Penumbra, Inc. (PEN) Q4 2020 Earnings Report, Transcript and Summary

Good afternoon. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to Penumbra, Inc. Q4 and Full-Year 2020 Earnings 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. I would like to introduce 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 fourth quarter and year-end 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 year ended December 31, 2020, which is scheduled to be filed with the SEC on February 23, 2021. 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, 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 20 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 fourth quarter and full year; and Jason Mills, our Executive Vice President of Strategy, will discuss our 2021 guidance. 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 fourth quarter and year-end 2020 conference call. Our total revenues for the fourth quarter were $166.9 million, a year-over-year increase of 14.9% as reported and 13.7% in constant currency, which marks the second consecutive record quarter for Penumbra. This also included a reduction of $5.8 million in revenue due to the recall of Jet 7 Xtra Flex in mid-December. Excluding this one-time impact, total Q4 non-GAAP revenue grew 18.9% to $172.7 million. For the full year 2020, our total annual revenues were $560.4 million, which represented growth of 2.4% over full-year 2019. Excluding the one-time recall impact, total annual non-GAAP revenue grew 3.4% over 2019 to $566.2 million. Maggie will further review the financials as well as details on our balance sheet in her commentary. During my prepared remarks this quarter, I will focus on three topics. First, I will briefly discuss our culture of innovation that is responsible for the development of our broad portfolio of products. I will then update you on our specific developments in vascular, neuro and virtual reality. Second, I'll talk about the progress we've made in international markets since our last call including China. And third, I will address the challenges we all faced in 2020 and early 2021 from the pandemic and our thoughts on its impact. We have built a purposeful structure and culture at Penumbra that allows us to develop and continue to innovate products that really matter even as the company gets larger. This ability to continuously innovate has been led for almost 17 years by a large team of highly skilled and motivated people, including our Pengineers who share a commitment to solving hard problems in healthcare, and it has been instrumental in the development of our broad portfolio of products. Our results this quarter show that our products are positively impacting more patients than ever before. Yet we continue to be driven every day by the number of patients we can still help. We estimate, in the United States alone, that nearly 80% of neurovascular thrombectomy patients, over 90% of vascular thrombectomy patients, and essentially 100% of patients to whom our real VR technology is applicable, can be added in the future to the patients we can help with our current portfolio of products. Let's start with our vascular franchise, which became our largest business for the first time in the fourth quarter. Our Lightning products once again drove strong growth in vascular. In fact, our proprietary Lightning technology is now embedded in products used to treat patients in both the venous and arterial segments with Lightning 12 and now Lightning 7, which I will discuss shortly. Lightning 12 continues to be incredibly successful at removing blood clot in single sessions from the veins and pulmonary arteries. During the fourth quarter, Lightning 12 received an indication from the FDA for the treatment of pulmonary embolism or PE. In addition, we announced our partnership with rapid AI to bring their cutting edge artificial intelligence platform from stroke to PE. From early conversations with pulmonary embolism response teams, also known as PERT teams at hospitals, there is a lot of interest and need to streamline the communication flow and decision making in PE cases to help more patients and help them faster. Lightning 12 is just scratching the surface in venous and pulmonary thrombectomy, even though adoption and physician feedback since its third quarter launch has been extraordinary. During the last month, we started the initial evaluation cases for Lightning 7, which have gone very well, and we expect to full launch in late March. We think Lightning 7 can offer significant improvements to physicians treating patients with clot in their arteries and provide benefits that are similar to those of Lightning 12 is providing on the venous side. In addition, CAT RX, our coronary product, continues to help more and more patients who have coronary clot. The US population that we estimate is approximately the same size as the number of US ischemic stroke patients eligible for mechanical thrombectomy each year. Taking stock of our entire vascular business, including peripheral embolization, which also had a record quarter, we are poised for durable growth for many years to come. Now, let me turn to our neuro business. In the fourth quarter, we launched BMX96, one of our most innovative Access products. BMX96 has a slightly smaller outer diameter compared to our Neuron MAX guide catheter. But our novel technology has allowed us to make the inner diameter even bigger, going from 0.88 to 0.96 inches. This allows for greater room inside the guide catheter to maneuver the other catheters being used in the case. It