Penumbra, Inc. (PEN) Q1 2020 Earnings Report, Transcript and Summary

Good afternoon. My name is Lee, and I will be your conference operator today. At this time, I would like to welcome everyone to the Penumbra's First Quarter 2020 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] Thank you. It is now my pleasure to turn the conference over to Ms. Jee Hamlyn-Harris, Investor Relations for Penumbra. Ms. Hamlyn-Harris, you may begin your conference.

Thank you, operator, and thank you all for joining us on today's call to discuss Penumbra's earnings release for the first quarter 2020. A copy of the press release and financial tables, which includes a GAAP to non-GAAP reconciliation, can be viewed under the Investors tab on our company website at www.penumbrainc.com. During the course of this conference call, the company will make forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding our financial performance, commercialization, clinical trials, regulatory status, quality, compliance and business trends. Actual results could differ materially from those stated or implied by our forward-looking statements due to certain risks and uncertainties. including those referenced in our 10-Q for the quarter ended March 31, 2020, which is scheduled to be filed with the SEC on May 7, 2020, as well as those described in our 10-K for the year ended December 31, 2019, which was filed with the SEC on February 26, 2020. As a result, we caution you against placing undue reliance on these forward-looking statements and we encourage you to review our periodic filings with the SEC, including the 10-Q and 10-K previously mentioned, for more complete discussion of these factors and other risks that may affect our future results or the market price of our stock, including, but not limited to, the impact of the COVID-19 pandemic on our business, results of operations and financial condition. 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. A reconciliation of GAAP to non-GAAP financial measures is provided in our posted press release. We anticipate the prepared comments on today's call will run approximately 18 minutes. 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 Sri Kosaraju, our President, will make concluding remarks. With that, I would like to turn over the call to Adam Elsesser.

