Good afternoon. My name is Sidarius, and I will be your conference operator today. At this time, I would like to welcome everyone to the Penumbra's Second 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 second 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 June 30, 2020, which is scheduled to be filed with the SEC on August 3, 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 basis. A reconciliation of GAAP to non-GAAP financial measures is provided in our posted press release. We anticipate the prepared comments on today's call will run approximately 19 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 Jason Mills, our Executive Vice President of Strategy, will join Adam and Maggie for Q&A. With that, I would like to turn over the call to Adam Elsesser.

Thank you, Jee and good afternoon everybody. Thank you for joining Penumbra's second quarter 2020 Conference Call. Our total revenues for the second quarter were $105.1 million, a year-over-year decrease of 21.7% as reported and 21.3% in constant currency. Maggie will further review the financials as well as more details on our balance sheet in her commentary. I will organize my comments today into three distinct topics. First, I will address the issues we have faced due to the COVID-19 pandemic and our view of the road forward. Second, I will review the developments since our last earnings call related to the company as a whole and our specific products. And finally I will touch on the issue of racial injustice that is brought to the surface this past quarter, and how Penumbra is addressing it both internally and externally. First, as we discussed on our last earnings call Penumbra confronted the COVID-19 pandemic, by first making sure all of our employees could work safely. Over the past few months, we have continued to iterate how we conduct business, namely how we manufacture our products and communicate with our customers. With respect to product manufacturing, our team has done an extraordinary job executing on two key objectives, ensuring a safe workplace and keeping up with demand. With respect to the overall business, we have also focused on cost reduction wherever possible and prudent. On the customer side, we are very pleased with our team's ability to strengthen customer relationships during this challenging time, including perhaps our most successful new product launch in our company's history, which I will discuss more in a minute. With these important structural iterations in place, we have a lot of confidence our team will continue to operate successfully throughout the length of this pandemic. Now,…

Thank you, Adam. Good afternoon, everyone. For the second quarter ended June 30, 2020, our total revenues were $105.1 million, a decrease of 21.7% reported and 21.3% in constant currency compared to the second quarter of 2019. Our geographic mix of sales in the quarter was 74% US and 26% International, neuro and vascular represented 13% and 44% of sales respectively. Furthermore, given distributor channels reside solely in our international business, we believe it is constructive to provide additional color this quarter on regional performance for both our vascular and neuro businesses. Revenues from our vascular business were $46.3 million in the second quarter of 2020, a decrease of 12.1% reported and 11.9% in constant currency. In the quarter, our vascular decline was driven by results from both our thrombectomy and embolization businesses, both of which were more negatively impacted by COVID-19 in the first half of quarter. The US vascular business declined 5.7% reported and international vascular franchise declined 36.7% reported compared to the second quarter of 2019. Revenues from our neuro business were $58.8 million in the second quarter of 2020, a decrease of 27.8% reported and 27.3% in constant currency compared to the same period a year ago. Our US neuro business declined 13.3% reported compared to second quarter of 2019 and international neural franchise declined 45.4% reported compared to second quarter 2019. Our neuro decline on the global basis was primarily driven by sales of our Penumbra system for ischemic stroke, while our international neuro business was impacted by distributor order timing. Our gross margin in the quarter was 61.8% of revenue compared to 70% of revenue in the same quarter last year. Our second quarter of 2020 margin performance reflects volume deleveraging, with minimal impact from ASP and product mix. During the quarter, we maintained…

Thank you, Maggie. As both Maggie and I have outlined, notwithstanding the challenges and uncertainty due to the pandemic, Penumbra is well positioned for strong long-term growth. I would like to use my closing remarks to clearly acknowledge that this strength is only possible because of the remarkable people who work at Penumbra and the extraordinary work they do every day. In addition, I want to extend my gratitude to every Penumbra employee for the sacrifice you were making during this very challenging time. Thank you. And now we'd like to open the call to questions. Operator, please go ahead.

[Operator Instructions] Your first question comes from the line of Bob Hopkins.

Hey, great, good afternoon. Can you hear me okay?

Yeah, hi, Bob.

Hey, Adam, how are you? Thank you for taking the question. First question is just a clarification on your comments on the impact of distributor actions outside the United States in the quarter. I was just wondering, sorry if I missed this, but could you quantify the impact on the company in the second quarter? And maybe give us a sense for how long you think this lasts? Just looking for a little clarification on the distributor commentary you made? Thank you.

