Penumbra, Inc.

Good afternoon. My name is Chris and I'll 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 speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. 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 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-K for the year ended December 31, 2020, which are 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 10K 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, Chi, 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% is reported and 13.7% in constant currency, which marks a second consecutive record quarter for penumbra. This also included a reduction of $5.8 million in revenue due to the recall of Jet 7 Extraflex 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 engineers 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 clots 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 a 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 that Lightning 12 is providing on the venous side. In addition, CatRx, our coronary product, continues to help more and more patients who have coronary clot. A U.S. population that we estimate is approximately the same size as the number of U.S. 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 NeuronMax guide catheter, but our novel technology has allowed us to make the inner diameter even bigger, going from .088 to .096 inches. This allows for greater room inside the guide catheter to maneuver the other catheters being used in the case. It is being 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 JET7 ExtraFlex, some of our stroke physicians switched directly to our ACE68 or JET7 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 JET7 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 put 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. Now, 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 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, A68, A60, 3Max, NeuronMax, 088, and JetD. 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 JET7 ExtraFlex 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 go over 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 Extra Flags 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 Extra Flags 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 cost of sales, primarily related to inventory write-offs and costs 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 increase in 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% U.S. and 30% international. U.S. 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 new row 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 Jet7 Extra Flex through December 15 was $9 million of 5.2% of total non-GAAP revenue excluding the impact of the recall. Our U.S. 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 60.2% 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 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 neural 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 of 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 sheet 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 $560.4 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 U.S. 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 neurotrombectomy business after the mid-December recall of Jet7 Extraflex. 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.

At this time, I would like to remind everyone in order to ask a question, Star, and then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Our first question is from Bill Blavonic with Canaccord. Your line is open.

Great. Thanks. Good evening. The first question that we 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 20 annualized. I'm trying to understand the puts and takes. I understand with the neuro and some of the comments and maybe that's not a growth business, but just trying to understand. Do you expect that 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.

Thanks, Bill, for the question. This is Jason. I'll start and then Adam can add on. So 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 Neurothrombectomy business and the recall. That having been 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? Yeah. As you know, Bill, when you sent guidance at the beginning of the year looking out, we try to be as accurate and careful as possible. 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.

And then just to 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 and the prepared remarks, just the kind of new platform to replace, you know, the JET-7 in this neuro area. I was just wondering if we could get a little more color on what those, you know, the features benefits may be, and if not, on that granularity, at least maybe some timing associated we should think about.

Yeah, it's a very fair question. I'm going to not on this call with this question break new news, so I'll prepare you for that. But I will share there are two separate things. One is, 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 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 and no matter where the clot's 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.

Great, thank you for taking my questions.

Of course, thank you.

Thanks, Bill.

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

Hi, guys. This is actually Alan on for Robbie. I want to start off with a quick question on lightning. Obviously, the peripheral side of the thrombectomy business is going to 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 had a very strong presence in arterial, should we think of that as a more kind of like a modest benefit to the business since 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?

Yeah, it's a really good question. 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 so that and the impact on those patients is pretty extreme. Many cases, not all, you know, 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 that will have a significant positive impact on the business, but of course on those patients. So the uptick on that, you know, how fast do people convert to Lightning 7, you know, 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 eight French 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 Cat 8 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 signal 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 discussion. 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 CAT-8 go back to down a size? Maybe in certain cases, but I think some of them might stay with CAT-8.

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

Great, and good afternoon. Can you hear me okay?

Yeah, hi, Bob.

Great. Good afternoon, Adam. So a couple 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 We are fairly confident, again, 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 timeframes 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 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 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.

Yeah, and along those lines, Adam, how big a push is this product going to be in 2021? I mean, in your 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 more color on what we might expect this year from that technology.

Yeah, 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 and so forth. So that'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. 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.

And then 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, or 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?

Yeah. Hey, Bob. 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.

Okay. Thank you very much.

Thanks, Bob.

Our next question is from Larry Beagleson with Wells Fargo. Your line is open.

Hi, it's Larry. It's Leigh calling in for Larry. Thanks for taking my question. Can you talk a little more about the extra 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?

Yeah, no, that's a great question. And it's a very, 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. You know, one of the things, you know, that I think we had some instinct around, you A68 and our Jet7 Standard Tip were, at the time, great catheters when they were dominant in the market. And just because we launched Jet7 ExtraFlex did not make them less good catheters. And when you take away Jet7 ExtraFlex and its tractability and just compare A60 to Jet7 Standard Tip to many of the other products on the market, They hold up really well. They perform really, really well. And so I think the nature of 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, you know, 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. I mean, as I called out in such a way that we went on a small back order on JET 7 standard tip, which we'll 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 until some new catheters come out later this year.