Thank you, Jee. Good afternoon, and thank you for joining Penumbra's First Quarter 2020 Conference Call. Today's earnings call will be structured differently than our prior earnings calls to address not only our quarterly performance, but also the larger considerations surrounding the COVID-19 pandemic. The pandemic has had and will continue to have a significant impact on our global society, health and economy. While Penumbra has handled challenging times before, obviously we have never faced anything like this. However, our mission and our culture have always served as important guides during challenging times, and we believe they will continue to help navigate us through this unprecedented period. Starting in early March, we took several immediate actions in response to the pandemic. These actions, first, focused on keeping our employees and their families physically safe and economically secure. Our next focus was making sure that we were able to supply and support our customers, suppliers and business partners, all of which allow us to serve our first priority patients. We all hope that this pandemic is over soon and that we can return to a more normal work environment. But the measures we have put into place enable Penumbra to operate in this new safe manner for as long as necessary. And they allow us to return to operating in this manner if additional waves of this pandemic were to come. This gives us great confidence that we will be able to satisfy our mission throughout the course of this pandemic. The specific company actions that we have undertaken can be captured in the following strategic priorities: first, restructuring our manufacturing operations to keep our employees safe during the pandemic; second, fortifying our already strong balance sheet; and third, positioning Penumbra to emerge from the pandemic even stronger. I will begin my commentary by sharing what we observed in the first quarter, and I will include early trends that we saw in April. I will then address the more important topic about how we intend to operate the business effectively during this pandemic and ultimately emerge from it when it is over. As it relates to our first quarter results, our total revenues for the first quarter were $137.3 million, a year-over-year increase of 6.9% as reported and 7.6% in constant currency. Excluding Japan, our constant currency increase was 14.3% over last year and sequentially flat versus the fourth quarter. We had operating income in the quarter of $0.6 million compared to an operating income of $11.2 million for the same period last year. Maggie will further review the financials, including some additional period expenses that we have taken in the quarter, and she will also provide detail on our balance sheet in her commentary. In the first quarter, we began to observe a negative impact on business trends due to COVID-19, particularly in March. I will share certain observations that we have seen in our business through the end through the month of April. While it is still early in the pandemic, we have started to see signs of stabilization. However, it is important to note that these are our current observations, and we can see rapid changes based on a number of factors in the United States and countries around the world. We have seen the nature of revenue declines compared to normal pre-COVID trends vary by geography, procedure type and channel. Geographically, the impact to our business was initially observed in COVID-19 hotspots, and then more broadly, as communities proactively adopted strict physical distancing measures. Globally, for the month of April, our daily sales trends in direct geographies have declined, on average, around 35% versus pre-COVID levels. Within the United States and Europe, our sales in April have trended down around 30% versus pre-COVID levels. As a reminder, the percentage changes that we are sharing are versus recent trends for the three months pre-COVID. These figures are not year-over-year growth rates. As it relates to procedure type, our Neuro business has generally been more insulated. In the United States and Europe, average daily sales in April have trended down between 20% to 25% compared to pre-COVID levels. Turning to our Vascular business. We have seen around a 35% decline versus pre-COVID trends. A greater percentage of our vascular procedures are elective in nature, and we have gathered the number of urgent cases presenting at hospitals are significantly down from normal. Over the last several weeks, we have heard from many of our physicians that they are seeing an increased number of COVID-19 patients with large vessel thrombosis, resulting in DVT, PE and lower extremity arterial occlusions. It is too early for this to show up in our numbers in a meaningful way, but it is a developing phenomenon that we are paying close attention to. Lastly, as we look at many of our international distributor channels, particularly in China and Japan, we believe they will show a lagging effect related to COVID-19, and therefore we would expect that to be reflected in Q2 ordering patterns. I would like to turn my commentary to highlight a few positive operational and pipeline developments that occurred in the quarter prior to the impact of COVID-19. In January, we held a ribbon-cutting ceremony for a new production facility in Roseville, California. This facility will more than triple our current manufacturing capacity in the long term. But in the short term, it gives us the advantage of having significant additional space to increase our manufacturing capacity, while maintaining physical distancing protocols for the safety of our employees. In late February and early March, we received two important updates regarding FDA clearances, one in Neuro and one in Vascular, respectively. While both regulatory clearances came earlier than expected, we will adjust our time line to launch these new technologies to when it is appropriate to engage our physician customers. This additional time will allow us the opportunity to refine our commercial strategies to be more effective in this new environment. The final point about the first quarter is to acknowledge and commend the extraordinary work of the entire Penumbra team in addressing the issues and challenges related to COVID-19 starting in early March. The team has shown they have the character, resilience and capacity to navigate the company through this difficult time. We have lots of stories of amazing work being done. But I think everyone at Penumbra would agree that it is appropriate to call out the incredible work of our production and operations teams. In addition to restructuring how we make, inspect and ship product in a manner that keeps all our employees as safe as possible, we also faced another challenge in mid-March. Just as we were starting on this new journey, an earthquake of 5.7 magnitude hit the Salt Lake City area, where we have a warehouse with significant inventory. Our people and the inventory were all safe, but it took incredible hard work and sacrifice from a team from California and the team in Salt Lake City to return the warehouse to normal function within 24 hours. This heroic effort resulted in minimal to no disruption in our ability to supply our critical products to those in need. Now I'd like to take a few moments to address the strategic priorities that I previously outlined. We have fully restructured how we make, inspect and ship our products so as to prioritize the health and safety of our employees. This means we are operating within the physical distancing and other protective protocols mandated by our local and state governmental orders. We have been able to make substantial changes that allow us to do this and so far keep up with the demand for our products. In addition, our commercial team has communicated to our customers that we are here to support them when they need us. But otherwise we have gotten out of their way as they have tackled the many critical issues facing healthcare professionals today. We have also moved to protect and fortify our already strong balance sheet. We have approximately $170 million in cash and no debt. In addition, our team worked quickly to put into place a $100 million revolving line of credit with JPMorgan, Bank of America and Citibank. We believe this is a prudent way to give us additional access to capital to navigate the current environment. And finally, we are positioning ourselves to emerge even stronger in a new environment following this pandemic. This work involves streamlining some of the workflow and decision-making and certain functions to take into account the extraordinary young leadership that has emerged during this time. We have also reimagined how our commercial teams will and should interact with our customers going forward, allowing us to be supportive and helpful around the new paradigm. Further, we have continued investing in important opportunities. For example, we have accelerated development programs for the REAL System to address new opportunities that are emerging directly from this pandemic. We will keep looking for internal and external opportunities that are critical and necessary to help patients during this challenging time. I would like to end my comments today by noting that during a once-in-a-lifetime crisis, people as well as companies, will all be measured by our attitude, our willingness to help and our compassion for others. I am proud to say that every person at Penumbra has risen to the challenge of this moment, and I am honored to work with them. We want to express our credible admiration and respect for our healthcare workers, first responders and other workers in essential businesses that work so hard to keep us all safe and healthy. And most importantly, all of us at Penumbra want to remember and mourn the loss of so many people in the United States and around the world. Our thoughts are with their families and communities. I'll now turn the call over to Maggie.