has been very well received by physicians not just in stroke cases, but in all types of neurovascular cases. On the stroke side of the business, following the recall of Jet 7 Xtra Flex, some of our stroke physicians switched directly to our ACE68 or Jet 7 standard tip, whereas others took this opportunity to try other reperfusion catheters. Following that trialing, some of those physicians are coming back to using either ACE68 or Jet 7 standard tip as their primary reperfusion catheter. In fact, based on both the demand for exchanges as part of the recall and current demand, we are working through a backorder situation for the Jet 7 standard tip which we expect to resolve in the next month. These products, together with the rest of our portfolio, will continue to play an important role in many stroke cases until later this year when we update our catheters. In addition, we remain very optimistic about our future innovation that we hope will bring even better solutions to our physician customers. 2020 was clearly a challenging year for the growth of US stroke procedures in general, due primarily to COVID. But this motivates us to work even harder to successfully treat more stroke patients. We constantly remind ourselves of the enormous cost of the resultant disability of stroke that is devastating to patients and puts such a huge financial burden on our healthcare system, billions and billions of dollars. It will take some time, but we believe for these reasons, the market will get back to growth over time. Let's now move to our newest product area, virtual reality or VR. VR is the area in which we think we can help the most patients over the long term. Our REAL immersive VR system is proprietary technology designed specifically as a platform for healthcare applications, built from the ground up to deliver creative applications that are purpose built for medical conditions that impact millions of patients. Our vision for REAL has actually expanded over the past year. First, there is a large opportunity for us to serve many patients who need some form of rehabilitation, with applications that are tailor made for patients interacting with their physical or occupational therapist, not only in the clinic, but also virtually while the patient is in their own home. This rehabilitation opportunity for REAL includes patients recovering from stroke, cardiac rehab, orthopedic rehab, movement disorders, traumatic brain injury, and other conditions. We also believe that it is important to offer a broad portfolio of applications dedicated to helping patients suffering from chronic pain, mental health, stress and anxiety and memory loss, among others. The clinical evidence around the benefits provided by virtual reality for both rehabilitation and mental health applications is significant already. And we plan to build on these data, working with some of the world's foremost VR experts in healthcare, to develop applications and clinical evidence for the REAL platform. We fully recognize that many uncertainties remain and we have a lot to prove regarding the real platform, but we strongly believe that we are what we are doing with the REAL platform truly matters and can help a great number of people. Now, let me update you on our international business which performed well in the quarter. First, I'd like to share company updates related to China. During the fourth quarter, we signed a new multifaceted agreement with Genesis MedTech Group, which merged with Hua Medtech, our former partner, making it, we believe, the largest domestic company in China's neurovascular space. Our initial collaboration is a multi-year fixed term strategic partnership for five products, ACE68, ACE60, 3MAX, Neuron MAX, 088 and Jet D. And each product produces three distinct revenue streams, licensing royalties, and product distribution, for which we have a good visibility. We are excited to be working in partnership with Genesis as they share our commitment to patients, and we believe they have the capacity and expertise to bring these important technologies to patients in China. We're also excited about future opportunities for Penumbra in Japan. While 2020 was a challenging year for us in Japan, owing to COVID, reimbursement changes and, ultimately, the Jet 7 Xtra Flex recall, we see many opportunities for growth in the region, not only in our current stroke and vascular embolization business, but in vascular thrombectomy and virtual reality over the long term as well. Looking forward, we expect solid growth in Japan in 2021 and beyond. We also made solid progress in Europe, Latin America, and Asia-Pacific in 2020, and expect to see continued growth in 2021. Finally, I'd like to discuss the pandemic and its effect on our business. The surge in cases around the holidays and our team's continued focus to maintain a safe working environment for employees had a small impact on our production. However, assuming the virus variants do not change the current status, we believe we will be able to navigate our production capacity during this time and keep up with demand. As for the impact on our revenue, like most of our peers, we did see some impact in the first part of the quarter around elective cases in the United States and in some international locations, which will have a minor impact on this quarter. That said assuming the current trajectory continues, we do not think it will have a major impact on our annual growth for 2021. I'll turn the call over to Maggie to deliver our financial results for the quarter and the full year.

