Penumbra, Inc.

Hello, my name is Stephanie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Penumbra Inc. First Quarter 2022 Earnings 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 this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. Investor Relations for Penumbra, 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 of 2022. 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 that the year ended December 31, 2021, barred with the SEC. 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 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 conditions. 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. The corresponding GAAP measures and a reconciliation of GAAP to non-GAAP financial measures are provided in our posted press release. We anticipate the prepared comments on today's call will run approximately 25 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 first quarter. And Jason Mills, our Executive Vice President of Strategy, will discuss our 2022 guidance. With that, I would like to turn over the call to Adam Elsesser.

Thank you, Chi. Good afternoon, everybody. Thank you for joining Penumbra's first quarter 2022 conference call. Our total revenues for the first quarter were $203.9 million. a year-over-year increase of 20.5% as reported and 21.8% in constant currency. Our gross margin increased 100 basis points sequentially to 62.5%, and I expect important investments we have made in our people, products, and production over the past two years will continue to translate into both strong growth and gross margin expansion going forward. Let me touch briefly on progress within our vascular, neuro, and immersive healthcare business during the first quarter. Then I will offer some general observations about our business, details about our new product roadmap, and growth opportunities that we see ahead. In our vascular business, we reported growth of 37.7% year over year to $122.8 million in the first quarter. We grew our vascular thrombectomy revenue 43.2% year over year, and our vascular embolization revenue 28.8% year over year. Our vascular thrombectomy growth was driven by continued robust adoption of our lightning products in the United States. We saw sequential growth across all segments of our U.S. thrombectomy business, DVT, PE, arterial, and coronary. we delivered strong growth of 30% year over year in our U.S. vascular thrombectomy business. We also expanded into China with our partner Genesis. This expanded partnership, which includes our older indigo vascular thrombectomy products, but not Lightning 7 or 12 yet, occurred a quarter earlier than expected and contributed an incremental $5 million to our first quarter revenue. In China overall, notwithstanding recent lockdowns, We have good visibility into our business, and we expect solid growth in China in 2022. We are excited to announce the launch of our computer-aided mechanical aspiration technology into the European market. We recently secured the CE mark for both Lightning 7 and Lightning 12, and the initial cases with both products have gone extremely well. Our dedicated vascular sales team in Europe which we established during 2021, is well prepared to bring this important technology to European patients suffering from arterial and venous clot, including pulmonary embolisms. On the coronary side, in late March, a new study was published in the Journal of Interventional Cardiology that confirms the extraordinary data shown in the CHETA study for CatRx presented last November at the TCT conference. This study called RAPOOST is an independent data set that shows the frontline use of CatRx to aspirate coronary clot prior to angioplasty leads to less distal embolization and better TIMI3 flow. Both are important predictors of long-term good outcomes for these patients. The study investigators said that they, quote, strongly believe that the Penumbra CatRx device should be used before any balloon angioplasty in patients with high thrombus burden, close quote. Our work to reach more of these patients is making great progress and will continue. In sum, our vascular business is our largest business and the number of patients we can help in our target markets is large and under-penetrated. We are expanding globally with our unique lightning products and the combination of our current product portfolio and new product roadmap, which I'll discuss more in a few minutes, gives us a lot of confidence that we can deliver strong growth for a number of years. Our neuro business grew to $81.1 million in the first quarter, or 1.3% growth over the first quarter of 2021. Globally, our stroke revenue grew 3%, which was in line with our expectations. Our stroke revenue was sequentially lower than the fourth quarter due to a mid-shift in our revenue in China, owing to our expanded partnership with Genesis on the vascular side. We expect the mix between neuro and vascular revenue in China will fluctuate quarter to quarter, but grow overall. Importantly, our U.S. stroke business delivered mid-teens growth year over year. Indeed, we believe we are at a very important moment in time in the ischemic stroke market. Notwithstanding a preponderance of clinical evidence over past years proving mechanical thrombectomy is unquestionably the best treatment modality for large vessel occlusions, only one in four of these patients are being treated this way in the U.S. The current paradigm in stroke treatment has brought us to this point, but we must do better for patients. Indeed, based on all we've learned in stroke thrombectomy, over the past 18 years, including many years of work on Thunderbolt, I am very optimistic that we are at the precipice of a new era in stroke treatment. We are excited to prove out our confidence in the Thunderbolt trial. Whereas the IDE has not yet been issued, we believe the trial will be a single-arm trial with approximately 150 patients with typical short-term endpoints. We expect to start enrolling patients this summer. Assuming Thunderbolt performs as expected, we hope to launch Thunderbolt in 2023. Meanwhile, we'll be moving this field forward with new catheter technology that will serve as an important bridge to and critical component of the future Thunderbolt paradigm. Thanks to the successful launches of REDD-6268, and 72 in the United States during 2021, we saw strong growth in our U.S. stroke business again this quarter. I expect our U.S. stroke business to achieve record quarters as we move through 2022, driven by red and momentum around our Thunderbolt trial. In addition, we plan to expand our red family in the U.S. later this year, which we think could have a positive impact on our U.S. stroke business late this year and beyond. Outside the U.S., we are launching the red catheter family into Japan this quarter. Japan is an important market for us and one in which we see tremendous opportunity going forward, not just with our new neuro products, but also with our vascular thrombectomy products. Further, we plan to launch our red catheters in Europe during the second half of this year. This launch will mark the first new stroke product in the EMEA region for us in more than three years, and we think our growth in this region will increase as a result. In sum, we have the most robust neuroportfolio in stroke, and we expect new red catheter launches around the world, coupled with enrollment in the Thunderbolt trial, will drive momentum in this