Penumbra, Inc. (PEN) Q4 2016 Earnings Report, Transcript and Summary

Good afternoon. My name is Sheryl and I will be your conference operator today. At this time, I would like to welcome everyone to Penumbra’s Fourth Quarter and Year End 2016 Conference Call. All lines have been placed to mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would like to introduce Mr. Dan Wilson, Director and Head of Business Development, for Penumbra. Mr. Wilson, you may begin your conference.

Thank you, Sheryl, and thank you all for joining us on today's call to discuss Penumbra's earnings release for the fourth quarter and year end 2016. A copy of the press release and financial tables, which includes the 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, 2016, which will be filed with the SEC on or before March 1, 2017. As a result, we caution you against placing undue reliance on these forward-looking statements, and 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. We anticipate that prepared comments on today’s call will run about 17 minutes. Thank you very much. And with that, I would like to turn over the call to Adam Elsesser, Penumbra's Chairman and CEO.

Thank you, Dan. I would like to welcome you to Penumbra's fourth quarter and year end 2016 conference call. I am joined today by Daniel Davis, President of North America; and Sri Kosaraju, Chief Financial Officer and Head of Strategy. I will begin today’s call with a few updates from the fourth quarter, a brief recap of 2016 and an outline of few key areas of focus for 2017. I will then turn the call over to Sri to cover the detailed financials as well as an overview of our revenue guidance for 2017. Our total revenues for the fourth quarter of 2016 were $73.1 million compared to $54.4 million for the fourth quarter of 2015, an increase of 34.3% as reported. We had an operating loss in the quarter of $1.2 million compared to $1.8 million in operating income for the same period last year. For the full year 2016, our total revenues were $263.3 million compared to $186.1 million for the full year 2015, an increase of 41.5% as reported. We had an operating loss for the full year of 2016 of $1.4 million compared to $4.2 million in operating income for 2015. In the fourth quarter both our neuro and peripheral vascular businesses saw strong growth driven by several important products and geographic launches as well as an uncharacteristically strong December. These two items contributed to the strong sequential growth that we observed. With the fourth quarter behind us, I would like to draw your attention to what we believe are some of the notable accomplishments across the company and our portfolio in 2016. Tens of thousands of patients were treated with our products in 2016 and for that we are particularly proud. What is extremely encouraging is that we made significant strategic strides to strengthen Penumbra’s foundation and to position ourselves to treat multiple times that number of patients in the future. We took a number of critical steps to help develop these markets, to strengthen our portfolio and to expand our overall capabilities. We strongly believe that we are in the very early innings here at Penumbra. Within neuro, we estimate that 21,000 to 22,000 stroke patients were treated with mechanical thrombectomy in the United States in 2016, which represents only 15% of treatable patients. We dedicated our full attention and resources throughout 2016 to supporting initiatives then ensure that all eligible patients get to an appropriate hospital so they can be treated with mechanical thrombectomy. These initiatives involved local efforts, the effort at the state legislative level as well as at the national level. It is extraordinarily exciting to work with so many dedicated people in these efforts. With this collective work, we see a time in three to four years when appropriate stroke patients get treated as a matter of standard protocol as opposed to relying on luck. As we discussed over the last year, we have anticipated that mechanical thrombectomy treatment would gradually move toward starting with direct aspiration. We believe that is occurring. We have taken several steps over the last year to further solidify and differentiate our stroke offering. We enhanced our stroke system with the introduction of our ACE68 reperfusion catheter and the 3D trial data, which was presented over the summer, provided the community with further clinical support for direct aspiration. In addition just last week, the ASTER trial was presented at the International Stroke Conference in Houston. The data from this independent study further confirms that it is beneficial to use the numbers aspiration technology frontline. Last year, we also laid the groundwork to broaden our neuro franchise, which will allow us to see added growth beyond stroke. We are poised to compete more broadly in the neuro coil market and our neuro access platform continues to set the standard in the field. In peripheral vascular, we believe that more than 1 million people each year in the United States suffer from some form of clot in the body either from deep vein thrombosis, pulmonary embolisms or other forms of peripheral arterial occlusions. We estimate that only about 150,000 of those patients are interventionally treated each year. As we are early in the paradigm shift to treat these patients interventionally, we see many opportunities to improve visibility for the disease and to improve existing technologies for treatment. For example next week at the Society of Interventional Radiology Meeting, the results of the NIH sponsored ATTRACT study for DVT will be presented. Depending on the results, the trial could be helpful in providing the clinical evidence to allow for the shift in treatment practice from anti-coagulants to intervention. As it relates to our peripheral thrombectomy system, Indigo, we have been very thoughtful in our commercial approach. Since we are new to the field, our work is cutout for us. Our team has invested meaningful time in physician education around Indigo and all its possible clinical uses. Over the course of 2016, we added a significant number of new customers in a measured way to allow us to focus on ensuring proper ongoing usage. While we are encouraged with our early impact, we know significant effort is required to continue to advance our technology and commercial footprint. Finally at a corporate level 2016 was an important year for Penumbra as we grew our capabilities across several areas. I wanted to share a few select highlights. We added almost 400 new employees including the addition of several senior leaders across marketing, clinical, IT and business development and we added three new buildings to increase our production capacity, two of which went into service last quarter. Many of these growth and investment initiatives will continue into 2017. Furthermore as we look ahead to 2017 and beyond, we are very enthusiastic. The significant under penetration within some of our larger patient opportunities is clearer, our portfolio is more robust and differentiated and our organization is stronger and poised to continue to innovate and execute. Our priorities heading into 2017 remained consistent with what they have been in the past. We will continue to focus on long-term growth of our current products in both neuro and peripheral vascular as well as opportunities to make major clinical impact in these areas and others. It is important to note that we at Penumbra measure our success on the longer-term impact that we have always championed. And while it may not always be linear, we believe that focusing on long-term success will ultimately bear the best outcome for patients, physicians and our stockholders. I'll now turn the call over to Sri to cover the financials.