Thank you, Adam. Good afternoon, everyone. I hope you and your families are safe and well. For the first quarter ended March 31, 2020, our total revenues were $137.3 million, an increase of 6.9% reported and 7.6% in constant currency compared to the first quarter of 2019. Our geographic mix of sales in the quarter were 70% U.S. and 30% international. Neuro and Vascular represented 57% and 43% of sales, respectively. Revenues from our Vascular business were $59.3 million in the first quarter of 2020, an increase of 26.2% reported and 26.5% in constant currency. In the quarter, our Vascular growth was driven by results from both our thrombectomy and embolization businesses. Revenue from our Neuro business were $78.1 million in the first quarter of 2020, a decrease of 4.2% reported and a decrease of 3.3% in constant currency compared to the same period a year ago. Excluding Japan, our Neuro business grew 5.1% compared to the first quarter 2019 and flat compared to fourth quarter 2019. Our Neuro performance was primarily driven by sales of a Penumbra system for ischemic stroke. Our gross margin in the quarter was 64.1% of revenues compared to 65.3% of revenues for the same quarter last year. Prior to COVID-19, our production capacity, efficiency and productivity have constantly improved over the course of last 12 months. Our first quarter 2020 margin performance reflect volume deleveraging with minimal impact from average selling price and product mix. During the quarter, we maintained overall manufacturing spending at fourth quarter 2019 levels, as we made a conscious decision to continue to pay all of our direct labor at 100%, while reducing labor capacity per shift to achieve social distancing and employee safety measures. As a result, certain labor costs were reflected as additional period expense in the quarter. Reduced labor capacity were offset by overall productivity to support demand. For the second quarter, we expected our gross margin will be lower as a function of volume absorption. Total operating expense for the quarter was $87.4 million or 63.6% of revenue compared to $72.8 million or 56.6% of revenue for the same quarter a year ago. During the first quarter of 2020, our operating expense reflects limited reduction related to activities restricted by COVID-19 such as travel and entertainment expenses. In the near term, there will be some natural reduction in expense as it relates to the current environment. We have also implemented other cost control measures. For example, as we shared in our pre-announcement, more than 20 senior executives have voluntarily taken substantial temporary salary reduction. While we continue to be disciplined in controlling spend, we will also continue to prioritize our investment in our production capacity, commercial channels, new product launches and new product development. Our research and development expenses were $12.9 million for the first quarter 2020 compared to $11.7 million for first quarter 2019. SG&A expenses were $74.5 million for the first quarter 2020 compared to $61.1 million for the first quarter 2019. We had operating income in the quarter of $0.6 million compared to an operating income of $11.2 million for the same period last year. Turning to our cash flow and balance sheet. We ended first quarter 2020 with $168 million in cash, cash equivalents and marketable securities and no debt. In the quarter, our cash usage was $20 million, which was higher than usual. The use of cash in the quarter was primarily related to building up inventory, securing material supply, making capital investment associated with new product launches, and general timing of certain cash outlays. On April 24, in order to further strengthen our liquidity position, we closed on a $100 million revolving credit facility with JPMorgan, Bank of America and Citigroup. In addition to the company's current strong net cash position, the revolving line of credit further bolster our access to capital, which allows both to navigate the current environment and to be opportunistic. And now I'd like to turn the call to Sri for closing remarks.