business through 2022. In 2023 and beyond, we think the launch of Thunderbolt could accelerate our business. Turning now to immersive healthcare. We are making enormous progress and plan to communicate metrics applicable to our progress beginning later this year around three important areas. Number one, new product development in hardware, software, and content. Number two, the number of third-party partnerships which should drive scale to the content on our platform. And three, partnerships with key companies within several large healthcare channels which will drive our RealSystem installed base in the United States. We have now treated nearly 4,000 patients since RealSystem was launched in the US in the early days of the pandemic. We have increased our presence at important industry trade shows including the HIMSS meeting last month at which 40,000 people attended. Our conversations with hundreds of potential partners have validated our business model and approach to this new market. We are pioneering the first full-scale platform in immersive healthcare and will continue to invest appropriately in this important area. Now, I'd like to spend a few minutes on general observations about our business and future growth drivers. Overall, we're seeing benefits from the increasing scale of our business. We are investing in our people, and market development initiatives to reach more patients as we invest proportionate to the myriad growth opportunities in our target markets and geographies. In sum, we will continue to innovate in both interventional and immersive healthcare while we run a profitable business in 2022 and beyond. We are quickly approaching the $1 billion level in global revenue. which we originally set as a goal before the pandemic at our investor day in 2019, when our business was roughly half that size. Our growth has come organically, developing products that matter for patients across six large markets. We are still very early in each one of the five interventional markets and our immersive healthcare business, which could scale to be our largest business in five to six years, is making the kind of progress I expected when I communicated our vision at the Investor Day last fall. In past calls, we have focused on where we have been and what we have done. We are proud of both, but we must communicate more about where we are positioned to go in the future. Our core markets are obviously attractive, and this inevitably attracts competitors. That said, it is important to be clear about how we will continue to win. Our focus on improving patient outcomes will drive our leadership in these markets, and our growth is a direct product of our innovation culture, core principles of which are unique, continuous, and impactful innovation. This culture not only keeps us ahead in patient care but it also gives us the opportunity to change paradigms, to take patient care to another level. For 18 years, we have worked purposely to prevent taking blood clot out of the body, first from the brain, then the arterial system, the coronary vasculature, and the venous system. We have taken innovation in this field well beyond simply a catheter and an aspiration source. We know what's critical in a thrombectomy system to do this work with the utmost safety and efficacy. First, technology to prevent taking too much blood out of the body is important. Tracking the appropriately sized catheter tailored to the specific anatomy quickly and safely is important. Taking all of the clot out is important. Smart continuous power aspiration is important. And finally, doing all of this work inside the vasculature without causing trauma to the blood vessel is important. Trade-offs between these core criteria in clot removal are no longer acceptable because they are no longer necessary due to our innovation in two core areas. integration of computer technology into the thrombectomy system, and development of next generation catheter technology. We will lean in aggressively to this paradigm to help our physician customers realize the differentiated benefits of using our technology to treat patients with venous arterial coronary and neuro clot. With that understanding, let me give more details about the new products we have coming on the interventional side of the business. First, we believe we have paradigm-changing products launching over the next 18 months in both neuro and vascular. These include Thunderbolt and ischemic stroke, as we have discussed, and significant innovative iterations of our Lightning product portfolio for DVT and PE, and a new technology, Lightning Bolt, for arterial clot, both of which combines and expands on our latest technology. In addition to this game-changing technology, we plan to launch several products that will augment and expand our unique portfolios in both neuro and vascular. Throughout our history, the combination of paradigm-changing innovation and differentiated product expanding products has expanded our leadership positions in the markets on which we focus. Importantly, our increasing scale and growth gives us the opportunity to attract additional leaders who will expand our capacity to grow well into the future. I am excited to announce the addition of two new senior leaders. Sandra Lesenfant has joined Penumbra as president of our interventional business, and Joe Sendra has joined as senior vice president of operations strategy. Sandra has spent a career in the interventional space, with our last two interventional jobs running structural heart and endovenous, respectively, at Medtronic. Joe spent his career at Johnson & Johnson, most recently as Vice President, Worldwide Engineering and Technology. In addition, we successfully transitioned to a new ERP system in early April. This is an enormous amount of work and required collaboration across a broad cross-section of our global team. This extraordinary work encompassed two and a half years of careful planning and execution. It is paramount to our increasing size and scale. The ERP transition is one of a few notable investments we have made over the past two years to augment our supply chain, expand our manufacturing capacity, and deepen our leadership team. The gross margin improvement this quarter is a good start, and we see additional productivity improvements ahead. And all of these investments are foundational to our commitment to continue to deliver strong, durable growth. Finally, I was back on the road during the first quarter visiting over 40 physicians across the country. It was great to be back in person with both existing and potential customers. We learned a lot about what they are dealing with on a daily basis and how we can help them treat their patients more effectively. within this new environment as they continue to deal with the staffing shortages. Nearly everyone with whom we spoke expects the staffing shortage challenge to continue for some time, and this is making hospitals more acutely aware of pricing and cost within their system. We received many compliments about our pricing philosophy as a company, as well as how our products are allowing them to successfully treat patients who suffer from significant clout burden. Our pricing philosophy has been longstanding and purposeful and has helped create a sustainable and competitive advantage, both near and long term. I'll now turn the call over to Maggie to go over our financial results for the quarter.

