Penumbra, Inc. (NYSE:PEN) Q4 2023 Earnings Call Transcript

Penumbra, Inc. (NYSE:PEN) Q4 2023 Earnings Call Transcript February 22, 2024

Penumbra, Inc. beats earnings expectations. Reported EPS is $0.76, expectations were $0.71. Penumbra, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon. My name is Audra, 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 2023 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] 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 fourth quarter and full year 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, 2023, which is scheduled to be filed with the SEC on February 22, 2024.

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. Non-GAAP operating expenses exclude the amortization of acquired intangible assets and a one-time expense associated with the acquisition of IPR&D and adjusted EBITDA excludes a one-time expense associated with the acquisition of IPR&D and stock compensation.

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 fourth quarter and full year 2023; and Jason Mills, our Executive Vice President of Strategy, will discuss our 2024 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 fourth quarter and full year 2023 conference call. Our total revenues for the fourth quarter were $284.7 million, a year-over-year increase of 28.7% as reported and 27.9% on a constant currency basis. For the full year 2023, our total annual revenues were $1,058.5 million, representing growth of 25% as reported and 24.7% in constant currency over full year 2022. During the fourth quarter, our global thrombectomy business achieved record revenue of $190.8 million, growing 42.4% as reported and 41.6% in constant currency on a year-over-year basis. Our global embolization and access revenue was $93.9 million representing increasing 7.6% as reported and 6.7% in constant currency over the same period a year ago.

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Q&A Session

Our U.S. thrombectomy business continued driving outsized growth increasing 46.4% compared to the same quarter a year ago, driven by continued growth with our computer-assisted vacuum thrombectomy or CAVT products in U.S. vascular thrombectomy. We also delivered more than 20% year-over-year growth in stroke thrombectomy in the U.S. with RED 72 with SENDit technology continuing to set the standard for the market in aspiration catheters and laying the groundwork for Thunderbolt. We expanded our gross margins in the fourth quarter to 65.7%, we expect to continue expanding gross margins in 2024, owing to favorable product mix and increasing productivity. While we are making important investments to sustain strong growth into the future, we’re also delivering increasing profitability.

We delivered another record quarter of profitability in the fourth quarter. Non-GAAP operating income was $37.4 million, representing 13.1% of revenue. We posted record adjusted EBITDA of $53.4 million or 18.8% of total revenue, and we grew our operating cash balance by $40.3 million sequentially. We expect to expand our operating profitability in 2024 and beyond, all while we pursue the significant opportunity ahead of us in thrombectomy. 2023 was a watershed year for thrombectomy technology. The defining characteristic about this moment in time in thrombectomy is a confluence of CAVT, true second-generation thrombectomy technology and physicians broadening recognition that this unique platform technology can now successfully treat the majority of both VTE and arterial clot patients.

Over the past several months, our expanded base of customers have communicated to us a desire to work together with their hospital systems to expand the pathways of care for their thrombectomy patients. In other words, following 20 years of innovation in thrombectomy technology, now is the time for Penumbra to start doing the next phase of the important work with the health care community to help the vast majority of clot patients who are not yet getting this treatment. To fulfill the promise of this opportunity for our patients and physicians, we are focused on three areas of work, which I began laying out on our third quarter earnings call. They are innovation, internal readiness and market access. These areas of interconnected work are critical to our mission to reach all of these patients.

Starting with innovation, Lightning Flash and Lightning Bolt 7 changed the trajectory of treatment in VTE and arterial thrombectomy in the United States during 2023. As many new customers work through the submission process for these transformational products late in the year, we saw the trajectory of our U.S. vascular thrombectomy business accelerate in late November. Coupled with the growth of our commercial team in the U.S., we see this new trajectory as sustainable. As reorder rates for both Flash and Bolt remain as high as any product we’ve ever launched in thrombectomy. As we look into 2024 and beyond, the innovation that delivered Flash and Bolt remains at the core of Penumbra. We recently received FDA clearance for Flash 2.0, the first of our four new CAVT products expected over the next 15 months.