Thank you, Adam. Good afternoon. I will begin with a discussion of the financial impact of the recent Jet 7 Xtra Flex voluntary recall, then I will go into the results for the fourth quarter and full year 2020. With the announcement of the voluntary recall of Jet 7 Xtra Flex on December 15, 2020, the financial impact in the fourth quarter was a reduction of $5.8 million in revenue due to refunds for product returns, as well as $12.6 million in charges to costs of sales, primarily related to inventory write offs and cost for product exchanges. This voluntary recall had an impact of approximately 900 basis points to our gross margin. These figures represent the total expected financial statement impact from the voluntary recall as we have accounted for or estimated any future returns or exchanges as required by the accounting rules. We do not expect to see any material changes to our financial statement in either a further reduction in revenue or increasing cost of sales expense in 2021 due to any lingering impact of the recall. The following fourth quarter financial metrics will represent non-GAAP financial results, which exclude the impact of the voluntary recall as previously described. As a reminder, fourth quarter GAAP figures and a reconciliation from GAAP to non-GAAP measures are provided in our posted press release. For the fourth quarter ended December 31 2020, our total non-GAAP revenues were $172.7 million, an increase of 18.9% reported and 17.7% in constant currency compared to the fourth quarter of 2019. Our geographic mix of sales in the quarter was 70% US and 30% International. US and international reported sequential growth of 10.5% and 24.4% respectively compared to Q3 2020. Revenue from our vascular business grew to $87.1 million in the fourth quarter of 2020, an increase of 45.5% reported or 44.7% in constant currency compared to the same period last year. Our year-over-year performance is driven by growth across vascular thrombectomy and embolization products. And we also saw strong sequential growth from Lightning 12. Revenue from our neuro business was $85.6 million in the fourth quarter of 2020, an increase of 0.2% reported and decrease of 1.2% in constant currency compared to the same period a year ago. Revenue for Jet 7 Xtra Flex through December 15 was $9 million or 5.2% of total non-GAAP revenue excluding the impact of the recall. Our US neuro business declined by 0.3% reported on a sequential basis. Our international neuro business increased by 30.3% sequentially and 5% reported compared to the same quarter a year ago. These results were driven by strong performance across Europe, China, and Asia-Pacific regions. Our non-GAAP gross margin in the quarter was 65.2% compared to 67.6% a year ago, and sequentially improved from 16.2% in Q3 2020. Our gradual improvement in gross margin is driven by fixed cost leverage with increased demand and favorable product mix. We continue to invest in direct labor and overhead spending on COVID-19 related safety measures, and have made trade-offs in efficiency to ensure employee safety and to support product demand. Looking forward, we expect gross margin performance to continue at current level, but it could slightly fluctuate with price and product mix. Total operating expense for the quarter was $96.1 million or 55.6% of non-GAAP revenue compared to $87.5 million or 60.3% of revenue for the same quarter a year ago. Our research and development expenses for Q4 2020 were $19.5 million compared to $12.9 million for Q4 2019 as we continue to invest in product development programs. SG&A expenses for Q4 2020 were $76.6 million compared to $74.7 million for Q4 2019. Our spend increased primarily due to increase in headcount and related compensation expense while we continue to have slower spending in activities such as travel and conferences. We had non-GAAP operating income in the quarter of $16.6 million compared to operating income of $10.6 million for the same period last year. I will now summarize our full-year GAAP performance. For full-year 2020, our total revenue for the year were $560.4 million, which represent an increase of 2.4% reported and 2.1% in constant currency compared to full-year year 2019. Revenue from our vascular business for the full-year 2020 was $267.8 million, an increase of 24.1% reported and 23.9% in constant currency. Revenue from our neuro business for the full year 2020 was $292.6 million, a decline of 11.8% reported and 12% in constant currency. Our gross profit for the year was 60.3% of revenues compared to 68% of revenue for full-year 2019. We had operating loss for the year of $38.9 million compared to a comparable operating income of $47.5 million for 2019. Turning to cash flow and balance sheet. In 2020, we increased our inventory balance by $67 million, which primarily consisted of $24 million investment in stocking of REAL system and $43 million in consignment, raw material and finished goods to support new product launches and growth in demand. In the fourth quarter, $18 million of REAL stocking was reclassified on the balance sheets from property and equipment to inventory due to changes in our go-to-market model. We ended the year with $265 million in cash and cash equivalents and marketable securities and no debt. And now, I'd like to turn the call over to Jason to discuss our 2021 guidance.