Sure. So we didn't quantify that portion of our business. We highlighted the majority – the vast majority of our business, which is direct, as you know, distributors make up somewhere between 10% and 20% of our business. So the vast majority is not that and I was pretty clear to say that we didn't think that this was any form of a fundamental situation other than just those companies, many of them family owned distributorships, managing their own businesses through this time. So I don't think it has any kind of long-term effect other than quarter-by-quarter managing their business. And the things to look at really are that businesses we control, which is again, the majority of the businesses are revenue.

Okay, I'm just wondering if there's a quantification of the impact in Q2 to total revenue, but from that I realized it's a short-term issue, but I was just curious. The other the other thing I want to ask Adam is just to clarify your message on your commentary on Q1 and beyond. And to make it easier for investors, I wonder if you could just let us know what Penumbra's total company year-over-year revenue growth rate was in the month of June because we have that data from most of the companies in MedTech? And then also I want to make sure I heard your message correctly on trends post June because I think you basically referenced that because of the spread of COVID things have slowed a little bit post June, but I just wanted to make sure I heard you correctly.

Yeah. Look, what we said in our prepared remarks, where we qualified the second half of the quarter versus the first half, so the first six weeks versus the second six weeks. And then we mentioned that June was a tick up from that. So we didn't purposely use numbers. And Bob, I totally understand the desire to know sort of the very micro trends and then sort of into July, as you've alluded to how things are going. I totally get that. I've even heard some folks are asking companies sort of for a week-by-week analysis of their numbers, but from our perspective, you don't really get reliable information, looking on those kinds of trends. That being said, and to be totally transparent our July numbers are on an even positive upward trend from those before. But what I wanted to say and the point that we want to make is really important, and that is the acceleration of cases always sort of leads – is a leading indicator of the hospitalization numbers and we saw a huge acceleration in cases in the month of July. And so it's just sort of prudent if you look at mainstream media and statements from public health officials, even in the last days over the weekend, that sort of looking forward, it's hard to predict where this goes. We have no information. There's nothing about our business that is fundamentally different than our MedTech peers a point that we wanted to make, but it's not prudent for us to project out that end of this quarter even the successful started this the quarter two any kind of trends for the whole quarter given the way this is playing out. So we just wanted to be crystal clear again, we have done well, we've seen a nice uptick, but we think just as our peers are saying, we cannot predict how it goes for the rest of the year.

Okay, so I guess that the message is and I apologize for the short-term nature of the – but it's just a unique environments. So I guess the message is July is better than June, but be careful about extrapolating because of all the uncertainty.

Yes.

Great, thank you very much for entertaining the questions. Appreciate it.

Of course.

Your next question comes from the line of Cecilia Furlong.

Great, thanks for taking our questions. I guess, Adam, I just wanted to start first, just from a high level perspective, your perspective, peripheral market and DBT with Lightning now, just the role that technology innovation versus clinical data can have in driving the market and just really any market differences you'd call out versus your experience with the stroke market?

Yeah, thanks for that question. I think it's a great question. To sort of compare the stroke, the stroke market needed the clinical trials that came out a number of years ago to prove that we should be treating these patients in the first place. And that was really the most important thing to lead and open up that market. And then we had the second task that we're still in, which is to make sure those patients who have strokes get to a hospital where they can be treated. That's dramatically different from the way the peripheral market is presenting itself. And what we did at our Investor Day in December was we outlined over 400,000 patients in the US that are currently being treated for their clot either interventionly already, most of the time using an interventional administration of tPA or a combination of tPA and devices, or surgically through vascular surgeons. So these are patients that are already being treated with no clinical data around that treatment. If you were to do clinical work to prove for example, in PE or DVT, that the use of some of these new modern techniques, particularly Lighting 12, were better than what the sort of original standard of care is, which is Medical Management, you could even take that 420,000 or 430,000 number to a much larger number, and probably get up to six or seven plus hundred thousand. So and again, these are all patients that are already being treated in the same labs that our customers – with our customers that are using Lightning 12. So there is definitely clinical work ahead of us in our plans. But that is really more to grow the market from the 430,000 patients, rather than to tap into that initial large market.