Flash 2.0 raises the already high bar established just a year ago by Lightning Flash in VTE thrombectomy. As 2.0 further optimizes the advantages of CAVT in PE and DVT procedures. Further, the next three products will expand the breadth of CAVT’s utility to more areas of the body and will enhance the safety, speed and simplicity with which CAVT tackles the variety of clot morphology. In addition, Thunderbolt is progressing very well in the THUNDER study, and we are excited to bring the advantages of CAVT to stroke thrombectomy as well, especially with our increasing market share in stroke aspiration catheters. Further on the innovation front, we are advancing our strategy to leverage the fact that we have a computer chip in every case, dedicated to each individual procedure.

Through this important work, we will integrate new technology into the platform that can seamlessly collect valuable information, both procedural and patient-specific. This information will be utilized by physicians in real-time and in reflection to further enhance treatment and produce efficiencies in patient care that could pay dividends for patients, physicians and hospital systems for many years to come. Moving to internal readiness. The fourth quarter was a very important moment in time for Penumbra. The momentum in CAVT was Flash and Bolt in 2023 gave us the opportunity to bring more focus on thrombectomy as well as more scale and efficiency to our vascular sales team. We augmented the capabilities of the team in some areas and increase the size of the team overall.

Much of this hiring was accomplished during the fourth quarter with continued hiring and significant training taking place throughout the current quarter. In addition to our commercial team in the U.S., we continue to make significant progress on efficient manufacturing at scale, which would benefit our gross margins going forward. Given how early we are in the penetration curve for CAVT and thrombectomy, this internal readiness work is timely, important and will continue to evolve. The third area of work for us is Market Access through which we are developing additional evidence to validate the clinical benefit of our CAVT platform and health economic data with which hospital systems can make more informed decisions on treatment paradigms.

We believe there are at least 800,000 arterial and VTE thrombectomy patients in the U.S. each year. In order to reach the majority of these patients over the next five-plus years, our market access work with large hospital systems is critical. With hospital systems partners, we are collecting and analyzing real-world data on an increasing number of CAVT procedures compared to traditional therapies. These initiatives will focus on DVT, PE, arterial and stroke. We believe this work will validate that getting the clot out by optimizing safety, speed and simplicity with CAVT is advantageous to the patient, physician and the hospital system in terms of both clinical outcomes and health economics. The benefits from the work we are doing in these three areas in 2024 will accrue primarily to our U.S. thrombectomy business.

Given that Flash and Bolt 7 have already built momentum, the new products in CAVT are coming first to the U.S. and reimbursement is in place for these procedures. In 2024, we project our U.S. thrombectomy business will deliver 27% to 30% year-over-year growth. While displacing traditional therapies and first-generation mechanical products will drive part of our growth, we believe the work I just described across these three areas will move more patients into the system to receive CAVT therapy in 2024 and build even more momentum in the U.S. over the next few years. Outside the U.S., our opportunity with CAVT is also compelling for future years, and we are well into the work with regulatory and reimbursement bodies in Europe, Asia-Pacific and Latin America to bring the entire CAVT portfolio to patients outside the U.S. as well.

We think we will begin to see the positive impact to our international thrombectomy business in 2025. This strategy and the timing associated with it allows us to not only focus on sustaining long-term revenue growth, but also increasing profitability. For the last 20 years, the Penumbra team has worked very hard to continuously innovate and in so doing, has built what has become the largest thrombectomy company in the world, removing blood clot from head to toe. This innovation has led to the CAVT platform. Now is the time to start the next phase of the strategy, which we have outlined in detail again today. Our successful execution of this strategy will make our technology available to everyone who can benefit. This work will be hard and will not always be a straight line.

However, it will be profound and extremely motivating. The company is in the best position we’ve ever been. The Penumbra team is stronger than at any point in our history and over the next few years, our CAVT products can positively impact the vast untreated patient population in ways no other technology platform has been able to before. I’ll now turn the call over to Maggie to go over our financial results for the fourth quarter and full year 2023.

Maggie Yuen: Thank you, Adam. Good afternoon, everyone. Today I will discuss the financial results for the fourth quarter and full year 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 fourth quarter ended December 31, 2023, our total revenues were $284.7 million, an increase of 28.7% reported and 27.9% in constant currency compared to the fourth quarter of 2022. Our geographic mix of sales for the fourth quarter 2023 was 71.5% U.S. and 28.5% international. For the fourth quarter 2023, our U.S. regions reported growth of 29.6%, primarily driven by 46.4% year-over-year growth in U.S. thrombectomy.