Thank you, Adam. For the fourth quarter ended December 31, 2016, our total revenues were $73.1 million, an increase of 34.3% reported compared to the fourth quarter of 2015. Our geographic mix of sales in the quarter were 66.5% U.S. and 33.5% international. Neuro and peripheral vascular represented 70.2% and 29.8% of sales respectively. As Adam mentioned, we saw an exceptionally strong December across our business. Revenue from our neuro business grew to $51.4 million in the fourth quarter of 2016 from $39 million in the same period a year ago, an increase of 31.5% reported. Our neuro growth was primarily driven by sales of our ACE68 reperfusion catheter, which is part of our Penumbra System for ischemic stroke. In the quarter, we introduced ACE68 in Europe following its U.S. introduction in the third quarter. Our neuro growth was also driven by sales of our SMART Coil, which is part of our neuro embolization products for the treatment of brain aneurysms. We were encouraged to see another quarter of distributor sales related to the launch of our SMART Coil in Japan. Given increases in sales and consignment inventories in the quarter, we are working to increase our overall capacity and replenish low SMART Coil inventory levels. Revenue from our peripheral vascular business grew to $21.8 million in the fourth quarter of 2016 from $15.4 million in the same period a year ago, an increase of 41.5% reported. Growth was driven by our embolization portfolio, which continues to see strong growth from several new products introduced in Q1 of last year. We also saw strong growth from peripheral thrombectomy with the continued penetration of indigo across both new and existing customers. Our gross profit in the quarter was $46.6 million or 63.7% of revenues compared to $36.5 million or 67% of revenues for the same quarter last year. Our gross margins remained at similar levels to last quarter. Now moving to our operating expense, total operating expense for the quarter was $47.7 million or 65.3% of revenue compared to $34.6 million or 63.7% of revenue for the same quarter a year ago. Our research and development expenses were $6.1 million for Q4 2016 compared to $5.5 million for Q4 2015. The increase was primarily due to greater compensation expense resulting from increased headcount to support continued investment in our products. Our research and development expense in a given quarter can vary based on the number of clinical trials that we are actively running as well as other factors. In Q4, we closed out clinical trials that were active earlier in the year. SG&A expenses were $41.6 million for Q4 2016 compared to $29.2 million for Q4 2015. Our spend increased primarily due to increases in headcount and related compensation expense. We had an operating loss in the quarter of $1.2 million compared to $1.8 million in operating income for the same period last year. In the quarter, we adopted a new accounting standard related to stock compensation, ASU 2016-09, which will be included in the provision for income tax in the quarter. The impact from the beginning of the year will also be applied to our tax provision for full year 2016. Moving to our balance sheet, we ended the quarter with $128.8 million in cash and cash equivalents and marketable securities. Our decreasing cash was due to expenses related to our new buildings as well as increased working capital. Next I will cover a few metrics on our full year 2016. Our total revenues for the year were $263.3 million, an increase of 41.5% reported compared to full year 2015. Revenue from our neuro business was $185.5 million for the full year 2016, an increase of 31.2% reported. Revenue from our peripheral vascular business was $77.8 million for the full year, an increase of 74.1% reporting. Gross profit for the year was $170.8 million or 64.9% percent of revenues compared to $124.1 million or 66.7% of revenues for the full year 2015. Total operating expense for the year was $172.2 million or 65.4% of revenue compared to $119.9 million or 64.4% of revenue for the full year 2015. We anticipate increased spending as we develop new products, add R&D personnel, initiate new clinical activities and grow our IT infrastructure. We had an operating loss for the full year of $1.4 million compared to $4.2 million in operating income for 2015. We had a benefit from income taxes in the year of $15.7 million for the year ended 2016, which includes a benefit of $17.2 million due to the impact of applying the new stock compensation standard to our tax provision. This compares to a provision for income taxes of $1.7 million for the year ended December 31. 2015. Now turning ahead, we are introducing revenue guidance for the full year 2017 in the range of $312 million to $317 million, which represents revenue growth of approximately 20% over full year 2016. This guidance represents continued strong momentum that we see in our business and reflects normalized comps as well as the unique items that we saw in 2016. Based on our earlier commentary, we expect that Q1 will see a sequential decline over the fourth quarter, but strong year-over-year growth. And now, I'd like to turn the call back to Adam for closing remarks.