Thank you, Maggie. As Adam mentioned in his remarks, Penumbra has handled challenging times in the past. Our mission has helped set our direction and our culture has helped our team execute in order to protect our employees and our stakeholders. While we may still be early in this pandemic, we have started to see signs of stabilization. We have been able to assess the near-term impact on our business and take significant actions to refine our operations and to fortify our balance sheet within weeks. These early actions are important and necessary steps in order to make the right long-term decisions for the business. These are the defining moments for any organization, and I am confident that Penumbra is as well positioned as anyone to emerge from this crisis as a better company. I also want to extend my gratitude to every Penumbra employee for the sacrifices each are making during this time. And I also want to the thousands of healthcare professionals and first responders who are making it possible for us to be safe and for us to do what we do each day. Thank you. And now we would like to open the call to questions. Operator, please go ahead.

[Operator Instructions] And your first question comes from Robbie Marcus from JPMorgan. Your line is now open.

Great, thanks for my question. I just want to start, it seems amazing to me that even your Neuro revenues are down that much in the second quarter. To me, it implies that people are dying at home with strokes rather than going into the hospitals. So I was wondering if you can talk about some of the trends you're seeing there? And is this more of an April type of event, while just ICUs and ORs were overrun with COVID patients? Or do you think this is something that can extend longer as patients rather not going to a hospital, than get treated?

Yes. Robbie, it's Adam. It's a very valid question. I think you have a number of different sort of things happening obviously within hospital communities all across, not only the United States, but the rest of the world. One of the phenomenon relates to sort of what is happening inside the hospital itself, obviously stroke and a number of the other conditions that are considered critical, there's a lot of publicity around patients not going into the hospital. And there's been this in the late press as well as in scientific journals, whether it's heart attacks or strokes or other critical issues, there is a time frame, particularly acutely in late March and into April, where those numbers were dramatically down. So I think that's what a lot of that is where people were concerned or anxious about going into hospitals, the assumption is because they didn't want to get the virus by going into the hospital. We don't know the exact reason for that, but that's the premise. And that's probably the bulk of this. Hospitals, as you know, are and we've confirmed this with a number of our customers and well as hospitals that they're rethinking how they're going to operate going forward anyway. There's a lot of sense that this is not over any time in the short time. And they're going to restructure how they think about and treat patients and make sure in their communities, they get the word out that they can be a safe place to come. Some hospitals, as you know, and this is just anecdotally, are talking about having separate entrances on one side hospital versus the other for COVID patients versus patients that have non-COVID conditions, physical barriers within the hospital so that those areas are segregated. And I think those are the types of things that we'll see those the communities' reaction to those issues change. And again, we're seeing that already in the last week or two, a little bit positive trends in that direction. So I think we have some optimism that critically ill patients will be able to feel comfortable going into most hospitals going forward.

And maybe on the flip side, in the Peripheral business, Indigo keeps patients out of ICUs, and it lets them free up space and let patients leave the hospital faster. So I know it's hard in this time to go and sell actual products in the hospital. But is this a turning point where you think it could stem a greater adoption of Indigo for these patients?

Yes. That's a really good question. I think Indigo has a lot of interesting points right here. Sort of there's no doubt that at the most fundamental level, that's true dripping TPA typically requires going into the ICU and monitoring those patients carefully versus just removing clot that was one of sort of the premises of the product. I do think and I called that out in the prepared remarks specifically on Indigo that the drop in cases is partly due to the same phenomenon I just addressed about people not showing up in the first place. So it's not a question of them showing up and being put into an ICU, but them not showing up in the first place. I think adding to that is the other part, where we are seeing and you're seeing this again in the late press, there were some articles around this, particularly around younger people in stroke recently, that there is this phenomenon sort of hypercoagulability coming from these patients or happening, which is a horrible additional sort of condition or tragedy to bestow upon these patients, but one in which physicians are wanting to learn how to address and deal with some of those issues. The worst thing is that you don't you're not dying of sort of the typical respiratory issues, but you end up dying of a PE caused by the virus. So we actually put on not a product-specific type webinar recently, but a week or so ago, a cross disciplinary webinar around just how do you treat these patients with this sort of large thrombus burdens that they've developed. We got over 400 registered physicians sort of dialing in to listen because it's a really growing issue. And we've seen the sort of little bit of uptick in those numbers in the last week or so, which gives us some sense that they're getting cared for the right way. And in addition, unlike sort of just a regular product, where the appetite for it might be different, we do, as you know, have a clear newly cleared Indigo product that was cleared before this happened, that we haven't launched, and I alluded to being able to come up with and develop the right format and way to do that in this new setting and paradigm. And I think there will be a significant interest and appetite for it, particularly now given the things we just said, that could be helpful to physicians and patients, even COVID patients right now. So that gives us sort of a proper mission around that in the next quarter or two.