Our international regions increased 26.4% reported and 23.5% in constant currency. The sequential growth in our total revenue of 5.1% was primarily driven by an increase in our global vascular thrombectomy business of $12.2 million or 10.1%. Moving to revenue by products. Starting this quarter, we are providing new revenue disclosures that better align with our business. As presented in our press release, we are providing detailed revenue results of our thrombectomy business and our embolization and access business, respectively, in the United States, international and globally. Revenue from our global thrombectomy business grew to $190.8 million in the fourth quarter of 2023, an increase of 42.4% reported and 41.6% in constant currency compared to the same period last year.

Revenue from our embolization and access business was $93.9 million in the fourth quarter of 2023, an increase of 7.6% reported and – 7.6% reported and 6.7% in constant currency compared to the same period a year ago. Before turning to our income statement, I will provide fourth quarter revenue results in the format we had previously used before we transition to the new disclosure format going forward. On a global basis and compared to the fourth quarter of last year, revenue from our vascular thrombectomy was $133.4 million, an increase of 64%. Neuro thrombectomy was $57.4 million, an increase of 9%. Vascular embolization was $51.5 million, an increase of 7.3%. Neuro access was $33.2 million, an increase of 18.3%. Neuro embolization was $5.9 million, a decrease of 33.8% and other revenues was $3.3 million, an increase of 46.3%.

U.S. thrombectomy was our primary growth driver in the fourth quarter and will be in 2024, and we are also being disciplined with our commercial strategy for our embolization portfolio. In sum, we are focused on driving both strong revenue growth and increasing profitability going forward. Turning to gross margin. Gross margin for the fourth quarter of 2023 is 65.7% compared to 62.6% for the fourth quarter of 2022 and 65.6% last quarter. The 300 basis point improvements compared to prior year are driven by higher thrombectomy product mix, while cost savings and improvement and productivity and volume leverage have offset labor inflation and material price increases. In 2024, we target improvements of 100 to 150 basis points expansion in gross margin, which reflects continued favorable thrombectomy product mix, investment to support new product launches and variation in regional and distributor mixes.

Now onto our non-GAAP operating expenses. Non-GAAP operating income and margin and adjusted EBITDA. Total operating expense for the quarter was $149.6 million or 52.5% of revenue compared to $131.2 million or 59.3% of revenue for the same quarter last year and $144.5 million or 53.3% of revenue for last quarter. Our research and development expenses for Q4 2023 were $21.9 million compared to $18 million for Q4 2022 and $21 million for last quarter. SG&A expenses for Q4 2023 were $127.6 million or 44.8% of revenue compared to $113.3 million or 51.2% of revenue for Q4 2022 and $123.5 million or 45.6% of revenue last quarter. The increases in the fourth quarter were driven by an increase in headcount for our U.S. commercial team. We recorded operating income of $37.4 million or 13.1% of revenue in the fourth quarter of 2023 compared to an operating income of $7.2 million or 3.3% of revenue for the same period last year and operating income of $33.2 million or 12.3% of revenue last quarter.

We continue to focus on innovation of our products, commercial evolution of our U.S. sales team to address the increased opportunity in front of us and market access programs in DVT, stroke, arterial and PE, all of which supports an increased number of patients treated. While we continue to spend on these long-term projects that will allow us to scale our organization into the future, we also continue to exercise self-discipline in our other spend in the present. In 2024, we target improvements of 100 to 200 basis point expansions in our operating margin. We posted record adjusted EBITDA of $53.4 million or 18.8% of total revenue compared to 10.5% in the fourth quarter last year. I will now summarize our full year performance for the full year of 2023.

Our total revenue for the year was $1,058.5 million, which represents an increase of 25% reported and 24.7% in constant currency compared to full year 2022. Our geographic mix of sales in the year were 71.5% U.S. and 28.5% international. For the full year 2023, U.S. reported growth of 28%, primarily driven by growth from our vascular thrombectomy business of 45.2% and our international regions increased 18% reported and 17.3% in constant currency. Revenue from our global thrombectomy business for the full year of 2023 was $677.3 million, an increase of 32.5% reported and 32.3% in constant currency. Revenue from our global embolization and access business for the full year of 2023 was $381.2 million, an increase of 13.4% reported and 13.2% in constant currency.