Great, thank you. And I guess if I could just ask about your commentary regarding just the benefits you saw in the quarter, launching this virtually, but really just how you're thinking about launching products going forward, what were the biggest benefits and just being able to really streamline that process?

Well, I – yeah, thanks for asking that question. I'm going to keep some of our exact strategy, even though it's sort of played out a little close to the vest because I don't want everyone else to use it against us. But I will tell you it's kind of extraordinary to adapt and deal with the world as it unfolds and our team found a way to really engage and using the tools and being very creative in the way we've done that to get the information about this product out there in a much, much sort of short timeframe. Normally when you launch a product, you start and your sales team starts to make appointments and call doctors and then meets with them and that process is pretty tried and true and it works. But it takes a certain amount of time and we were able to collapse some of that time pretty dramatically because of the launch techniques we used and the nature of time and whether or not it's successful in a world in which we're not dealing with a pandemic. That's hard to tell. It may or may not have legs beyond this, but it certainly was quite effective for us with this launch. And not to be cute about it, it helps that the product is as good as it is because it's really kind of an extraordinary product.

Great, thank you, Adam.

My pleasure.

Your next question comes from the lawn of Larry Biegelsen.

Good afternoon. Hey, guys. Thanks for taking the question. Adam, you can hear me okay.

Yeah. Hi, Larry.

Good. Hi. So Adam, I assume the product that you were talking about what you said it's the most successful product launch ever was at the new Indigo 12 franch with Lightning. Is that fair?

Yeah. Yes.

So okay, you launched on July 14, it's pretty early to make that claim. So I guess a couple questions on that. One is what's that comment based on? And we're assuming we've heard in the market about a 35% price premium? Is that in the ballpark? And is that – do you expect basically the entire Indigo franchise including the eight franch to kind of transition to Indigo plus Lightning, in other words, to use Lightning and is the price premium associated with the Lightning tubing? And I had a follow up.

All right, well, let me – there's two or three questions in there, so I try to write them down and then I'll try to answer them. If I missed one, let me know in your follow up. First, I – as you know, and you've gotten to know Penumbra and me personally, from covering us for a bit. I typically don't get ahead of ourselves and comment on products until it's sort of after the fact. And so your observation that it's only been two weeks and I'm making these comments is quite astute. And the only answer to that is my personality has not changed. So what changed and that is the success of this product. It is we had very high expectations for this product, Larry. You know, we've been working on this for four years. The technology is quite sophisticated and we were quite optimistic about what we thought we would see. But to see it in the first couple of weeks in the real world and to see the success, and they just huge volumes of clot, were able to get off – get out of patients on the venous side. It's really been kind of extraordinary and I think it's surpassed our even high expectations. So that's why I have the confidence to say that we've talked to lots and lots of doctors who have used it, tried it out and heard their reactions. And that's led us to make those statements. As it relates to price, which was next part of your question. There is obviously a – before our tubing was just tubing and it was sold for a relatively small dollar amount. This now is a much more sophisticated component that does have a higher price, but the price trade off comes with the fact that we are likely going to use, notably less separators, which were used in a lot of these Venus cases. And that's sort of where we're going to not get to quite the same price premium that you just outlined, because we'll see an overall reduction in number separators. So we price this – we've talked about pricing strategy, the goal for us on pricing is to always make this a profitable procedure for hospitals, for them to have success in treating their patients and be viable. And this continues that exactly how we've always done that. So we feel very good about our prices. You know we've always been thoughtful around that strategy, so we never have to go backwards. And this gives us – plays right into that strategy, exactly how we've always done. And then you said you have a follow up or two?

Yeah. So thanks for that, Adam. Just – so first JET 7, XTRA FLEX, MAX, you have that approved and I think you said neural access product. But I didn't hear you talk about the rollout of those. And then just lastly, on the R&D spending, is this the new run rate, it looks like kind of in an underlying basis, about $20 million a quarter. And why now such a large increase in R&D and it's kind of a new run rate. Thanks for taking the questions.