Thank you, Adam. Good afternoon, everyone. Today, I will discuss the financial results for the first quarter of 2022. Financial results on this call for revenue and gross margin are on a gap basis, while operating expenses and operating loss income are on a non-gap basis. The corresponding gap measures and our reconciliation of gap to non-gap financial measures are provided in our posted press release. For the first quarter ended March 31, 2022, our total revenues were $203.9 million, an increase of 20.5% reported and 21.8% in constant currency compared to the first quarter of 2021. Our geographic mix of sales in the quarter were 70.8% U.S. and 29.2% international. U.S. and international reported growth of 20.2% and 21.3% respectively compared to the same period in 2021. Moving to revenue by franchise. Revenue from our vascular business grew to $122.8 million in the first quarter of 2022, an increase of 37.7% reported and 38.8% in constant currency compared to the same period last year. Compared to the prior quarter, revenue from our vascular business grew by 8.1%, which was driven by our strong performance in peripheral thrombectomy in the U.S., and expanded partnership in China, as Adam described earlier. Revenue from our neuro business was $81.1 million in the first quarter of 2022, an increase of 1.3% reported and 2.9% in constant currency compared to the same period a year ago. Compared to the first quarter of 2021, we saw double digit growth in US neuro thrombectomy, partially offset by product makeshift from neuro to vascular in China during the quarter. Moving to gross margin and operating expenses. Gross margin in the first quarter was 62.5% compared to 65.8% in the same quarter last year, but increased sequentially from 61.5% last quarter. While we have seen some gross margin pressure over the last 12 months due to accelerated investment in capacities and direct labor to support manufacturing transfer activities, we have made great progress with our productivity initiatives. Gross margin improved 100 basis points from last quarter despite inflation headwinds and higher Omnicron-related labor absenteeism in the beginning of the quarter. Looking forward to the balance of this year, we expect to see gradual margin expansion to continue owing to labor efficiency and productivity improvements. Now onto our operating expenses. In the quarter, we had amortization of acquired intangible assets of $1.8 million in SG&A, and in the prior quarter, we had one-time SG&A expenses associated with the six cents acquisition and amortization of acquired intangible assets of $10 million. As such, the following financial metrics will represent non-GAAP financial results which exclude the impact from these expenses. Total operating expense for the quarter was $129.7 million or 64% of revenue compared to $97.9 million of 58% of revenue for the same quarter last year. Our research and development expenses for Q1 2022 were $20.6 million compared to $18.1 million for Q1 2021. SG&A expenses for Q1 2022 were $109.1 million of 54% of revenue compared to $79.8 million for Q1 2021 and $103.5 million compared to last quarter. The increase in SG&A expense from last year reflected increase in headcount, trample and other in-person activities, and investment in facilities and infrastructure. Sequential increase in SG&A expenses includes $5 million of seasonal first quarter spending, such as our national sales meeting for both the neuro and vascular teams, which returned to in-person this year, as well as other variable expenditures. While we continue to invest in new product development and commercial resources with completion of key facilities and infrastructure investment to enable scalability for future growth, We expect slower rates of sequential increases in operating expenses in 2022. For the first quarter of 2022, we recorded operating loss of $2.3 million for negative 1.1% of revenue, compared to an operating income of $13.5 million for the same period last year. We ended the first quarter with a cash, cash equivalents, and marketable security balance of $240.3 million at steady working capital level. And now I'd like to turn the call over to Jason to discuss our guidance.

Thank you, Maggie, and good afternoon, everyone. We reiterate our 2022 revenue guidance range of $860 million to $875 million, representing 15% to 17% growth over 2021 revenue of $747.6 million. After a slow start to 2022, caused in part by staffing shortages that affected hospital customers across our industry, our team produced accelerating growth through the first quarter, namely in the United States. We also benefited from an earlier than expected expansion of our business in China, pulling into Q1 slightly over $5 million that we had originally expected to land in the second quarter. Looking ahead, we also faced the most robust year-over-year comparison of the year this quarter, owing to the successful launches of two major products during the second quarter a year ago, Lightning 7 and Red 62. In sum, we expect a modest sequential increase to our second quarter revenue, translating into a year-over-year growth rate in the low teens in Q2. We expect our growth to accelerate in both the third and fourth quarters, with Q4 growth expected to be at or slightly above the top end of our annual growth guidance range of 15 to 17%. Looking further out, while we are not giving formal guidance yet for 2023, we are optimistic we could accelerate our revenue growth rate in 2023 compared to 2022 from our interventional business alone, based on our expectations for new products and geographic growth opportunities. The potential for material contribution from immersive healthcare is incremental to this expectation. Finally, we expect additional gross margin expansion and operating profitability gains through the rest of 2022 and 2023, all while we continue to make meaningful investments in our business to drive long-term growth. I will now turn the call back to Adam for closing remarks.