Thank you, Maggie, and good afternoon, everybody. We entered 2021 with strong momentum in our business. The markets we target are large, the products we bring to physicians are unique and our dedication to patients remains paramount to our culture. We are introducing revenue guidance for full-year 2021 in the range of $675 million to $685 million, which represents 20% to 22% growth over full-year 2020 revenue of $516.4 million. Regarding revenue trends, we anticipate revenue in the first quarter to be lower than our record Q4 results, then increasing sequentially throughout the subsequent quarters of the year. We highlight two factors to consider with this guidance. First, we saw an impact to elective procedures in January from the resurgence in COVID cases in the US and other geographies. We expect this to be a minor factor in our first quarter results. Second, our guidance takes into account the near-term dynamics in our neuro thrombectomy business after the mid December recall of Jet 7 Xtra Flex. That said, we are optimistic about our current portfolio of stroke products as well as our pipeline of new products, including the potential to usher in a new paradigm in stroke intervention. Overall, consistent with our approach to setting guidance in the past, our 2021 revenue guidance represents our current views on our markets, timing of new product launches, and other relevant inputs. I will now turn the call back to Adam for closing remarks.

Thank you, Jason. I'd like to end our prepared remarks by first acknowledging the incredible work of the Penumbra team during this challenging time to continue to ensure our products were available to help so many patients in need. Your dedication is extraordinary. And I am proud to work with all of you. And finally, I know everyone at Penumbra would like to thank our physician customers and their entire teams for the work they have done over the past year, sometimes in extremely challenging circumstances to treat their patients. Your heroic work motivates us to continue innovating to make better and better products, and has meant so much to us this year. Thank you. And now, we'd like to open the call to questions. Operator, please go ahead.

[Operator Instructions]. Our first question is from Bill Plovanic with Canaccord.

The first question just on the – you gave us some color on cadence and guidance. Considering the quarter and if you back out the one-time charges, your annual 2021 guidance is below just fourth quarter 2020 annualized. And I'm trying to understand the puts intakes. I understand what the neuro and some of the comments and maybe that's not a growth business. But just trying to understand, is that – do you expect to go back significantly? I'm just trying to put all this together and it just seems a little lower than what we would expect it.

This is Jason. I'll start and then Adam can add on. As we said in the prepared remarks, we did see in January a bit of an impact as our peer group has seen in COVID. And we also are just taking into account the dynamics associated with the neuro thrombectomy business and the recall. Then I've even said, we're very optimistic and confident about our business. And as we mentioned, we expect to see sequential increases as the year progresses. Adam?

As you know, Bill, when you send guidance at the beginning of a year, looking out, we try to be as accurate and carefully as possible. That said, I think the guidance represents a pretty strong growth for the company as we look at 2021 and, of course, beyond. But we obviously are – I think Jason's point about the first quarter is fair and obvious. But going forward, I think the numbers represent pretty strong growth.

Just a follow-up on that. In terms of the neurovascular, you've talked I think last year a bit and now this, some of the commentary in the prepared remarks, just that kind of new platform to replace the Jet 7 in this neuro area. I was just wondering if we could get a little more color on what the features benefits may be and, if not on that granularity, at least maybe some timing associated we should think about.