Sure. So the first question on JET 7, MAX, that I did mention, we have been doing some of the work we do with every new product that is clear to evaluate and make sure it's all good. The product is exactly what we hoped it would be. What I want to make sure everyone understands and I have said before, I think a number of times and that is some of the products that are coming, this being one of them matter independently, but really matter as part of a larger component of our long-term strategy. And I reiterated that in my prepared remarks that the goal here is to fundamentally reshape how stroke patients are treated. And MAX is an important step in that, but independently, may not be as obvious as the long-term picture, which I think will come clearer as we get closer or not closer, but into 2021. And as for R&D spend, we're not making any comments today on this being the new normal, other than what we had said that the raise that we did in this quarter gave us the comfort in a time in which there's some uncertainty. We were hoping to do this anyway, but the raise gave us that comfort to spend this money particularly focusing on three internally pre existing projects, and one of them being the REAL system. As we've said before, the pandemic has opened up an opportunity for the REAL system to be used. The existing the original REAL system REAL 1 for lack of better term is used when a patient and a therapist are physically together. That became hard at the beginning of – end of March and into April for a lot of patients. And so, CMS put out a new temporary order around reimbursing sort of tele-rehab therapy sessions and then subsequently put out notifications on that. It may, – they're considering it may be permanent. That opens up the door to have all kinds of ability to do work with patients and therapists when they're not physically together, as well as having therapists assign homework and do work independently to accelerate people's recovery. It also opens the door to types of medical conditions that don't require a physical or occupational therapist, but have a huge impact on patient health care or health and wellness. So that is what – the REAL investment is about is to take advantage of that need that is desperate in the market right now. And as I said, the other two are projects we've been working on that gave us the comfort to continue to invest in actually accelerate them. So that I think it is a good time.

Thank you, those were helpful answers. Thank you very much.

Your next question comes from a lot of Robbie Marcus.

Great, thanks for taking the questions. I was hoping you can give us a little more color on the US versus international trends. I very much appreciate you breaking out peripheral and neuro US and international. I love when companies go to more versus less detail and disclosure. But Adam, even if you take the 10% to 20% of revenues out of distributors and just assume, they didn't happen at all in the quarter, you're still at a pretty large differential in trends internationally and US. How much of that if you can say was the first half of the quarter versus the second? Does international look more like the US as we're exiting the quarter here in any other trends you can give us help think about the future US versus international?

Yeah. I can't give you any sort of quantitative information beyond what we've said. The US, there was a difference, obviously, geographically in the first half of the quarter than the second half of the quarter. But the US did relatively well on a whole quarter basis. There isn't anything, I guess – I guess what I'm trying to respond to, there's nothing – there's no information here that that is to be gotten. There's nothing about our international business other than what I call that around distributors versus our US business. Our US business was obviously strong. That is the story sort of beyond just managing through the timing of the pandemic. And I guess that's the best way to answer the question. There's no underlying issue to uncover here. The business has been – returned strongly both in the US and international. Our distributor markets in the long-term I think we'll be fine. So I guess I'm not trying – I'm not sure what I – Maggie maybe could provide a different color.

Yeah, just US and Europe direct business then the performance in first half versus improvement in the second half is pretty consistent and uniform across. But then if we look at the international distributor revenue, I mean, even historically, the orders come in on a pretty inconsistent lumpy pattern. So there is no – we cannot derive just based on first half or second half performance to the second half of the year.

Okay, thanks and maybe it's a follow up. Adam, you talked about three products that you're using the equity raise to put forward to advancement in the pipeline. One was REAL VR. I know I'm not going to get you to disclose the other two. But can you give us a sense on are these near, medium, long-term projects, do they fit within your existing verticals? Are they new verticals like REAL VR was to neuro peripheral? And any other comments you'd like to share?

Yes, to some of those, no, to some of those. No, they are significant opportunities that can help an extremely large number of patients. And as you know that's sort of the way we think about products that we work on and both of these fit that exactly, significant opportunities that would help an extremely large number of patients.

Appreciate it.

Sure.

Your next question comes from the line of Margaret Kaczor.

Hi, this is Brandon, on from Margaret. If I could just – looking at the US It was kind of interesting that the vascular business seemingly had a little less headwind than the neuro side. I guess it was interesting just because you think the exposure to elective procedures on the vascular side maybe would have given a little headwind or a little more headwind relative to neuro? So I was curious if you could talk about what do you – what would you attribute that to? Is it just a mix thing of electives are urgent? And then maybe your expectations for what that means for the rest of 2020 and how these businesses should trend going forward?