Thank you, Jason, Maggie, and Chi. I want to end our prepared remarks today by clearly stating that Penumbra is built to create and innovate the best technology to help patients in many different areas. We do this work in a thoughtful and disciplined manner, but with great urgency. Now in our 18th year, Penumbra has proven we can do this work and succeed in any environment. Thank you.

Operator, please open the call for questions.

I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad.

Your first question comes from Larry B. Jellison with Wells Fargo.

Good afternoon. Thanks for taking the question. Hi, Adam. Hey, Maggie. Hey, Jason. Just one clarification question. Hi, guys. One clarification question, one product question. Adam, maybe just help us understand what happened in China this quarter and how to think about that $5 million. Is it one-time stocking benefit, and why did it go into vascular as opposed to neuro, if I understood correctly? Maybe just a little clarification around that, and I have one follow-up.

Sure. So as you know, we have our deal with China, as we've said many times, includes a series of different things, both distribution licensing and royalties. This was new. The China deal in the past included only a small number of our old, five of our old stroke neuro products, if you will. I think one of those was an access tool. This was the first time we added the vascular side to it, and we expected to do this in the second quarter, and we were able to complete it earlier and do it in the first quarter. So that's why it came in, because of those revenue streams based on that coming in a quarter.

Just one follow-up on that, Adam. Why would that have negatively impacted neuro this quarter? And then let me just ask my second question. um you know you talked about significant iterations for dvt and pe you know i guess the question is you know what what kind of color can you provide us today what what are the unmet needs you're trying to address and lightning bolt obviously you know you you would expect me to ask about that just kind of any color on that you know you um color on that and can we see any of these new product launches in 2022 you know on the last call um you said there would be some you know new vascular launches this year so Thanks for taking the question, and if you need me to repeat anything, let me know.

Sorry for that. I think I got them. Let me start on the last question. Yes, our hope and expectation is you will see the two vascular products that you alluded to or that we talked about in the very end of 2022. That's certainly very likely and possible. That being said, Let me walk through as best I can without going to the point of, as you know, we have lots and lots of competitors here, and we have to be a little cognizant of sharing all the product detail, even though with these products there's some really good patent protection, and we're pretty excited about that. We, as you know, have not had that all the time. But even with that, I think you would agree and most investors would agree that there are certain things we need to keep more confidential until the product launches. But go back to what I said earlier in the script. How do you get clot out? What are the things that are important? And I went through a very clear list of things that are important so that you can get clot out safely without taking too much blood and without damaging the vessels. As we move to the next phase, we are at a point, and we want to continue to expand on that, where you don't have to make those tradeoffs anymore. And you know, because you've followed us for a long time, there's always been those tradeoffs being made between how do you get clout out. And we're now at a point where we don't think with this new technology that you will need to make any tradeoffs. And that is really important, because if we're going to get to the point where this is being done all over, it's a democratized procedure, and no longer do you have to think about other means of dealing with blood clot in the body. You can't be doing it with trade-offs. So that's where we're headed, and the reason we lay that out that clearly is we have a lot of confidence that we're almost there now, but we'll be there without any question very soon. And when I say we're almost there now is on a comparative basis, our products really do that right now pretty darn well. We just want to get it to the point where it's, you know, even easier and easier, and we're pretty excited about that.

The lightning bolt and the 5 million, you know, why did it, you know, Adam, sorry, why did the 5 million kind of come from neurovascular? I didn't understand. I can understand stocking for vascular, but I don't understand why it came from, it sounded like it came from, added neurovascular. So thanks for making that particular question.

Jason can give you that specifics.

Yeah, it didn't come at the expense of neuro. We had been expecting solid growth in China with just the previous partnership with those five products. What we got was a quarter early adding vascular to that mix. And so overall, our China business, it's a combination of multiple revenue streams, as Adam mentioned. And it will fluctuate quarter to quarter, Larry, between neuro and vascular. Overall, we expect a solid growth out of China this year and for years to come. But it didn't come at the expense of neuro. It added to the overall Chinese business, which ended up being that $5 million more than we had anticipated for the first quarter.

I got it.

Still under, obviously, well under 10% of our total revenue or else we would have broken it out.

Thanks so much.

Yeah, thank you, Larry.

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

Oh, great. Thanks for taking the question. Congrats on a good quarter. Thank you. Maybe I can ask about the guidance. And maybe Maggie, walk me through just the thought process here on the beat. Even if you back out the $5 million from China, it was still a $4 million beat in the quarter, reiterating guidance. So just walk me through the puts and takes there and why you decided to hold guidance.

Yeah, Robbie, I can take a shot at that first and then others can chime in if that's okay. It's a great question. So if you look at sort of the first half of the year relative to where consensus was and where folks were heading into the quarter, I think we're tracking ahead of that. The first quarter was above our expectations and obviously significantly above consensus expectations. in part because we had a stronger quarter overall and in part that $5 million that we had expected to land in the second quarter. But I think the important point is that the first half is tracking maybe a little bit better than what we'd anticipated when we originally gave that guidance. And then the second piece of that to your question about reiterating the guidance as opposed to doing something else, We just wanted to take account at this early point in the year of the moving parts both from a macro perspective and also wanting to get just more clarity on timing of our own product launches that we talked about on this call as well as product launches we talked about internationally and just the pace of those. So we thought it prudent at this point in the year to maintain that guidance, which we were obviously very happy about when we gave it a quarter of go.