Revenue from our vascular business for the full year of 2023 was $652.4 million, an increase of 30.6% reported and 30.6% in constant currency. Revenue from our neuro business for the full year of 2023 was $406.1 million, an increase of 16.8% reported and 16.3% in constant currency. Our gross margin for the year was 64.5% of revenue compared to 63.2% of revenue for the full year 2022. We had non-GAAP operating income for the full year of $101.3 million compared to a non-GAAP operating income of $14.4 million for 2022. Our adjusted EBITDA is $170.6 million or 16.1% of total revenue compared to 7.7% last year. Turning to cash flow and balance sheet. We ended the fourth quarter with cash, cash equivalents and marketable securities balance of $289.2 million and no debt, which is an increase of $40.3 million from last quarter.

We expect positive operating cash flow trend to continue in 2024. 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. For 2024, we introduced guidance for total revenue in the range of $1,230 million to $1,270 million representing year-over-year growth of 16% to 20% compared to $1,058.5 million in total revenue in 2023. Primarily based on currently forecasted orders from our international distributors and timing of new product launches, we expect global revenue growth in the first half of the year to be in the mid-teens range. Then we expect growth to accelerate to the high end of our 16% to 20% guidance range or above in the second half of the year. We guide to U.S. thrombectomy revenue growth in the range of 27% to 30% year-over-year. We expect growth in U.S. thrombectomy to be consistently strong in this range throughout the four quarters of the year.

We expect our U.S. embolization and access business to contribute low double digit growth in 2024. And therefore in total, we expect our U.S. business to deliver strong, consistent growth in the 22% to 25% range throughout the year. From a geographical distribution perspective, we expect our U.S. business to represent 73% to 75% of our global revenue in 2024. Outside the United States, we have worked the past two years to expand the foundation for thrombectomy in our international markets with our legacy products and have made significant progress. In 2024, more of our focus will be on regulatory, reimbursement and market access initiatives to bring our CAVT products to patients outside the United States. As we do this work this year, we expect our international thrombectomy revenue in 2024 to grow modestly over 2023 levels.

And as these initiatives come through, we expect to accelerate our international thrombectomy growth in 2025. Also on the international front, we are focusing more on driving profitable growth. We plan to continue to be disciplined with our commercial strategy in the near-term for our embolization and access products in certain international markets where prices do not currently reflect the value of our products. At the same time, we are continuing our work with international regulatory and reimbursement agencies with our new products in these areas. In sum, we expect our total international revenue in 2024 to be similar to 2023 levels, and we think our international revenue will accelerate to double digit growth in 2025. As a final thought, as we look beyond the current year, as Adam mentioned, we believe our CAVT products will sustain strong growth for the company over the ensuing years.

Operator, we can now open the call for questions for the next 35 or 40 minutes.

Operator: Thank you. [Operator Instructions] We’ll go first to Joanne Wuensch at Citi.

Joanne Wuensch: Thank you very much for taking the question. I wanted to ask – I’m curious, I’m going to ask two. One, we are hearing about increased payer scrutiny on mechanical thrombectomy. I’m curious how that may or may not be impacting you. And then number two, how do we think about sort of ongoing profitability metrics? I’m finding that comes up more and more on several stocks in medtech, sort of an LRP longer-term view on gross and operating margins. Thank you.

Adam Elsesser: Yes. First of all, thanks for the good questions. We, in fact, have not – on mechanical thrombectomy, particularly as we see it, we have not seen the type of what you’re calling scrutiny. That shows up in other types of procedures that aren’t clot – removing blood clots in the cases. So, we haven’t really seen that. In fact, we saw the opposite this year. In arterial, there were some increases, particularly interesting increases related to hospital outpatient use. So, I think we’re seeing the opposite. As it relates to sort of how we think about profitability, we’ve outlined the beginning on this call, our thoughts and plans around how we want to continue to accelerate that by focusing on certain areas where we’re not seeing the same sort of price value for some of our embolization access business.