that this implies that you expect to have a majority share in the U.S. stroke market within the next three to four quarters? And I guess, given the longer time line to Thunderbolt, does this imply that SENDit is generally what is getting you to that dominant share position rather than more or less being dependent on Thunderbolt?

Adam Elsesser: Yes. You want me to expand on that? Yes. The answer is, yes. SENDit, and that’s what I meant by – we don’t have to wait – when Thunderbolt comes, there’ll be more fun. We’ll have more growth. It will add to our benefit in the future. But we don’t have to wait for that benefit now. We have – and when we first started talking about Thunderbolt, which was a few years ago, we didn’t have SENDit. So, we didn’t know that we would not have to wait. And the fact that we don’t have to wait, and we all thought we did, and now we don’t is a positive. It’s really kind of exciting. And to see, we had a tech suite at SNIS. We had physicians who were trying the products without SENDit and they were getting stuck around the curve.

They then try it with SENDit and failed right up over and over again. And the reaction is like, that’s amazing. And that’s about patient safety. It’s about getting the clot out fast because, again, if you take – if the clot, if you’re using Thunderbolt to get the clot out and it takes a minute or two, but it took you 45 minutes to get there, there’s still room for improvement in that case. But if you can get there in a minute or two, and you can get the clot out in a minute or two, then you’ve really done the work. So, we’re doing work now to get the first part of the case, the most important, getting there. And then we’ll add to that with Thunderbolt when it comes. Frankly, that feels like a pretty good set up for success for many years.

David Rescott: Okay. No, that’s helpful. Thank you for the longer answer there. I guess my second question, just on the margin – gross margin operating margin. Longer-term goals? And I think you said maybe the above 70% gross margins within a few years. Wondering if you’d be able to qualify that as maybe closer to the two to three-year time frame or something that’s within a five-year view? And then just wondering more or less on the operating margin side, just based on your – with the launches with kind of the sales force today, should there be any thought about accelerating or any incremental spend maybe on the sales force side in back half of this year and into 2024? Are you kind of set with where the business is today? Thank you.

Maggie Yuen: Yes. No, thanks for your question. I think in terms of the gross margin, yes, I think we previously mentioned two to three years out is the right target to look at. And we’ll continue to see all the favorable factors that we’ve been seeing both margin, and both mix and volume and scalability.

Adam Elsesser: And on the sales force side, it’s a really – it’s a good question. We really – we have an incredible team, and we cover the whole U.S. pretty effectively. We may have to add one person, two person here and there care to grow. But for the most part, we’re not going to – we’re going to be able to get some real leverage there. We don’t think we’ll need – this is sort of the busiest they’ll be because they’re launching new products. They’re going through the process in all these hospitals and they’re doing case coverage and as somebody raised the coil business. I think it will get over time, more normalized. And our team is amazing. I called them out in the prepared remarks for just the sheer volume of work that people have done in the first half of the year. I think we’ll get a lot of leverage out of that, because I do not think we need to fundamentally change the size of the team.

David Rescott: Thank you.

Operator: At this time, I will turn the call back to Ms. Hamlyn-Harris.

Jee Hamlyn-Harris: Thank you, operator. On behalf of our management team, thank you all again for joining us today and for your interest in Penumbra. We look forward to updating you on our third quarter call.

Operator: Ladies and gentlemen, this concludes today’s conference call. You may now disconnect.