Thank you, Sri. As we head into 2017, I would like to reiterate that Penumbra has built a very strong foundation for its current and future success. We have created the structures and culture to take important ideas and make them a commercial reality that positively impacts a great number of people. This concept was clearly highlighted to me at our recent U.S. sales meeting in the first week of January. As is traditional at sales meetings, we have awards for our top performance including territory manager of the year in both neuro and peripheral. One of the winners of that distinction for 2016 gave a short speech in which he indicated that he’s worked harder at this job than any other, but that he has been more motivated and satisfied at Penumbra than any previous job. He described the work highlight of this year when he woke at 2:30 in the morning when his cell phone rang. Said a quick goodbye to his wife and raced into a local hospital. He arrived to see a family in crisis in the waiting room. As they cried and prayed for their son and brother. He went into the angio suite to help in any way he could. Within minutes the medical team using the Indigo system was able to treat a patient dying from a huge heartburn and saved his life. This story and the emotion with which it was expressed and felt by our entire commercial team does a lot about their collective character and motivation. I could not be prouder, not just of the amazing innovative products that we have developed, but the dedication of our team around the world to get them used to help patients and their families. Thank you for joining us on the call today and we’ll now answer questions.

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

Thank you and first off guys congratulations on another fantastic quarter. Sri, what do you think drove that that particularly strong December? We don't think of your businesses as being highly elective, but obviously you saw a very strong close in the year. So any thoughts on that or had a mystery.

Yeah I think in our comments Adam touched on two things. You highlighted the particularly strong December and we haven't seen a December like that which obviously helped to contribute to the strong sequential growth. And as you highlighted Mike that's stronger sequential growth than we saw last year. We also saw some continued strength out of Japan. It's something we discussed last quarter as it relates to the SMART Coil, but I think you're right. The observation is spot on that it was a very strong sequential quarter for us and I'll turn it over to Adam for a little more color.

Yeah, thanks, Mike, for the question. It's hard to pinpoint it to – beyond what Sri said to one particular element. End of the year is as you know always tend to strong. It was just a little greater than anticipated, but there was no one particular product or item that stood out, I think just a really very uniquely or as I said uncharacteristically strong finish.

Adam can you spend a minute on the Japanese Coil market, unfortunately I actually covered [indiscernible] years ago. And so I remember that how meaningful the Japanese market is for Coils. Can you just remind us of your go-to market strategy in Japan and they have thought the early success at this point is encouraging. So just we’d love to spend a minute on what you're doing there and how we should think about it?

