Penumbra, Inc.

Good afternoon. My name is Kathy and I will be your conference operator today. At this time, I would like to welcome everyone to the penumbra fourth quarter and year end 2022 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'd like to ask a question during that time, simply press the star followed by the number one on your telephone keypad. If you'd like to withdraw your question from the queue, simply press star 1 again on your keypad. I would now like to introduce Ms. G. Hamlin-Harris, Investor Relations for Penumbra. Ms. Hamlin-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 full year 2022. A copy of the press release and financial tables, which include the 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, 2022, which are scheduled to be filed with the SEC on February 23, 2023. As a result, we caution you against placing undue reliance on these forward-looking statements and we encourage you to review our periodic filings with the SEC, including the 10-K previously mentioned, for a more complete discussion of these factors and other risks that may affect our future results or the market price of our stock. 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. Adam Elsesser, Penumbra's Chairman and CEO, will provide a business update. Maggie Ewen, our Chief Financial Officer, will then discuss our financial results for the fourth quarter and full year 2022. And Jason Mills, our Executive Vice President of Strategy, will discuss our 2023 guidance. Sandra Lessonfort, our President of Interventional, will join the team for questions. With that, I would like to turn over the call to Adam Alsasser.

Thank you, Chi. Good afternoon. Thank you for joining Penumbra's fourth quarter and year-end 2022 conference call. Our total revenues for the fourth quarter were $221.2 million, a year-over-year increase of 8.4% as reported and 10.5% on a constant currency basis. Our fourth quarter revenue increased 3.5% sequentially, our fastest sequential growth of the year, and a trend we expect to continue into 2023. Our gross margin increased 110 basis points compared to the fourth quarter of 2021 and was consistent with our near-term expectations. We saw continued improvement in productivity, which was offset in the near term by inflationary pressures. We increased our non-GAAP operating income to $7.2 million, representing 3.3% of revenue in the fourth quarter, increasing nearly threefold year over year. We generated positive operating cash flow in the fourth quarter and continue to expect increasing profitability and operating cash flow in 2023, as I will discuss in a few minutes. For the full year 2022, our total annual revenues were $847.1 million, representing growth of 13.3% over full year 2021 on a reported basis. On a constant currency basis, total revenue grew 15.5% over 2021, which met our original guidance given this time a year ago. We are now embarking on a new era in thrombectomy, and our team is focused on doing the purposeful work necessary to help the significant number of patients who can benefit from our proprietary computer orchestrated thrombectomy products. Our journey to develop the most optimal solution for safe, effective, fast, and powerful removal of blood clot, wherever it resides in the body, is nearly two decades in the making. And the early results from the use of lightning flash in venous and PE patients and Thunderbolt in our stroke trial is giving us even more confidence that the computer orchestrated aspiration is changing the treatment paradigm in profoundly positive ways. for patients and physicians. Looking into 2023, we reiterate our expectations for our business. We expect to achieve at least $1 billion in total revenue, expand our gross margins, making progress toward our objective of 70% plus margins within a couple of years, and increase our profitability and operating cash flow. We will realize these goals by helping more patients with our proprietary products. And if we look beyond 2023, we believe we are still closer to the beginning of our journey to help all patients who have blood clot in their body rather than the end of the journey. There are over 1.25 million patients with clinically significant clot in their bodies in the United States alone across the five vascular beds we target. And the number of patients around the world with similar needs is two to three times larger. The rate of treatment with mechanical thrombectomy in the United States ranges from under 10% to about 25%. So we have in front of us in 2023 and beyond a significant opportunity to help the vast majority of these patients with our computer orchestrated thrombectomy. During the fourth quarter of 2022, our vascular business achieved record revenue of 129.3 $7 million, accelerating sequentially to over 5% growth compared to the third quarter. Our vascular business was driven by growth in our thrombectomy franchise, which grew over 20% year over year, and also accelerated sequentially, growing 5%. We continued to gain share in the fourth quarter in venous, arterial, and coronary with our Lightning 12, Lightning 7, and CatRx products. Looking into the first quarter, our vascular team is launching full speed into the lightning flash era in the United States. Lightning flash is performing just as we had expected and is being used successfully in both pulmonary embolism and DBT procedures. We are also proud to announce that we are embarking on a new era in arterial thrombectomy. Last week, lightning bolt was cleared by the FDA. We have talked in the past about both the promise and the propriety of our modulating aspiration algorithms, which are built into both Lightning Bolt and our Thunderbolt stroke product. We are excited about the potential of this technology for arterial patients. Initial evaluation cases using Lightning Bolt are planned for the next few weeks, and we are on track to initiate a full launch of this product just before the end of March. Moving to Thunderbolt. We are seeing solid progress in rolling patients and our thunder trial. And importantly, the product continues to perform just as we had anticipated. Notwithstanding the slowing in the growth of the stroke market that has been discussed during the past year, the red catheters, which will be part of the Thunderbolt system and our other neuro products continue to gain share in the United States and globally, which led to another quarter of sequential growth. The recent launch of Red43, coupled with the launch of an access product, should help us grow our neurovascular business in 2023, leading up to the introduction of Thunderbolt. We continue to believe Thunderbolt has the potential to fundamentally change interventional treatment of ischemic stroke, and we believe this product, in conjunction with the work of our extraordinary commercial team and partnership with physicians, could create an environment in the stroke care system in the U.S. in which many more patients who suffer an ischemic stroke will get treated successfully and quickly. In sum, we still have a long way to go to reach all of these patients, and we believe Thunderbolt will help the field get there, just as we expect our proprietary computer orchestrated products to do across all five vascular beds. And while we think these products will initially have the biggest impact on our thrombectomy business, in the United States. We plan to bring these products to physicians and patients in Europe, China, Japan, Asia Pacific, and Latin America, where our businesses are already strong and growing, but still just as nascent in the U.S. relative to the number of patients we can ultimately help. Let me briefly discuss our immersive healthcare business before handing the call to Maggie. As we have stated in the past, we have restructured our work in this field to better fit with the current market. This has allowed us to focus on the two most important aspects of immersive healthcare. First, ensuring that patients who are using the real immersive system are responding positively to the technology. And second, that we are working with large healthcare providers, both public and private, to figure out how to properly introduce a real immersive system into the therapeutic workflow for patients. who need rehabilitation, as well as patients struggling with aging and many other conditions, including mental health issues. We remain very optimistic about these efforts. I'll now turn the call over to Maggie to go over financial results for the fourth quarter and the full year 2022.