Okay. So just chalk it up to conservatism earlier in the year and nothing that we should read into beyond that.

Thank you. Got it.

Great. And maybe if I turn to the neuro business aspect you know, the growth rates are impacted. We don't know how much of the 5 million move from one to the other. So, you know, part A, wondering if you could give us adjusted growth rates, you know, excluding the China contract. And B, you know, this is a market, the growth rates have slowed down. There's a lot of competitors. Others are talking about increased competition in neuro. So maybe you could just give us a quick state of the union, what you're seeing in terms of underlying growth, geographic growth, if it's different, and any impacts from competitors. Thanks.

Yeah, so when you look at international business, particularly this quarter, it obviously gets a little complicated a little harder to look country by country and compare. I think what you have to look at is if you look at our U.S. stroke business, we still grew in the mid-teens, which was pretty good on a year-over-year basis, and we were pretty happy with that. That being said, there is no question, and I think I was pretty direct in my prepared remarks to talk about The state of the stroke market, you know, we've done an amazing job, you know, not only our company but the other industry partners as well as the physicians, particularly over the past seven years, growing this market from when the stroke trials were first announced. It's extraordinary. And we've gotten to about 25% of those patients being treated. And my comments around the next wave or the next era, I think we need to reinvigorate this field. We have to have the kind of paradigm shift that brought us this far. And I think Thunderbolt is bringing that attention. As we have started to sign up folks for the trial and demonstrated the product, it's clear from their reaction that that this is a different thing and that it will have the kind of impact that we're hoping on patient care and probably provide the energy that's needed to do the really, really hard work to keep growing this market. So I think that's the state of the universe or of the field, if you will. It is a competitive market. There's a ton of companies you know, with catheters of all kinds of shapes and sizes at this point. But that's not going to be what drives it. That's not how the story ends. And that's why we're particularly excited about it, why we've outlined the size and timing of the trial so clearly as best we can, you know, given that the ID is not issued. And I think you can hear we're leaning in pretty heavily because we think this is going to help not only treat patients better, but drive a growth on top of the growth rate that we've seen over the past bunch of years.

Yeah, and Robbie, this is Jason. You had a question in there about the vascular business ex-China. We included in our prepared remarks the comment to, we anticipated that that would be a question, that we grew over 30% in our vascular thrombectomy business in the United States. So hopefully that helps sort of give you a sense for the strength of our vascular business outside, excluding that Chinese piece.

Do you have the global numbers that you're able to share since we don't get the segment geographic breakdown?

Global numbers for what? I'm sorry?

Excluding that, you know, the mixed shift in revenue.

Yeah, so you could do it very easily just if you wanted to exclude that $5 million from our vascular business. You saw the growth in our vascular business writ large was over 40%, so it wouldn't be too far off from that.

Great. Thanks a lot.

Thank you, Robbie. Next question comes from Marguerite Kayser with William Blair.

Your line is open.

Hi, everyone. This is Brandon on for Margaret. Thanks for taking the question. I want to focus on the vascular side. Hi, guys. You've had several years of really impressive growth here. And as we move typically within medical devices, as you move further along the adoption curve, maybe your growth is coming from different segments, different channels, or maybe just different functions, maybe. new versus existing accounts, things like that. So I was curious if you guys could talk a little bit about where growth is coming from today, where that's going to come from in 2022, and contrast that a little bit to what you've seen in the earlier parts of the adoption curve. And maybe what's the green space left out there for you guys? Because you're still pretty early within the adoption of the broad market.

Yeah, it's a great question, Brendan. And in my prepared remarks, I was very clear that we continue to see, and I said we saw sequential growth across all four, focusing on the U.S. where the lightning products are available, all four of those markets. So, DBT, PE, coronary, and arterial. All four of those we saw continued growth. And we expect that. It obviously is not going to be even quarter by quarter, you know, as Our team out in the field is focused on individual accounts and their caseloads and what the specialty of those doctors are. But all of those are seeing growth and really some real success with the products. And it really comes back down to the point that I made in the prepared remarks that that as people use these products, as people talk to each other about these products, they're realizing that, you know, really for the first time they don't have to make tradeoffs. They're using appropriate sized catheters with, you know, smart technology, lightning that deals with blood loss and also where you are in the vasculature, you know, vis-a-vis the clot. And they're having great success with it and it's proving to be, the type of thing that they can see using on a regular basis. And that's how we're going to see growth. So we have a lot of optimism that where we are today with these products will continue. I didn't mention CatRx on the coronary side in this answer, but obviously we're seeing that as well continue to succeed on the back of the cheetah study and then the repose study that followed up. So all of them are pretty healthy and I think going forward we'll see growth in all of them.