I'm going to not, on this call with this question, break new news. So, I'll prepare you for that. There are two separate things. And we said that on this call. The update to reperfusion catheters and then separate from that what we're calling this new technology with a paradigm change. The update on the catheters is just to continue to make them better and more trackable, which is not new news. The paradigm shift, we've talked about this more in generalities where the goal of what we're trying to do with all of our thrombectomy product lines and stroke, particularly, is to try to get all the clot out, not part of the clot out, but all the clot out as fast as possible in all the cases, no matter where the clot is located. And we think we can make an impact on that with our new technology. We'll wait and see. But I'm not yet able to go beyond describing that technology. But we're pretty excited about it and want to bring it as soon as we can.

Our next question is from Robbie Marcus with J.P. Morgan.

This is actually Allen on for Robbie. I want to start off with a quick question on Lightning. Obviously, the peripheral side of the thrombectomy business continue to do very well even with COVID-19 headwinds. So, when we look at Lightning 7 and the kind of growth that Lightning 12 has given you, given it is moving into an area that you already have a very strong presence in arterial, should we think of that as a more kind of like a modest benefit to the business? It's not like you're moving into an area that you didn't have a strong presence in already? Or can we think of that as being as big of an impact as Lightning 12 was for the broader franchise?

I think the way we look at it really is in just total numbers. If you look at the arterial side, there are a lot more patients that are being intervened on with or surgically treated for arterial clot than there are patients who are being intervened on for venous or PE. And we've gone through those numbers in the past. There are 250,000 – these are US numbers – patients who have arterial clot that is being treated through intervention or surgery. And that's compared to a little over 100,000 on the venous and PE side. So, the opportunity is just bigger and the impact on those patients is pretty extreme. You're, in many cases, not all, intervening or doing this in order to make sure you can save a leg or a limb. And so, by definition, we think in the long run, that will have a significant positive impact on the business, but, of course, on those patients. So, the uptick on that, how fast do people convert to Lightning 7, that's an open question. Right now, many of our customers are having great success with our current technology. The barrier for many people to have converted – because, again, we're not even treating 10% of these patients. The barrier for the other 90%, in many cases, what we've heard doctors say is, they don't want to use as large a catheter as our CAT8, which is an 8 F system. And so, we're offering now a slightly smaller French size, a 7, but with almost all the benefits of a bigger catheter. It's just smaller enough, and that's using our new novel technology, to maximize the inner diameter. So, it's almost the size of CAT8 on the inner diameter. But then we add to it Lightning, which allows for a case in which you don't have to worry about blood loss and you have sort of the auditorial signals that you're in clot. And those are the things that I think will help bring folks who have not yet tried our system over to try single session. And again, a lot of the discussion around single-session treatment versus multiple-day lytic treatment is in the forefront of the medical discussion with these doctors because of COVID and ICU beds and all that. So, I think we'll have some real success with it. Will some of the physicians who were using CAT8 go back to – down a size? Maybe in certain cases, but I think some of them might stay with CAT8.

Our next question is from Bob Hopkins with Bank of America.

A couple of things. You guys had previously said that you might be getting into the weeds a little bit more on REAL this year with either maybe an analyst day or some sort of event to kind of put a little bit more meat on the bone. Is that still going to happen at some point this year? And I think you had also previously said that a new stroke system would definitely launch sometime in 2021. I just wanted to confirm that was still the case.

So, let's start on the stroke side. We are fairly confident. Again, we don't control every regulatory decision that our catheters will come out. We will wait and give a little more definitive update on timing of the sort of new paradigm shift, again, as I get more confidence and clarity around specific dates on the regulatory front. So, I don't want to give you time frames that are specific on this call until I have that certainty. That being said, on the REAL side, we definitely will share the new technology, the models. The timing of that, as we look at it, it would be so more helpful and impactful if that was done in person, so people can experience and see virtual reality. So, if that's possible in the first half, we'll do that. If we have to wait a little bit, so we can have that, we'll find a way to share what we can virtually and then have the in-person follow-up and just give us a little time to sort that out. But there's no question we will be sharing a lot more of that in the near term as we approach because, as you can tell, we're pretty excited about it.