Yeah, Mike, it’s good question. I think the fundamental, there is not a fundamental difference between the way our Coil is being seen and viewed in Japan versus any other market. The fundamental difference is just our relationship that we have a distributor relationship as opposed to direct selling. So in the United States and in many other of the world markets, Coils are not sold in the hospitals, they're consigned. And so that process when we have a direct sales force delays the revenue to accompany. In Japan, we’re slowing it to the distributor, which sort of highlights that sale a little faster. And then once they get enough then we see a little bit of a tick down in their reorders as they go through that process. So that's why we're calling that out. We were pleased to see the success of the coil continue and so they needed to continue to stock sort of the next round of centers but that’s obviously can't continue beyond that.

Yeah, understood. Yeah, go ahead, Sri.

Just on the market size, Mike, just a quick one. I think if you – sort of most of the third party research would have it, it’s slightly under $100 million end user market for Coils.

Perfect that's helpful. Adam I wanted to spend a minute on peripheral thrombectomy, obviously it's going to be a topic we're talking a lot about hopefully positively next week. Can you just share with us your thoughts on the success of Indigo in the arterial system versus the venous system worries. How it’s viewed today? Obviously, we've got a lot of feedbacks from clinicians about its particular use in those two applications. So one we’d love to hear where you think it's particularly successful. And then two is there anything you’re going to share with us today on where you're trying to innovate and make clot retrieval removal in the peripheral vasculature using more successful beyond just aspiration. Thanks.

Great, great question. So on arterial, so in the peripheral side, we go after clot both on the arterial side and the venous side. Arterial side which shows up mostly in the legs, but not exclusively is much similar – much more similar to what we've done for over a decade in stroke. And that has I think allowed us to have a pretty quick success out of the blocks with our product in the arterial side. On the venous side, the clot burdens are much greater and that requires a sort of different approach, different tips and tricks and different sort of mindset that’s the primary reason that we developed our larger CAT8 size, which as you know is pretty large and have the capacity to suck out an awful lot of clot fairly quickly. As we go further in to this filed just like we’ve done with stroke where we’re on much later generations, ten years into it, we will continue to look to make our products better and better. I use the term perfect, particularly as we go into next week with the presentation of ATTRACT. Regardless of ATTRACT’s outcome, we are committed and believe that the idea of removing blood clot in your leg – in the veins in you leg, is a good thing. And we’re going to continue to make our products better and better. I think we’re really good right now, I think physicians who have used us have found it remarkably successful. But just like we’ve done in stroke, we’re never done at developing and thinking about how to make this procedure better and better.

Will you show us anything new this year?

Not on this call.

You know I had to ask Adam, I had to – okay I’ll let someone else jump in. Thank you guys and congrats on the quarter.

Thank you.

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

Thanks guys. And good afternoon and can you hear me okay?

Yes.

Great. So first of all just to echo Mike’s comment, great 2016 congratulations on a fantastic year. I just want to follow-up on a couple of quick issues. First was just on the guidance for 2017 it’s sort of an obligatory question and I think I know the answer but I’ll ask it anyway. Obviously you’re forecasting a deceleration in growth in part because of the larger numbers. I’m just curious so this is maybe a little below what I thought you’re going to guide to. I assume that’s just because of the higher 2016 base and just some conservatism. Or is there something that you want to point to in terms of 2017 from a competitive perspective or something you think The Street should be aware of as we go about modeling in 2017? Or is this just kind of conservatism?

Thanks Bob it’s a great clarifying question. And I’m glad you asked it. So one thing that’s clear as you listen to our commentary and watch the course of last year, I think you’ve sensed that we’ve gained a lot of enthusiasm about the markets we’re in and some of the new opportunities. The momentum of our business, again if you look at sort of it from a sequential nature continues to be quite strong and as we had hoped and expected. I think there’s a couple of things that contribute to your question around if you’re just looking purely at the growth rates. One, we are now fully normalized as it relates to our comps that we’re going into for 2017. What I mean by that is we had a big comp in neuro that we passed in 2016 and then recently passed in the back half of 2016 for peripheral. Two, as you recall in some of our prior calls we always try to be very transparent about items that happened in the quarter that we think may not be necessarily repeatable and we’ve tried to call those out in great detail. But as you think about those items, and like I said, the idea of repeating into 2017, you should think about that, as well. So the combination of those three things, the strong business moment, the comps and then the items that we thought were unique in 2016, I think, that’s how you can reconcile the growth rate that’s implied.