Okay, thanks. And then internationally you guys have lightning starting to roll out there, arguably your most impactful product launch that you've ever had. I think that was a phrase you used to use, Adam, in the U.S. when it launched and Clearly, in the results we're seeing, it definitely has been one of the best products we've seen. So I guess maybe can you talk a little bit about how big is the Salesforce organization you have internationally right now? Kind of what's the opportunity that you're launching into this year? How many countries are you planning to go to? And what other investments are you planning to make internationally as you prepare for that product launch? Thanks.

Yeah, so the product launch in Europe is in the earliest, earliest stages, obviously. We put out a release on that saying, you know, we were doing the early cases. They've gone really well. I didn't make the trip over to Charling Cross, but Sandra Lesenfant, our new president of Interventional, did, and this is a field she knows really well, met with a number of the key opinion leaders that were at the Charing Cross meeting in London. And I will tell you, the desire, the interest in this product is really high. The things that this product, both Lightning 7 and Lightning 12 do in their respective areas, was understood. The only difference in Europe, and this is just a reality, not a caution and meant as a caution, is It's a bit more of a patchwork quilt of reimbursement country by country, and we're on top of that and we'll navigate that. So that's a little different than the U.S. obviously, but I'm really, really excited about it. Our size of our sales force, we have been selling our peripheral coil over there already, so we had built up a, a relatively robust sales force, so I don't think we need to add to that for a while. And it's really just doing the work like we've done in the U.S. to get the product out there and get it used and see the growth. So, again, excited about the future with it as well.

Great. Thank you. Thank you.

Thanks, Brandon. Your next question comes from Joanne . Your line is open.

Thank you for taking the question, and good evening. Two questions. SG&A was higher than I expected. Could you peel that apart so I can figure out what is sort of, I want to say ongoing, but may only be ongoing for the remainder of the year, and what's sort of one time in nature that moved that up?

Okay, yeah, thanks for the question, Joanne. So if you look at the total SG&A expenses compared to last year, there's probably three major components of increases. One is just naturally a lot of the in-person activities and marketing conferences come back. I think last year we even mentioned that we got a 10% reduction of our overall SG&A expense as a result. The second component is related to headcount investment across functions. And then the third component is related to some facilities and infrastructure investment. So going forward, we talk about in Q1, there are some seasonality in like sales meeting and one-time expenses, more seasonal in nature, about $5 million. And going ahead is probably going to be... gradually lower increases quarter over quarter.

Thanks. I just want to add for those who've followed us for a long time, we're pretty disciplined in our spending and we have a lot of control here. This is purposeful spending. We were very clear that particularly now as we sort of enter you know, a slightly different environment, which we're obviously quite aware of, we are not going to get over our skis. We know how to do that. And that's the point we were trying to make on that side of the ledger.

Thank you. My follow-up question, which is product-related, has to do with Real. It sounds like you're making progress on it, and the words sound like more to come next year, but I'm sort of, A, I'm curious, did I hear that correctly? And B, can we finally start talking a little bit about what the ramp might look like and make it a little bit more tangible than less real?

We can. What we wanted to be very clear about is to lay out the first round of information and metrics that we're going to provide later this year I think that is the starting point for being able to start to talk about more specifics, you know, the business models as well as timing and the ramp. I think that will be the right starting point. Otherwise, you know, it becomes a little more theoretical. And so far, you know, obviously most people have waited to see the real tangible success. And so those metrics that I've talked about will be the starting point of that success. And I want to sort of add a point to this. When we started Penumbra many, many years ago, 18 years ago, the idea of treating stroke patients was really out there. The doctors didn't really all want to do the thing. There wasn't reimbursement. There wasn't anything patentable. all kinds of hurdles, but we have built our culture around this company where we know how to go into areas that no one's been and carve out that work. We've done it in the peripheral side as well, and we're now doing it in an immersive healthcare platform. And so it's never been done before, and so you're gonna have to give us a little leeway to do the work necessary, What I am going to tell you, and it's really heartening to see, is we've had a lot of conversations with all sides of this, both on the developer side, but almost most importantly on the user side. And there is a lot of interest. There is a lot of knowledge. There's a lot of understanding about the benefit that immersive computing has on many, many people's healthcare. And there's a lot of interest that we got the model right. There's a lot of acknowledgement that they need one source, a platform, but they want all of the content that they can have. So we feel really, really good about where we're sitting right now. And the next time we really go into the details, you'll start to hear some of that success.

And Joanne, just to add a little color to Adam's remarks, just to go back to one thing that I said in my prepared remarks was that we do have the potential for material contribution from immersive healthcare, and it would be incremental to that expectation next year in 2023 of accelerating growth. So if you're landing somewhere in our guidance range for this year, What we're seeing is we think we can accelerate next year just on our interventional business, but we did make a point to say there's potential for contribution from immersive healthcare. We'd like to get to a point, as Adam mentioned, with those three points to start to talk about that more granularly as we get towards the latter end of the year.

Thank you.

Thank you. Thank you.

Your next question comes from David Rescott with Truist Securities. Your line is open.