Along those lines, Adam, how big a push is this product going to be in 2021? Maybe a way to ask it is implicit in the guidance that you gave, what kind of contribution do you have from REAL? Are you making a big push on the launch front this year? Just maybe a little bit more color on what we might expect this year from that technology.

I think it's a really good question. 2021 is not the year that we're counting on a huge revenue contribution from this product. Rather, it's a year in which there's a lot of work that we want to do to lay the base and the groundwork for that future revenue growth. But a lot of that, I think, will become even clearer when we talk about this in the future when we sort of explain both the go-to-market model and where our thoughts have evolved on this product. But again, the possibility to help a huge number of people has just gotten clearer and we remain pretty excited. But most of our revenue guidance revolves around our interventional products.

Just one real last quick one on the guidance. On the neuro piece of the guidance, do you have neuro growing over 10% implicit in that guidance? I'm just trying to get a sense for a rough breakdown of how much you think neuro will grow and how much that contributes to that 20% to 22% overall growth you're forecasting.

It's Jason. Thanks for the question. It's a really fair question. As you know, we don't break out our guidance to that level of detail, and so we're not going to do that here. But that having been said, if you look at the businesses in total, we're really optimistic about the products we have in the current portfolios for both neuro and vascular as well as the new products that are contributing in both. And we've talked about both the current and the new on this call. So, I'm not going to give any ranges for you for the two businesses, but we're confident in both that both can contribute to growth over time.

Our next question is from Larry Biegelsen with Wells Fargo.

It's Lei calling in for Larry. Thanks for taking my question. Can you talk a little bit more about the XTRA FLEX recall and, specifically, the capture rate? You've made a comment about physicians moving to other PEN devices versus competing devices and coming back to PEN. Is there anything you can quantify or give a little more color to that?

It had been and still, I think, remains a bit of a fluid process. So, I think quantifying it at this stage is challenging because it's changing. One of the things that I think we had some instinct around, our ACE68 and our Jet 7 standard tip were, at the time, great catheters when they were dominant in the market. And just because we launched Jet 7 Xtra Flex did not make them less good catheters. And when you take away Jet 7 Xtra Flex and its tractability and just compare ACE60 to Jet 7 standard tip to many of the market – other products on the market, they hold up really well. They perform really, really well. And so, I think the nature of this – many of our physicians is to try new things and to make sure that they're testing them out, but it has not surprised us and certainly been heartening for our team to see many people coming back to using the catheters that have done so well and have huge amounts of clinical data to support their use and are really independently great products. So, I think we're in a pretty good spot. As I called out in such a way that we went on a small back order on JET 7 standard tip, which will resolve shortly here. So, I think we're doing okay. That being said, I think everyone knows us. We never rest on our laurels, and we're going to keep innovating and can't wait to some new catheters come out later this year.

If I can have another question, just on what you talked about reaching $1 billion-plus revenue in 2023, Adam. Given the pandemic and the recall, what gives you the confidence at this point to kind of get to that?

And the confidence comes from the success we've had the last couple of quarters, the growth of all of our businesses, but particularly the Lightning series, which really is in the earliest innings and the reaction to that. You add in some of the other products that we've talked about and called out even today on today's call and what we have coming, I think that innovation and that sort of constant improving from our baseline is what gives us that confidence that we're on the right track. It's a couple of years away. Let's see how it goes. But as you can tell, I think, from our prepared remarks and some of our answers, the products we have now are performing really well and solve so many of the issues that physicians wanted solved. I went to a long answer on the Lightning 7 question, in part, so people understood that that product, it's sort of unusual, right? You're going slightly smaller, albeit that's – the inner diameter is almost the same size as the CAT8 or bigger. But you're doing exactly what the doctors wanted without taking away any of the power. In fact, adding capacity with Lightning. So, I think those are the kinds of things where we listen to our customers. We iterate and innovate as fast as possible, give us the confidence that we can hit that target.

And the only thing I would add to that, as Adam mentioned in his prepared remarks, is sort of the market backdrop to all of that. So, on the product side, I talked about our confidence and optimism. The market backdrop in each one of the segments that we are focused on is really positive, positive from the standpoint of those patients we've already helped, but even more patients, 80% in stroke, over 90% in peripheral thrombectomy, and then we've got the whole market in front of us in virtual reality. So that provides a backdrop about which we're excited.