Okay, that’s nice. It doesn’t sound like there’s anything structural or unique that you guys are anticipating in 2017 that folks haven’t been sort of thinking through or writing about, just. Okay that’s super helpful. And then of course the other thing I wanted to talk about a little bit more was on ATTRACT. We’ve frankly been pretty surprised at the physician calls that we’ve been doing in terms of the feedback and how critically important this study is to the universal radiology community and a lot of the docs were talking about – are talking about the potential for a fairly significant impact on their business. Some guys telling us you could see a four and five-fold increase in the number of procedures. So I guess my question to you guys is in your view how do we put ATTRACT in the perspective? Maybe one easy way of asking the question is, what are you kind of assuming in your guidance? And if ATTRACT is a really positive study, does that guidance go higher? Just trying to think about ATTRACT and its potential impact, if it’s positive as so many of the physicians we talked to seem to think it will be.

Bob yes good question. And I think, first of all, let’s not get too far ahead of ourselves the data hasn’t been presented. But if the trial is positive and it will start no doubt to act as a catalyst to change the paradigm that many of these physicians look at when they think about DVT from not doing any intervention, to doing an intervention. So that will be positive. Remember we weren’t in the trial, our product wasn’t available during the trial when it enrolled, so we’re not part of it. So we’re always going to be playing a little bit catch up as a company to the folks who were in the trial. And we’ll see a little bit of a delay, I think in that just like we saw several years ago when we had big trials in stroke and we played that well. But that being said, we feel very confident that our products will be able to be used effectively do – are used effectively now and will continue to evolve to be even better and better. I just think, it’s hard to guess the exact sort of growth rate around this, and I also think we have to be cautious as it relates to us that we’re going to be playing a little bit behind because of the issues that I talked about. And Sri comment on the specific numbers for a second.

Yes, on the tail of your question Bob on the impact to guidance, you were generally there to provide the guidance based on what we see sitting here today. So as Adam mentioned we don’t yet know the data, we’re hopeful that it’s helpful, but we haven’t factored anything into that, any other thing that we don’t sit here seeing today.

Okay, that’s helpful. Then one last thing you provided some numbers in terms of the U.S. and a million cases out there where there’s some type of clot that could be removed. And you mentioned a 150,000 being treated today. That 150,000 I assume that’s the license market, the drug market you’re talking about. Do you have a sense as to how many mechanical thrombectomy cases are being done today?

So the best data that we can put our hands on says it’s roughly a little less than half of those 150,000, have some form of device. Many of those devices also use lytic, as well as opposed to remove the clot directly like what we do, our macerated or change its form. And a little more than half are, as you indicated, catheter-directed lysis. And again that was – we don’t know any of the breakdown in the ATTRACT study obviously, but that was sort of the broad definition in ATTRACT of intervention, which includes this catheter-directed lysis in some form of other intervention.

Wonderful, very helpful thanks guys.

Thanks Bob.

Thank you.

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

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

Yes thanks.

I just wanted to follow-up on some questions asked earlier. So can you – are you guys willing to quantify the onetime benefits in 2016 from recalls and things like that, competitor recalls. And then on the 2017 guidance, will you comment on kind of the cadence of growth? It sounds like you said for Q1 it would be down sequentially. So the consensus is about $72 million, which is down $1 million sequentially. Are you comfortable with that. And then can you comment on peripheral versus neural growth? And lastly the stroke market it looks like it grew about 35% in 2016 from a U.S. patient standpoint. What are you guys expecting for 2017? Sorry for all the questions. I’ll repeat any if you missed them.

All right, we’re going to give it our best shot here Larry.

Sorry about that.