Hey, guys. Thanks for taking the questions. Hey, guys. Congrats on the quarter, and thanks for taking the questions. I guess first on the Vassar business, you know, I think over the past couple years or even prior to that, you know, compared to the neurothrombotic business, you know, you always talked about, you know, there's been multiple entrants in the space. I'm not sure if I can from 10 to 15, and really outside of these larger size competitors that have come in and attempted to kind of take share in the space, but really hadn't had much of a meaningful impact, I guess, on the company's market share. And again, this is outside some of the larger players. You know, when we think about some of the recent approvals in the vascular space, you know, how do you think about the differentiation with the product, with the portfolio, and then kind of you know, just opposed to, I guess, the experience on the neurovascular segment. You know, really, how do you think about the competitive position here going forward?

Yeah, listen, I think it's a really fair question, and I think everyone who, you know, follows us, you know, knows I'm not going to use this call or something to be specific about any particular company and competitors. I don't think that's appropriate. I do think it is appropriate, though, to do what we've already done on this call, which is to be very, very clear about what is necessary to move, to be at the forefront of removing clot. And putting something together real quick, trying to get something done and out, the field isn't going to move backwards. It's going to move forwards. And the criteria that I outlined are really critical for patient care and for how this field advances. And I think we know that. Physicians know that. And it's not going to be the same as I can just come up with a catheter and aspiration source or something that scrapes the vessel wall. Those are no longer valid tools as we move into the next more sophisticated phase. So again, we feel pretty darn comfortable and confident about the work we've done over the last, uh, 18 years to perfect this. Um, and I think we'll be in pretty good shape to, to continue, uh, to show, uh, that we can, uh, make the best products to take a lot out.

Okay. That's, that's helpful. Um, I guess my second question on, uh, on Thunderbolt, um, you know, so you've provided, I guess, some insight so far as the goal here to really democratize stroke treatment, you know, providing this, or broaden at least the use of this type of therapy into a larger number of stroke centers. And so, I guess, you know, my question here is, you know, should the data really here bear out when Thunderbolt does evolve into this type of technology that really opens the door toward broader use of thrombectomy in the U.S.? You know, I guess, how should we think about technology here being brought to a wider range of designated stroke centers? I mean, you know, is this something that would take kind of a guideline change to expand the therapy, or is there some low-hanging fruit maybe or a pathway perhaps toward primary care center or primary stroke care centers or maybe even acute stroke-ready hospitals that may not specifically have these designations for stroke but, as we know, are already doing these types of procedures?

Yeah, I think it's a really good question and one that I think has a number of different aspects to it. You know, as hospitals have tried to deal with their own staffing issues, there's been an increased use of locums. and so on. So there's a lot of work that is being done, but I think it all comes down to if you can get the cloud out faster and easier and better, by definition, that will likely reignite the energy in this field that the past couple of years of COVID has been really hard on. And so I I think it's a pretty fairly, I guess, easy thing to see as we look at what's needed to sort of reengage the doctors, reengage the hospitals, realize that this is something they like to do and want to do. That's the place that I think Thunderbolt brings. And for us, again, to remind people, unlike catheter technology, which really wasn't able to be patented, we have issued patents on this technology. And I think that puts us in a different spot than we have been in the past. So again, pretty exciting time. But look, we're getting up close to the time where we're going to start treating patients. Let's wait and see how that goes. Again, optimistic about it, but let's see how that goes, and we'll connect after we've treated our first few patients.

Yeah, and David, this is Jason, just to add to that. You asked a question on Vapular, you asked a question on Neuro, just kind of about the procedures and competition, and Adam, towards the very end of his second answer, mentioned the technology and the innovation, which with the computer-aided innovation is patentable. It's important to just remind you that that's the case with the computer technology we're bringing to bear on the vascular side as well. And so that technology is not only one we can protect, but it allows us to eliminate trade-offs that other technologies might have. trying to optimize the core criteria of clot removal. It's a critical component that now exists both on the vascular and neuro side for us and is unique to Penumbra.

All right, very helpful.

Thanks for taking the questions. Yeah, thank you.

Your next question comes from Ryan Zimmerman with BDIG.

Hey, guys. Thanks for taking my questions. Thank you. I'm just going to squeeze three, hopefully, short questions in, but I'm going to squeeze them in real short. So number one, just on China, I want to follow up on Larry's questions earlier. You know, value-based purchasing is wrapping up with recon devices. Then they're going to spine. And then the last component that we at least know of right now is neuro. And I just want to see, is there any impact that you're expecting? Because I don't think it's defined yet as to what that is encompassed. within the neural segment. And so is there any impact that we need to consider for a value-based purchasing program or impact in China? And then the other two questions, I'll just ask them up front. As you roll out into Japan in red and you roll out into Europe with some of the products, what impact on margins is that expected to have in those markets relative to the rest of the business? And with all this emphasis, and this is just the third question, With all this emphasis on margins that we heard and the hires that you've made, Adam, can we expect potentially some long-term margin targets to complement the $1 billion target that you've set out? Thanks for taking the questions, guys.

Those are great questions, Ryan. We'll try to attack them. Let me work backwards, and then Jason and Maggie can jump in here. I appreciate the request for a margin target. I don't know the answer to that because we haven't talked about it internally and the idea that I would commit to that sitting in a room here with Maggie looking at me, I'm just not going to do that. But it's a fair request and we'll take it under advisement. I will tell you our goal has always been to have as high as an appropriate margin as we can. Again, we talked about our pricing structures so that we price for long-term sustainability. So that includes an appropriate margin, but we certainly can get back to over time where we were historically before COVID. So that's that. lightning and thunderbolt and so on, and red. As we move into the computer-aided technology, those have slightly better margins, so I think we'll be fine going forward. And then the final question was on China. I'm going to let Jason tackle that.