Our next question is from Ryan Zimmerman with BTIG.

Adam, I just want to ask one. So, I just want to ask one, first on Jet 7 and Jet 7 Xtra Flex. This paradigm shift you're talking about, Adam, I'll ask it in a different way. But what is it that you feel like you're trying to build upon from Jet 7 Xtra Flex that you're solving for, maybe just beyond the design challenges you ran into with the agency? What is it that needs improvement at this point in ischemic stroke? And not to steal thunder from maybe what you're going to debut later on this year when you do debut it, but what were some of the issues beyond what we saw maybe with some of the reports in the MAUDE database?

I think the two things are unrelated. And I think it's really important that I make sure you understand that. So, the paradigm, the current paradigm is to make catheters as big as possible to, therefore, suck out as much clot as possible. And as you make catheters bigger, making them big and trackable becomes the design challenge, which Jet 7 Xtra Flex did a really good job of, again, if instructions and all were followed. That paradigm that every company is now trying to make bigger catheters that track well is the paradigm that we're saying might change where that race is no longer as necessary because you think about a different way to think about removing all the clot as fast as possible. So, we're not really – the challenges or the design considerations, I should say, for this new product or new technology is really unrelated to Jet 7 Xtra Flex or ACE68 or any of the other catheters. It's trying to deal with the underlying issue, which is how do I sort of democratize and make the success of cases broader. Right now, some physicians, with certain patients, have great success quickly. Other patients don't have that kind of success. What we're trying to do is create a product that can have the ability to remove all the clot out as fast as possible in everybody. And so, that's sort of the point. So, it's sort of unrelated to Jet 7. When you update our catheters, our key is to make big catheters track as fast as possible and as well as possible. That's today's paradigm. And we'll continue to do that until the new technology is out there.

Just a follow-up to Bob's earlier question, and I don't know if we'll get color on this or not, but Maggie, I think, alluded to a change in business strategy related to REAL. And so, contrasting that with what you laid out maybe in 2019 at the analyst day, what can we take to mean from those comments in terms of business strategy on REAL? Thank you.

That's one of the things that we'll share as soon as we can. As Maggie said, it's really about our go-to-market strategy. One of the more interesting things about a lot of the things we've ever done, whether it was stroke or the vascular thrombectomy and now REAL, is they haven't been done before. When we started out in stroke, the idea of taking a catheter, a large catheter, up deep into the brain and sucking out clot, no one had done, and so they were lots of things to figure out and learn and get better at. And REAL is no different. And as we do more work, get more experience, get more feedback, we're constantly – I think part of our strength is being able to evolve and adjust. And we've looked at our go-to-market model and the way that should go, and I think we're evolving our ambitions in a very strong and positive way. We're really sitting on something that can be a platform for the entire healthcare field, and that's pretty powerful.

Our next question is from Margaret Kaczor with William Blair.

This is Brandon on for Margaret. First, can I just ask a question on the vascular side? Is there any way you can quantify how impactful COVID might have been in vascular in 2020? And I ask because it was actually a very strong year for vascular despite kind of a higher mix to elective procedures. So, I'm trying to understand, as patients come back into the funnel, potentially, there's some backlog in vascular patients and you continue the momentum you're seeing with Lightning 7 and Lightning 12, is there a potential for vascular to even accelerate as we move through 2021?

Yes. There are really two parts to that. The first part is, are we seeing more patients, if you will, that have clots because of COVID? We certainly saw that in sort of the April-May time frame when it was a new phenomenon, and the healthcare professionals weren't yet aware of it enough and were trying to catch up. I think medical management of a lot of COVID patients has gotten up to speed pretty quickly, and so I don't think we're seeing any sort of quantifiable numbers, massively large numbers of more patients because of COVID. That being said, and I alluded to it already today, one of the benefits of COVID – the moment I said that, I realized that came out wrong. I don't mean that as a benefit of COVID. But one of the byproducts of COVID, was the word I was looking for, is people needed to think about treating a lot of these patients in single sessions, and that plays directly into our technology. And that's different than sessions that take multiple days or require sort of a longer recovery period. And so that, I think, is opening many physicians' minds to the technology that we've brought. And then, you add in it the ease of use around Lightning, I think that has been certainly helpful to sort of move physicians toward our technology. And I think that phenomenon is here to stay for a while. I think that will continue because it's sort of top of mind to many people as they think about the idea of single-session treatment.