Great. And if I can have another question just on what you talked about, about reaching a 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?

Well, I think the confidence, I mean, it's a great question, and the confidence comes from the success we've had, you know, 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, you know, that we've talked about and called out even today on today's call, and what we have coming. I think that's, you know, that innovation and that sort of constant, you know, improving from our baseline is what gives us that confidence that we're on the right track. But, you know, it's a couple 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, you know, the inner diameter is almost the same size as the Cat 8, 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 is, as Adam mentioned in his prepared remarks, is sort of the market backdrop to all of that. So on the product side, Adam 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.

Great. Thanks so much.

Thank you.

Our next question is from Ryan Zimmerman with BTIG. Your line is open. Thanks.

Thanks for taking the questions. So, Adam, I just want to ask one. Hey, guys. So I just want to ask one first on Jet7 and Jet7 Extra Flex, excuse me. You know, 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 Jet7 Extra Flex that you're solving for, maybe just beyond the design challenges you ran into with the agency? You know, 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 or when you do debut it, but, you know, what were some of the issues beyond what we saw, you know, maybe with some of the reports in the MAUD database?

Yeah, thank you, Ryan, for the question. I think the two things are unrelated, and I think it's really important that I make sure you understand that. The current paradigm is to make catheters as big as possible to therefore suck out as much clot as possible. As you make catheters bigger, making them big and trackable becomes the design challenge, which JET7 Extraflex did a really good job of, again, if the instructions and all were followed. The 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 JET7 Extraflex or 868 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 can, 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 JET7. When you update our catheters, our key is to make Thank you for taking that.

And then just to 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, you know, contrasting that with what you laid out, maybe, you know, in 19 at the analyst day, What can we take to mean from those comments in terms of business strategy on real? Thank you.

Yeah, no, Ryan, that's a good question, and that's one of the things that we'll share as soon as we can. As Maggie said, it's really about a 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, they haven't been done before. When we started out in stroke, the idea of taking a large catheter up deep into the brain and sucking out clot, no one had done. And so there 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 the 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.

Thanks for taking the questions, Adam.

Thanks, Ryan. Thank you.

Our next question is from Margaret Cazor with William Blair. Your line is open.

Hi, everyone. This is Brandon on for Margaret. Thanks for taking the question. 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?

Yeah, it's a really, really good question. So one of, there are really two parts to that. The first part is, are we seeing more patients, if you will, that have clot because of COVID? You know, we certainly saw that in sort of the April, May timeframe when it was a new phenomenon and the healthcare professionals weren't yet I think a lot of that has, you know, medical management of a lot of COVID patients has gotten up to speed pretty quickly. And so I don't think we're seeing in any sort of, you know, quantifiable numbers, massively large numbers of more patients because of COVID. That being said, and I agree with you, alluded to it already today. One of the benefits of COVID, and the moment I said that, I realized that 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, has opened 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.

Got it. Thanks. And then 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 21. 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. Why, you know, can we start to see gross margin expansion in the back half of 21, maybe approaching the pre-COVID 2019 levels?

Yeah, hey, thanks for the question. 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're 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.

Got it. Thank you. Thank you.

And again, if you would like to ask a question, press star and then the number one on your telephone keypad. Our next question is from Joanne Wench with Citi. Your line is open.

Yeah, hi. This is Matt Henriksen 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?

Yeah, let me answer the last question first. Unfortunately, I don't think those two are tied. 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 in the end of 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, you know, work. And that is, you know, people being able to go back out into their community, make sure these patients are treated. And as 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 wanna be realistic that when you're in a dynamic like this, the work that's necessary to drive that, doesn't become first priority. And I think that's what, I said that during my prepared remarks, you know, that 2021 saw that, or 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 them both, you know, 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 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's standpoint, and again, this is, 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 in there. I do think it's going to take a little longer, though.

That makes sense. And then 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 third quarter and fourth quarter. What's the strategy behind kind of first the fourth quarter spending and then how should we look at 2021? Is it something where we're looking more back towards the 20 percent of revenue or is it kind of 11 to 12 percent kind of the right go forward?

Yeah, I'll take that. First of all, if you remember, in our last quarter earnings call, we talked 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.

Thanks for taking the questions.

Thank you. Thank you. Thank you.

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.

This concludes today's conference call, and you may now disconnect.