Yeah, so Ryan, on China, certainly we are studying and keeping ourselves abreast of the economic specifics you mentioned in China, value-based pricing, et cetera. And I'll just tell you that through the course of our partnership work with Genesis, and now this goes back multiple years, as you know, We've discussed that, both of us, and we've factored that into our discussions as we've developed the framework that is driving our revenue across those multiple channels that we've discussed in China with our partner, Genesys. So certainly we're tracking it, but we were purposeful in our words and our script, which Adam, I think, said we have very good visibility into our business in China. We also said that we expect, I think we said solid growth in China. We expect to grow our Chinese business overall. So hopefully those two things and just the commentary about us keeping abreast of the macroeconomic issues answer that question. And just to go back to one of your questions that Adam addressed, In general, the thrombectomy businesses or products specifically tend to carry higher margins globally, so in the United States as well as around the world. So that should give you, I think, a bit of an additional color on that side of it.

Thank you for answering all of my questions. Yeah, thank you. No problem. Thank you, Ryan.

Your next question comes from Mike Massen with Needham and Company. Your line is open.

Yeah, thanks for fitting me in. Hi. I know it's running a little over here, so I'll limit to just one question. I think your vascular sales force in the U.S., I think it's a single sales force. Correct me if that's wrong, but at what point would you decide maybe to split that up and have reps dedicated to some of the sub-segments there? I mean, do you think you're at a disadvantage at all to some of the other more focused, smaller companies out there that are maybe focused only on the venous side, for example?

No, I don't. As you know, there are three subspecialties of doctors. They ultimately all cover the four areas, coronary, arterial DVT and PE, not always in the same rotation. Sometimes they all work together, sometimes they don't. So I think the way we've done it allows us to cover a lot of ground. You know, to remind you, you know, if we're ever at a, I don't think it's a disadvantage, I think it's actually an advantage, but the team is busy because in addition to the thrombectomy business, we have the coil business, and so they cover a lot of ground. We do have, in addition to our sales team, clinical specialists that are incredibly valuable and a hugely critical part of our team that works directly with the sales reps in various territories. So I think we're in pretty good shape. And to be honest with you, if you indulge me, I want to shout out to what I think is the best vascular team ever put together. I couldn't be prouder of the work they've done and the dedication and the integrity in which they sell. It's kind of extraordinary. So I think we're in pretty good shape.

Okay, got it. Thank you. Thanks, Mike.

Our next question comes from Peto Cheering with Deutsche Bank.

Your line is open.

Hey, good morning, guys. So two quick product questions. Can you give us color on the coronary volumes in the corridor for post-cheetah in terms of penetration of new centers and new doctors and how the reorder rates are tracking for those? And then on the neuro side, any color on U.S. market share today with red versus where you were in pre-recall? And how did the growth rates look at the end of the quarter versus the beginning of the quarter when you had the January COVID comps?

Yeah, so I'll start with the last question first, and then we can work backwards. Like everyone else, obviously, March was a much stronger month than January. That would be typical in any quarter. I think everyone would agree. But it was more so this quarter than not because obviously January, at least the first part of January was particularly noticeable given everyone being absent and staffing shortages. So I think we're in a pretty good track as we move through the quarter and we were very pleased to see the way we finished obviously. As for breaking out each specific thing, you know, we haven't done that. That hasn't been something we've done. You know, we may at some point do that in the future, but I doubt it. As we think about the business and we actually talk about it to the sales reps, you know, we're doing all of this at the same time, and that is really important. We don't put buckets out there and targets for each thing. Our goal is to continue across all of the patients that can benefit from our products to have it. And it really defeats the purpose in the way we run the business and talk to our customers to be talking about it in those kind of specific things. So we're not going to do that for now, but I appreciate the question very much.

Yeah, Peter, just to add a little bit of color to the other question, In terms of market share, a few general observations there. Certainly, our market share in U.S. strep thrombectomy has improved markedly since the JET7 ExtraFlex recall early last year. I think the broader point we're wanting to make are twofold. One, as we start the Thunderbolt trial and move through that, we gave some specific details about not only that trial but also when we expect approval and obviously what we think will happen after that approval to our neuro business. We did talk about expectations for continued gains through this year as we're launching other REDD products. And I guess the second point that I'd like to make is a point that Adam made earlier, which is to say that the stroke field, Penumbra included and others, have brought the stroke field to this far, but we're just treating one out of four patients that need help, that could use help from these systems. And I think the energy around this field will benefit significantly with technology that just does a better job and that is allowing this procedure to be done more ubiquitously, and Thunderbolt is that paradigm. So that's what we're working forward. In the meantime, we think we will do fine with our business with the red catheters. And then I think you also asked about coronary. Coronary was strong in the quarter. We had strong growth in all four segments of our vascular thrombectomy business. We're not going to break it out separately, but it was strong.

Great, thank you. Thank you.

There are no further questions at this time. G. Hamlin-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 second call-to-call. Thank you. This concludes today's conference call. You may now disconnect.