Starting with I think you’re – I’m going to go in reverse order on stroke growth. So the numbers that Adam had talked about in his commentary of 21,000 to 22,000 patients is over 17,000 patients treated in the U.S. last year. So I think we’ve generally talked about a similar absolute number of patients treated in terms of growth. And we’ve also touched on in prior calls our idea and I think the popular view that the CAGR for patients treated grows roughly at a 20% growth rate. You touched on peripheral versus neuro growth going forward. As we breakdown the components of our business, neuro obviously stroke is the biggest portion of that – of neuro and even of the business. And we just touched on the key driver, which is a stroke market growth. There are smaller parts of our business that are early and have some more – some higher growth prospects to it in neuro, for example, the SMART Coil launch, which we’re starting to see. And then in peripheral as you touched on, the growth associated with that. And I think if you look at our last few quarters in peripheral, you get a sense for what the sort of comp adjusted environment looks like. Now one comment in the peripheral number, we’ve had some very, very attractive growth rates on the embolization side, which has a lot to do with new products that were launched in January of last year, which we’ll cross this quarter meaning Q1. So hopefully that helps you on the – your question on the peripheral and neuro growth. The cadence of growth, you’re exactly right with our comments about the sequential nature, sequential decline over Q4 that we anticipate in Q1. We’re not going to comment specifically, Larry. I hope you can appreciate on some of the specific numbers, but I think you got the idea correct and a lot of our thoughts as we think about the fundamentals of the business haven’t really changed. So we called out the things again that we thought contributed to the higher than anticipated growth we saw in Q4. And also I think as you might recall as we went through last year, typically in Q3 we see a little bit of a seasonal slowdown in regionally in parts of Europe and then also in scheduled cases here in the U.S. And now if I remember right your last question was on quantifying the one-time items in the 2016. And again on that we haven’t generally broken those down. I think we talked about in Q3 the one-time nature of SMART Coil launch in Japan with our distributor as well as some of the recall related benefits. We don’t see there was a lot of lasting effect for the recall tailwind that we saw when we started talking about it in Q2, Q3. So not much of that in Q4, but we would more so point to the Japan SMART Coil launches still consistent, but the strong December is the other point in Q4. So hopefully that answered all of your questions, but let us know if there is any.

Sri, that was impressive. Thank you. Few more…

Few more, all right.

Yeah, sorry, few more easy ones. FX about $3 million to $4 million by our math. Can you confirm that and any update on 3D? Was it filed? Do you plan to launch it this year and is anything assumed in the guidance. Thanks for taking all the questions guys.

Larry, thanks. Let me address 3D and then I’ll let Sri to address the last question or the FX question. We’ve been – for obvious reasons, competitive reasons, we’re not going to comment on our timing around 3D whether it’s related to launch or the filing or any of that. We have in the past said that we expected sort of in the back part of the year. We certainly stand by that statement again. But I’m not going to give you more specific information as it relates to whether 3D is in our guidance or not. Let me sort of reiterate what I’ve said that we strongly, strongly view this stroke field is moving toward direct aspiration first. And therefore, we have always said that we support the need for multiple modalities to deal with tenacious strokes. And that having a tool like 3D will be helpful, but it won’t be material to our fundamental business because we think that the number of need – the number of times you need a stent retriever sort of in an adjunct capacity is declining. So it wouldn’t be material one way or the other. I’ll give it to Sri to address that.

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

Thanks for taking my questions guys.

Sure, thank you, Larry.

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

Thank you. Hi, Adam, Sri and Dan, congrats on a great quarter. Can you hear me, okay?

Yes, thank you.

So, I apologize in advance for the long question, but you probably expect it for me at this point. Sri, on the guidance, so taking into account your answers to all of the questions that have been posed to already. So we have – if you think about your business in sort of five buckets in the neuro you have three sort of big one stroke, aneurysms and access and then in peripheral you have thrombectomy and embolization and we take your guidance at 20%. Would you – sort of if we think about over under to that 20% overlaying across those five businesses based on what you’ve said in stroke with 20% tailwind of the market and your belief were moving towards first line aspiration, which certainly seems to be the case in our research that would tend to be bias towards the upside of that 20% overall guidance number. For aneurysms given the comp and a more normalized comp maybe a little lower and then access given the ASPs in that business et cetera, maybe a little lower. Within the peripheral business certainly thrombectomy depending on the track could be significantly higher than that rate and embolization has been tracking well above that rate. So could you maybe just using my long question as you guys sort of comment on the over under those businesses relative to the overall growth rate, is it a different way to ask the guidance question.

