Penumbra, Inc.

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 speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, simply press star, then the number one on your telephone keypad. If you would like to draw your question, press the pound key. 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 gap to non-gap 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 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 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, Chi. 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 COVID-19, particularly in March. I will share certain observations that we have seen in our business 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 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. 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 that 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, TPE, and locations. 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 our employees.

And lately, we received two important updates regarding

One in neuro and one in vascular, respectively. While both regulatory clearances came earlier than expected, we'll technologies to when it is appropriate to engage our physician customers. This to refine our commercial strategies to be more effective in this new environment. The final point about the first quarter commend the extraordinary work of the entire Penumbra team 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 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 J.P. Morgan, 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 We have also reimagined how our commercial teams will and should interact with our customers going forward, allowing us to be supportive and helpful but taking into account 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 incredible 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 31st, 2020, our $37.3 million, an increase of 6.9% reported and 7.6% in constant currency 2019. Our geographic was 70% U.S. and 30% international. Neuro and vascular represented 57% and 43% of sales respectively. Revenues from our vascular business were 50% 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 in 2019 compared to the same period a year ago. Excluding Japan, our neural business grew 5.1% compared to the first quarter of 2019. Our neural performance was primarily driven by sales of a Penumbra system. Our growth margin in the Thank you for joining us today. 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 we to achieve social distancing and employee safety measures. As a result, certain labor additional period expense in the quarter. Reduce labor captivity to support demand. For the second quarter, we expected our gross margin will be lower as a function of volume absorption. The operating expense for the quarter was $87.4 million, or 63.6% of $72.8 million, or 56.6% of revenue during the first quarter of 2021. Our operating expense reflects limited reduction related to activities restricted by COVID-19 such as travel and entertainment expenses. There will be some natural reduction in expense as it relates to the current environment. We have also implemented out-of-cost control measures. In our pre-announcement, more than 20 senior executives have voluntarily taken substantial temporary While we continue to be disciplined in controlling spend, we will also continue to prioritize our investment in our production capacity, commercial channels, and product development. Our research and development expenses were $12.9 million for the first quarter 2020 and $1 million for first quarter 2019. SG&A expenses were $74.5 million for the first quarter 2020 compared to $61.1 million. We had operating income in the quarter of $0.6 million compared to an operating income of $2 million for the same period last year. Turning to our cash flow and balance sheet, we end the 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, primarily related to building up inventory, securing material supply, making capital investment associated with new product launches and general timing of certain. On April 24th, in order to further strengthen our liquidity We close on a $100 million revolving credit facility with J.P. Morgan, in addition to the company's current strong net cash position. The revolving line of credit further bolstered our access to capital, which gave the current environment and to be opportunistic. And now, Alex.

As mentioned in his remarks, Manumbra has Thank you for joining us today. I also want to extend my gratitude to every Penumbra employee for the sacrifices each are making during this time. Thousands of healthcare professionals, and first responders who are making it possible 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.

At this time, I'd like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. And your first question, comes from Robin Marcus from J.P. Morgan. Your line is now open.

Great. Thanks for taking the question. You know, I just want to start. It seems amazing how our 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 was wondering if you can talk about some of the trends you're seeing there. And is this more of all just ICUs where an ORs were overrun with COVID patients? Or do you think this is something that can extend longer as patients would rather not go into a hospital than get?

Yeah. Hi, Robby. 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 over the rest of the world. One of the phenomenon, what is happening inside the hospital itself, obviously, stroke and a number of the other conditions that are There's a lot of publicity around patients not going into the hospital. And there's been this in the lay press as well as whether it's heart attacks or strokes.

There was a time frame particularly acutely in April where those numbers were dramatically down.

So I think that's were concerned or anxious about going into hospitals. The assumption is because they didn't want to by going into the hospital. We don't know the exact reason for that, but that's the premise, the bulk of this. Hospitals, as you know, are, and we've confirmed this with a number of our customers, You know, they're rethinking how they're going to operate. There's a lot of sense that, you know, this is not a short time. And they're going to restructure how they think about and treat patients and make sure in their community that they can be a safe place to come. just anecdotally are talking about having separate entrances on COVID patients versus patients on COVID conditions in the hospital so that those areas are segregated. And I think those are the types of things that we'll see those The community's reaction to those issues change, and again, we're seeing the last week or two, you know, a little bit positive trends in that direction. So I think we have some optimism that patients, you know, 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 in this time to go and sell actual products in the, say, turning point where you think it could stem greater adoption of Indigo for these patients, thanks.