Thank you very much,

Thank you. Moving on to the next question, we have Larry Biegelsen from Wells Fargo. Your line is now open.

Hey guys, good afternoon. Thanks for taking the Quest on the new products. one on Japan. So first, Adam, so you had two meaningful new product approvals here. I know you're not launching them immediately because of coronavirus. But I'd be curious to hear from you what's incremental, what's new and different about these two products, JET 7, XTRA FLEX, MAX in Neuro and then Indigo with Lightning. And I had a follow-up.

Well, thanks, Larry, for asking that. I'm not going to go into sort of the specific technical improvements and details around those products on this call, and I hope and appreciate I hope you appreciate why. We will wait until we're ready to sort of share that with the physician community, but nevertheless, particularly on the Indigo side, not to take away from the stroke product. But the Indigo one, I think, may find a particular receptive audience given the things I said to answer Robbie's last question. And I think it will make fundamentally the procedures faster, more efficient and more complete. And I think a time like this, particularly with COVID patients with some of these issues, it will be an important addition to our offering. You had a question a second question?

That's helpful. Yes, I did. So on Japan, it sounds like Japan was down about $7.5 million year-over-year in Q1. How do you see that playing out over the rest of 2020? I think Japan was a $43 million for you guys in 2019. I think you expected it to be down about $24 million year-over-year, somewhere in that ballpark when you provided your guidance. So any update there would be helpful.

Larry, it's Sri. I'll take that one. So on Japan, obviously with the COVID-19 pandemic, we're watching that closely. That's the obviously, the major sort of new news since our last call, an update on it. We're going to watch it closely. I think the quarter occurred the way we had expected it from our last call and in your comments and that continues to be our expectation, but obviously with the large caveat of the COVID-19 pandemic.

Understood.

Your next question is from Joanne Wuensch from Citi. Your line is now open.

Yes, hi, this is Matt Henriksson in for Joanne. The first question we have is on REAL and the stroke rehabilitation centers, how are they adapting to this COVID-19 environment? Kind of mainly how much can be done with these patients through telemedicine and how much requires in-center visits?

That's a great question. And I'm glad to answer it. So there really are several different forums or locations in which we had planned for and envisioned the REAL system to be helpful to patients. Starting out in the acute centers, hospitals in which they're treated, going into sort of a more typical inpatient rehab experience and then kind of going to outpatient rehab at the end of that. The first two are still valid. Patients are in those facilities are getting treated, maybe the numbers are slightly down as we commented for stroke, but they're still in acute centers and they're certainly also in inpatient clinics, and in those settings are being treated. It's hard to launch a product in the middle of this and go to those centers and have the conversations. So we're looking at alternative method rather than and just sort of the typical process that we have started at the beginning of the year around getting the product out and how we did that. And I think we'll be able to sort of give some more detail on that in the near term. That being said, the outpatient facilities are really very, very different. Many of those are closed and are really not in a situation to continue in the manner that they were doing beforehand because of physical distancing rules, mandates or just fear around getting that done. There's been some discussion and movement into sort of more of a tele-rehab type of model, hard to do that pretty well. You're really talking either over the phone or FaceTime or meeting to encourage somebody to do things that are hard to do and even if you were in the room with them. And there's opportunity, obviously, and I alluded to it in my prepared remarks to dramatically improve and address some of those shortcomings that have come from this terrible pandemic. So stay tuned for more details as it emerges. But I think there's the existing need is there, and there's some new opportunities that I think have developed.