Yeah, let me start by commenting on the trend. We really talked about this also, last quarter to what we had started that in April when we shared our April numbers. And I really think it comes down to the simple fact that particularly in the beginning of the quarter the number of patients who had strokes had – that were showing up and again, well documented, and not only in scientific literature, but mainstream media did not show up to the hospital. And they don't come back. Once that happens, you can't catch up on those or treat them later. But in the peripheral side, a lot of that – those patients can come back and be treated. So there's a fundamental difference in what those trend lines are going to look like. And I think that's sort of expected. And then moving to the place where people feel comfortable going to the hospital, we obviously have that positive trend line in the back half of the quarter, but my caution is just what is happening in the larger communities, both in the US and other markets, with the pandemic and the acceleration of cases in the US and the resurgent of cases in some other markets where they had done a better job of suppressing it. So that's what provides some uncertainty going forward, beyond just what we all know by reading or listening to the news. We don't have any additional insight to offer sort of guidance or perspective going forward. Obviously, if we can continue to have people be educated and public awareness that going to hospital is safe, we expect the stroke numbers to continue to be strong. But if that were to change and people started to feel differently, then those numbers can be and would be impacted. The peripheral numbers have that added – the benefit of seeing some of that business come back in June and then into, as we said, continuing to July.

Got it, that's helpful. And then within the vascular side still have your reps been able to get back into the accounts. I'm trying to think about how training efforts are going and thinking about growth going forward. One, are you able to train new Doc's, so can you have growth in the back half of the year from new docs and are you really able to just keep developing that market given it's a little bit of a market development effort? Thanks.

Yeah, it's a great question. And the answer is during the window of really June into July there a lot of reps were able to get back into hospitals. There are definitely parts of the country that that became a little more difficult and strained as the acceleration of virus happened. But so far that hasn't been a big limiting factor, particularly around the launch of Lightning 12. But again, we're cautious about projecting out what we have seen so far to the back half of the year, just given the nature of what's happening and what you hear about the reports, but that being said, that hasn't been a limiting factor yet. And for most people the use of this product is – if you're already using this product and all you're doing is adding Lightning, it does not really require additional in person training, nice to have, we're happy to do it, but you could do it without it. And that's part of sort of our virtual launch, if you will, for new doctors who've never used it, they certainly could do that, but we would try to get them some in person sort of education or training if possible.

Got it, thank you.

Yeah, my pleasure.

Your next question comes from the line of Joanne winch.

Good afternoon. How is everybody?

Good. How are you Joanne?

I'm doing well, thank you. I have two questions. I'll ask them together. One of the drivers of the US stroke market was regional or state-by-state adoption of new guidelines. I have no doubt that every state is really distracted elsewhere. But have you heard additional conversations on this type of topic? And then my second question is more of a financial one. I think if I heard you correctly, third quarter margins will be similar to the second quarter, can you confirm that? And then how do we think about re-accelerating that metric? Thank you.

Sure. Well, let me address the first part of the question and then I'll let Maggie address the gross margin question. Your instincts I think are generally right that state legislatures right now pretty busy with lots of other things than worrying about stroke triage. They are obviously are facing questions around the pandemic and unemployment and schools opening and so on. We did recently receive an update from the group that is running this campaign and there are still some positive developments moving albeit probably a little slower than normal in states, Massachusetts, Ohio, Pennsylvania. But I would expect that there would be a slowing of that state-by-state campaign for a little bit while we move through the pandemic. But it doesn't mean it's beyond that timeframe. And then Maggie you can answer the gross margin question.

Yeah. H1. So when we look at –think about gross margin, so first of all, gross margin is still a function of volume absorption. So if revenue increase, if volume increase, we will be able to better leverage fixed costs. But there are a couple other factors to consider. We did invest and build some inventory in this quarter in preparation for new product launches in Q3. So some of the under absorbed overhead is an inventory and will be reflected in quarter. Another factor is while we're syncing with demand, we're still continuing to appropriately invest in efficiency and productivity in our new Roseville facility. So some of these investments may have short-term margin impact, but all these investments will set us up for better margin expansion in the future. So it's more of a future – a short-term view.

Thank you.

Thanks, Joanne.

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

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

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