Yes. So, without staying over under on those maybe we can just talk through it a little bit to help. So on the stroke side of things, I think you’re – you obviously right. The focal area for us as we’ve been talking about is on the market growth. And that really is the key thing that we’ve been talking about. Adam has touched on several calls about some of the things that we’re focusing on with our time and resources. As we had discussed patient growth that had 20% CAGR, I think you highlighted something very important in that. As you think about dollar market growth rates, as we move as we’ve expected towards direct aspiration, which is a cheaper alternative that does have an effect on the market growth rates. That does affect us in a positive way to the extent direct expiration is coming from stent retriever frontline usage and obviously it doesn’t do anything to us if it’s going from slumber to adapt. But with that move in trend obviously it’s going to become more competitive. And that is again another theme that I think we’ve spoken a lot about and we all have spent time discussing on prior calls. So we would expect with that move there comes – albeit with a benefit to us with that move there comes competition as well. Some of the other areas, the only other one I want to sort of touch on is on the peripheral side. As you think about that growth rate there obviously two large businesses within that for us that contribute to growth. The embolization side, which has had very, very strong growth this year, again by benefit of a couple of new products: Lantern and the POD Packing Coil, which were launched earlier the year. So we saw a very helpful benefit from those new products in 2016 as it relates to growth rate. The peripheral thrombectomy side, I think you can understand how that’s grown post sort of the comp and adjusted environment, when we launched our larger sizes with our venous indication. And that – the commercial strategy around that we talked on the last few quarters about our focus in particular a couple quarters ago, we talked about the focus on existing customers and balancing that commercial strategy. And what lies in front of us obviously, what everyone is highly anticipating is attracted and what it could do to potentially accelerate the paradigm shift. So that’s a little bit of unknown to be perfectly candid until we get through it, and we have a little bit of experience beyond it and understanding what that does, but I think we’ve also touched on. We were in that trial. So naturally they’ll be – though it could be beneficial there’ll be some work that we’ll have to do before we can see some benefit. So I hope that’s helpful Jason without giving you the over under.

Yes, thanks for humoring me [ph] going through my like a little conventional, I appreciate. That was helpful. Adam a bit on the stroke market in general and I guess how it’s an analogous or potentially analogous to your thrombectomy business. And clearly as you discussed the history of the later, you’ve talked about how you leveraged, what you learned developing Penumbra and then ACE to develop Indigo. And so a two part question, what’s struck me last week at the ISD meeting relative to a couple of years ago, when the attendees very rarely talked about stroke and certainly a lot of them didn’t talk about interventional stroke in a positive way. Quite a paradigm change just being at the meeting this year versus a couple of years ago and clearly that business for you is more than double the thrombectomy business. So as you think about where you are in the stroke market and you talked in your prepared remarks about initiatives that you think can still augment growth in penetration of that market. How do you think about ATTRACT and other studies in peripheral thrombectomy. Is it potentially similar in it in their impact, obviously, depending on positive or negative to what we saw happen in ischemic stroke a couple of years ago with MR. CLEAN, EXTEND-IA et cetera. Maybe talk about the similarities or analogy between those two markets and then what you think portends going forward? Thanks.

Well, Jason, thank you. You wrapped up I think a number of sort of questions in there. Let me address sort of the big – the last question around ATTRACT and what does it mean. There is a few similarities and there’re few differences between what happened with the number of stroke trials that came out several years ago and ATTRACT. The big differences that ATTRACT is only one study. And I think one of the reasons we saw such a huge sort of overwhelming level of energy and excitement come out of the stroke world two years ago is that we had many studies all show the same thing at the same time, which is pretty rare. That being said as you indicated we were in sort of a world in which there had been some folks that were skeptical of the treatment until we had the data. With ATTRACT even though it’s only one study, I think we’re seeing and hearing a different level of – a different attitude, I think you have most of the folks that I’ve certainly talked to and I think most folks would agree are very excited they’re not skeptical, they’re waiting for this, they sort of ready for to use this as a tool. So even though it’s only one study, we may see a lot of energy coming out of it. So I think there are some similarities there, albeit there is a sort of a fundamental difference. I think the other big difference between the two that could be interesting to watch is that most of these patients that would be now candidates for interventional treatment assuming again that ATTRACT is positive are already in the hospital. They're already being seen sort of in by somebody, and therefore the interventional treatment does not require sort of a wholesale change of the pathways of care, the systems of care, the way that we're having to do that in stroke. And so that's good for the patients that they can get access faster. It also though doesn't have the same sort of catalyst as you now been in a number of stroke meetings, the energy and passion that I've alluded to a number of times, I get to experience around stroke because they have so much work to do ahead of them. I think accelerated it out of the box even faster than anything we've ever seen, because you have so many sort of passionate people because of the work that they have to do to get the patients to the right place. So it's hard to do a direct line by line comparison. I think a lot of the lessons that we learned as a company, will come in handy on how to be helpful to the medical community, again both in –we're talking about how to make sure patients are getting the right care, and also on our capacity to continue to add better and better tools.