In terms of gross margins, if I heard Maggie correctly, I think she had said that you're broadly expecting gross margins to remain somewhat in line or flat as we move through 2021. I was just curious, one, did I hear that correctly? And two, with a premium on Lightning 12 and presumably a slight premium on Lightning 7 as well and then as we move past COVID, maybe some of the manufacturing efficiencies can start to die off a little bit, can we start to see gross margin expansion in the back half of 2021, maybe approaching the pre-COVID 2019 levels?

Yeah, I did mention that, for 2021, gross margin is likely continue to stay at the current level and not return that quickly to the pre-COVID gross margin level. At least not until we are completely out of the pandemic manufacturing environment and cost structure. It is not something that will switch overnight. We can probably – until the end of 2021 to see if the manufacturing environment changes. We did see slight accretive impact to our gross margin as a result of Lightning and we're going to assume similar trend going forward.

[Operator Instructions]. Our next question is from Joanne Wuensch with Citi.

This is Matt Henriksson in for Joanne. Our first question is related to stroke. We've talked a lot about the new products that are coming out. But with stroke protocol, 2020 was obviously a quiet year. But how do you look at 2021 with kind of new states and legislation adding new protocols? And especially with this new paradigm shift, will that help accelerate that process?

Let me answer the last question first. Unfortunately, I don't think those two are tied. The way one is treated versus the energy needed to get patients to the right hospital, I think they're sort of unfortunately de-linked. It'd be nice to link them. I really don't have the kind of visibility on the question around the state legislation that I did before COVID, in part, state legislatures are very busy doing lots of other things. As you know, their hands are full with crises. We obviously get updates from the Get Ahead of Stroke campaign that is run by the physician society. There's been some movement in some of the states, but it hasn't been incredibly fast. There's some moving into 2020, so I expect 2021 to have some progress. But I do think what will drive this in the short term is the kind of work that drove it before the state legislature work, and that is people being able to go back out into their community, make sure these patients are treated. And as we get a little closer to normalcy and having a lot of the healthcare workers vaccinated already, we're sensing that they're anxious to get back in to build their practice and go into the community to do that. So, I'm cautiously optimistic. But again, I want to be realistic that when you're in a dynamic like this, the work that's necessary to drive that doesn't become first priority. I said that during my prepared remarks that 2020 saw that. But I do think, and this is the part that is really important, we have too much evidence that we should treat these people. The cost of not treating on both to their health, but also financially, is so significant that this isn't how the story ends. We're going to keep at this, and we're going to – there are a lot of people that will stay motivated to drive this growth. It just might not be in this quarter or next quarter, but I do think it will continue. We know too much, and I think it will happen. From the company standpoint, and again, I think everyone knows this now, we will continue to grow because we have such a broad portfolio of products that cover a lot of different areas. And stroke is obviously not the single thing driving our growth. But obviously, we've taken a lot of questions on it. We remain incredibly committed to innovating there. I do think it's going to take a little longer, though.

Just looking at the R&D line, we noticed there was a drop-off in both the absolute spending and the percentage of revenue between the third quarter and the fourth quarter. What's the strategy behind kind of, first, the fourth quarter spending? And then how should we look at 2021? Is this something where we're looking more back toward the 20% of revenue? Or is it kind of 11% to 12% kind of the rate going forward?

I'll take that. First of all, if you remember, in our last quarter earnings call, we talk about a $20 million of R&D one-time expenditures related to Lightning 12 that we reported as a non-GAAP expenditure. So, going forward, our Q4 spending as a percent of revenue is likely going to be the trend going forward.

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 first quarter call.