No, that's great color. And then just a follow-up. You talk about how daily sales trends globally were down about 35% versus kind of pre-COVID levels. And I just want to clarify if that includes the Japan impact from the reimbursement change?

Yes. It's a great clarifying question. We had said direct to kind of distinguish that. Obviously, the daily sales are different with distributors. They're not so daily. So that reflects sort of direct global sales.

Okay, great. Thank you very much.

Thanks.

Your next question is from Malgorzata Kaczor from William Blair. Your line is now open..

Hey guys, thanks for taking the questions. So maybe the first one for me just to talk a little bit about market development efforts and your strategy around that during the pandemic and frankly in the quarters thereafter. So what kind of steps or partnerships maybe that you would take to pivot to both a virtual education platform for peripheral for example? And then, kind of a similar question within virtual sales because sales have probably changed not only for now, but going forward with essential employees and hospitals and so on.

Yes, thank you. It's a great question. There's the obvious sort of things that and I use one example of a webinar that got a fair amount of attendance just on a topic sort of very relevant to this crisis. But there obviously are going to be ways that we, through virtual technology, can interact and deal either in large groups or smaller groups. There is one story that emerged, where there was a physician in a hospital who they had Indigo in the hospital already from a different physician who had used it, but this particular physician hadn't. They had a COVID-19 patient develop a great large thrombus load, ended up causing a PE. And through just FaceTime, if I'm not mistaken, was able to sort of get trained by our sales rep, remotely have the sales rep there and support in the case, again, all coming from the physician asking and reaching out to our team to be there to support and ended up having a really gratifying and remarkable result for that particular patient. So there are going to be and there are ways to be supportive of the physician community during this timeframe. One can sort of think about this and say, how long does this go, how does it fundamentally change the way we interact. And without sort of sharing every detail of our plan, I can tell you that we're really, I think, excited, I'm excited that through this, we can develop much sort of lighter-touch ways, the traditional way that we operated as most Medtech companies do, which is pretty high touch. You go in the hospital, you meet with your customers, you talk to them about your products, you sort of go through that process. We saw that play out in our Vascular business for the last number of years. It takes time to sort of do that. And I think there are ways to accelerate that with a lighter touch that doesn't require so much sort of hands-on interaction. And we'll start to show that and test those things out. Again, when it's appropriate, when there's a need and desire and probably the first will be the beginning of the launch of this new Indigo product coming up.

Okay, that's helpful. And this is another question that's kind of similar along those lines of reporting clinicians. But it's just a different time right now during the pandemic. And so a lot of these guys are facing operational pressures. And companies are starting to talk about how they could be helping with them, not only just for the existing patients that they treat, but just helping them with their business running things maybe in a way that they didn't really think about because they're not business folks. So, maybe give us a sense of things that you're doing right now to help them through that time period that might be different than some of your peers?

Yes. So I'm not exactly sure, the question around what are we doing to help the hospitals themselves. Obviously, we will be there however we can to support them. We sometimes our products are used where we're bringing in inventory. There's a particular case that requires extra inventory or things like that. We're able to continue to do that at request. So we've developed the capacity to do that in a maybe broader way, particularly as we hear more about elective cases getting scheduled and the need for sort of unique moments of inventory as opposed to sort of overall par levels, increasing cost-effective ways to do that. The team here has developed, I think, a lot of capacity to support that. Again, our ability to be there and respond to requests as opposed to sort of take a more sales approach and try to convince them to use our product has been really well received by across the Board from our customer base. And that sort of is our primary focus right now. But I think as they come out of this, they start doing more elective cases, it really is being there to, one, with inventory; and two, with expertise if they want it.

Great, thanks.

[Operator Instructions] There are no further questions at this time. Ms. Hamlyn-Harris, I turn the call back over to you.

So 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 second quarter call.

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