Thank you. That's helpful. One quick one Sri for you, and I'll get back in queue. On gross margins, you talked about the capacity you've added clearly during the midst of adding that will depress gross margins to some extent. Could you talk about how you're thinking about your gross margin cadence for this year and maybe re-calibrate us with respect to what your long-term gross margin targets are? Thank you and congrats again.

Thanks, Jason. Yes, on the gross margins question, I think our view – our fundamental view on sort of long-term hasn't changed and we're quite confident over the long-term, we could get gross margins to where our peer Medtech companies are. I think as we touched on earlier in 2016, some of the rationale for seeing a gross margins in the areas that we've talked about today with regards to Q4 and that being the area that we think gross margins will stay at for a little while. And just to give you a little more color as we talk about all of these dynamics that we're experiencing with growth markets with things moving our way from a competitive standpoint with recalls, and potentially new products coming for us, there's a tremendous opportunity ahead and the goal and the focus is to have product and have adequate capacity, I touched on one of my comments. On the neuro side with regard to SMART Coil is due to the success of that product and the success we had in December that we're having to replenish inventory levels. So being that aggressive around capacity and having product will obviously could come with some cost, for us we're focused on driving against that opportunity and driving the growth rate. So that's where our focus is going to be for 2017. Thank you.

Thank you.

Thanks, Jason.

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

Good evening. I have 15 questions and they're all multi-part questions. Keep it simple this evening.

Thank you.

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

Sure. So really have to look at each country individually. And so let me sort of rather than go through it country by country, sort of talk about it philosophically as to how we approach it. And with stroke, we're relatively available in the country that we sell in. The work there is two-fold, one to continually bring our newest technology to the countries that sometimes lags a little behind what we’re able to do in the U.S. So we have a lot of work in front of us always to sort of catch up with our newest private technology. And the second is really each country has slightly different avenues to drive, or to create a solution to the issue of getting the patients to the right place. As you know, in the U.S. there’s an awful lot of energy that has been put in locally county by county but also in the state initiatives that’s different in different parts of the world. And so what we’ve done is tried to invest in a thoughtful strategy engaging politically in the appropriate countries where we can be helpful and that there’s a desire to move in that direction to try to deal with that. In our rest of our business, particularly on the peripheral side, where we still have work to do, to grow our products’ availability and sort of our footprint. So we will continue to look at that. Again, each country is different, each country has a different cost structure and a different thought process around the paradigm shift in peripheral thrombectomy. And we’re relatively tuned to those markets and we’ll continue to pursue that.

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

Sure. I will share sort of our mindset around how we think about new products at the most sort of high conceptual level. Because I’ve done this, I think a little bit in the past. We look at really three fundamental things, on when we take on a project. The first is does it matter, is there a significant opportunity to help a lot of folks. And that’s really the most fundamental question first. The second is do we at Penumbra, think we can do this? And that brings in a lot of questions around our thinking. Do we have the technical skills, could we go hire the technical skills, do we have a shot at doing this? And that brings with it the question of resources, how much will it cost, is it within our capacity as a company to take something like that on. And then the third is the commercial aspect. If we were successful with doing all that, could we commercialize it? Do we have the ability and the bandwidth or the resources to make sure that there is a commercial capacity and opportunity. So relatively simple things but we’re over the years that we’ve been doing this have been very rigorous in applying that thought process to that analysis. In terms of giving you some preview around cadence of products and all that, we’re not going to do that. And it’s also not how we think about it. Products aren’t sort of measured out in a sort of predictable cadence that’s just not how we think about what we do here. So sometimes they come in several at a time, sometimes they’ll be longer periods between them. And I don’t think it’s development doesn’t work in sort of plans logical cadence that way. It would be nice if it did, but it does not really work that way.

Well. Thank you very and congrats on a good quarter.

Thank you.

Thanks, Joanne.

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

Thank you, Sheryl. On behalf of our management team, thank you all again for joining us today and for your interest in Penumbra. We look forward to updating you on our next call.

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