Yeah, that's a really good question. I think Indigo has a lot of interesting points right here, you know, sort of on a level that's true, you know, dripping TPA typically requires going into the ICU and monitoring those patients carefully versus, you know, just removing clot. That was one of sort of the premises of the product. and I called that out in the prepared remarks specifically on Indigo that the drop in cases is partly about people not showing up in the first place. So it's not a question of being put into an ICU but them not showing up in the first place. I think adding to that is where we are seeing, and you're seeing this again in the lay press, there were some articles around this, particularly around younger people in stroke recently, that there's this phenomenon of hypercoagulability which is a condition or tragedy to one in which physicians are wanting to learn how to address and deal with some of those issues. The worst thing is that you typical respiratory issues, but you end up dying of a PE caused by the virus. So we actually put on not a product specific recently, but a week or so ago, a disciplinary how do you treat these patients with the sort of large thrombus burdens that they've over 400 registered physicians sort of dialing in to a growing issue. And we've seen the sort of little bit of uptick which gives us some were the right way. And in addition, you know, unlike sort of just a regular product, you know, where the appetite for it might be different, you know, we do, as you know, have a newly cleared indigo product that was cleared before this happened that we haven't launched, and I alluded to, you know, being able to come up with and develop Thank you very much. Thank you.

Robbie, do we lose you?

Excuse me, Mr. Marcus, your line is still open.

Oh, I'm all set. Thank you very much, operator. Thank you.

Thank you.

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

Hey, guys. Good afternoon. Thanks for taking the question. One 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, Jet7 ExtraFlex Maxx? and I had a follow-up, thanks.

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 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, you know, fundamentally the procedures faster, more efficient, and more complete. And I think at a time like this, particularly with COVID patients with some of these issues, it will be an important addition to our offering.

That's helpful.

You had a question?

Yeah.

A second question?

Japan, thanks for the color on that. 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 $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. Thanks for taking the questions, guys.

Hi, Larry, it's Shree. I'll take that one. So on Japan, you know, obviously, you know, with the COVID-19 pandemic, we're watching that closely. That's obviously the major sort of news since our last call and 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 your comments. and that continues to be our expectation, but obviously with the large caveat of the COVID-19 pandemic.

Understood. Thanks, Ray.

Thanks, Larry.

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

Yes, hi. This is Matt Henriksen 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 are 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. They're certainly 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, you know, and go to those centers and have the conversations. So, you know, we're looking at alternative methods rather than just sort of the typical process that we had 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 are 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 or 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 meeting to encourage somebody to do things that are hard to do even if you were in the room with them. There's opportunity, obviously, and I alluded to it in my prepared remarks, to dramatically improve and address some of those shortcomings of the horrible pandemic. So stay tuned for more details. But I think the existing need is there, and there's some new opportunities that I think have developed.

And then just my follow-up, you talk about how daily sales trends globally were down about 35% versus kind of pre-COVID levels, and that includes the Japan impact from the reimbursement change.

Yeah, it's a great clarifying question. You know, we had Thank you very much. Thank you.

Your next question is from Margaret Cazor from William Blair, your line is still open.

Hey, guys. Thanks for taking the questions. Maybe the first one for me is 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, you know, what kind of steps or partnerships maybe that you would take to pivot to both a virtual education platform for Purple, for example, and then kind of a similar question within virtual sales just because sales have probably changed not only for now but going forward with essential employees and hospitals and so on.

Thanks. Yeah, thank you. It's a great question. You know, there's the obvious sort of thing that, and I used 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, 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 a hospital A physician who had used it, but this particular physician, 19 patients, developed 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 support in the case, and asking and reaching out to our team to be there support and ended up having a really, really gratifying and remarkable result for that particular patient. So there are going to be supportive of the physician community during this timeframe. You know, one can sort of think about this and say, you know, how long does this go? How does it fundamentally change the way we interact? And without 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, you know, the traditional way that we operate as most med tech companies do, which is pretty high touch. You know, you go in, you go to 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 Indigo product coming up.

Okay. This is another question that's kind of similar along those lines of supporting clinicians. Thank you.

Yeah, so I'm not exactly sure of the question around, you know, what are we doing to help the hospitals themselves. Obviously, we will be there however we can to support them. We, you know, 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 You know, sort of unique moments of inventory as opposed to sort of overall par levels increasing, you know, cost-effective ways to do that. The team here has developed, I think, a lot of support that. You know, again, our ability to respond to requests as opposed to sort of take a more sales approach and try to continue has been really well received 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.

Margaret, thank you.

Again, if you would like to ask a question, press star then the number one on your telephone keypad. Again, to ask a question, simply press star one on your telephone keypad. There are no further questions. 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 second quarter call.

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