Thank you, Adam. Good afternoon, everyone. Today, I will discuss the financial results for the fourth quarter and full year of 2022. Financial results on this call for revenue and gross margin are on a GAAP basis, while operating expenses and operating income are on a non-GAAP basis. The corresponding GAAP measures and our reconciliation of GAAP to non-GAAP financial measures are provided in our posted press release. For the fourth quarter ended December 31, 2022, our total revenues were $221.2 million, an increase of 8.4% reported and 10.5% in constant currency compared to the fourth quarter of 2021. Our geographic mix of sales in the quarter was 71% US and 29% international. US reported growth of 8.8% and our international regions increased 7.7% reported and 14.9% in constant currency. We see strong sequential growth in US and Europe direct channels offset by timing in international distributor orders. Moving to revenue by franchise. Revenue from our vascular business grew to $129.7 million in the fourth quarter of 2022, an increase of 14.2% reported and 15.4% in constant currency compared to the same period last year, driven by growth in the U.S. Revenue from our neuro business was $91.5 million in the fourth quarter of 2022, an increase of 1.2% reported and 4.4% in constant currency compared to the same period a year ago driven by the red catheter launch in Europe. Moving to growth margin, growth margin in the fourth quarter was slightly improved at 62.6% compared to 61.5% in the same quarter last year. While we have made great progress in labor efficiency at our road seal manufacturing site, short-term disruptions from supply chain inconsistencies have had an impact on steady margin improvement. Looking forward to 2023, we target to achieve 100 to 200 basis point improvement driven by product mix and productivity, offsetting inflation headwinds. Now onto our non-GAAP operating expenses. which exclude the amortization of acquired intangible assets of $2.4 million for this quarter and last quarter, respectively, and as well as non-recurring research and development milestones, one-time expenses associated with the Sixth Sense acquisition, and amortization of acquired intangible assets of $42.6 million for the same quarter last year. Total operating expense for the quarter was $131.2 million, or 59.3% of revenue, compared to $123 million, or 60% of revenue, for the same quarter last year. In the fourth quarter of 2022, we had $1.5 million due to one-time costs for reorganization efforts, a continuation of future savings we previously discussed last quarter. Our research and development expenses for Q4 2022 were $18 million compared to $19.4 million for Q4 2021. SG&A expenses for Q4 2022 were $113.3 million of 51.2% of revenue compared to $103.5 million of 50.7% of revenue for Q4 2021 and $106.2 million of 49.7% of revenue last quarter. We are investing in resources to support our growth target while maintaining discipline in discretionary spend. In 2023, we expect higher investment in clinical trials while leveraging our infrastructure investment made in 2022 to deliver operating margin expansion. We recorded operating income of $7.2 million or 3.3% of revenue in fourth quarter 2022, excluding the amortization of acquired intangible assets compared to an operating income of $2.5 million for the same period last year. I will now summarize our full year performance. For the full year 2022, our total revenue was $847.1 million, which represents an increase of 13.3% reported and 15.5% in constant currency compared to full year 2021. Our geographic mix of sales in the year were 69.8% US and 30.2% international. US reported growth of 12.1% and our international regions increased 16.2% reported and 23.5% in constant currency compared to a year ago. Revenue from our vascular business for the full year of 2022 was $499.4 million, an increase of 22.1% reported and 23.6% in constant currency. Revenue from our new real business for the full year of 2022 was $347.7 million, an increase of 2.7% reported and 5.6% in constant currency. Our gross margin for the year was 63.2% of revenue compared to 63.6% of revenue for full year 2021. Excluding the amortization of acquired intangible assets of $8.3 million for 2022 and non-recurring research and development milestones, one-time expenses associated with success acquisition and amortization of acquired intangible assets of $42.6 million in 2021. In 2022, we had non-GAAP operating income for the full year of $14.4 million compared to a non-GAAP operating income of $35 million for 2021. turning to cash flow and balance sheet. We ended the fourth quarter with a cash, cash equivalents and marketable security balance of $188 million. We expect positive operating cash flow trends to continue in 2023. 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 guidance for total revenue in 2023 to be $1 billion or more. representing year-over-year growth of at least 18%, which is an acceleration from 2022 total revenue of $847 million. Moreover, we expect our quarterly revenue growth rates to accelerate as the year progresses. Further, we expect to expand gross margins in 2023 toward our 70% plus objective within a few years, with margins increasing from current levels in the first half of the year toward the mid 60% range in the second half. Lastly, we expect our operating margins to expand sequentially during 2023, approaching double digits as we exit the year. I will now turn the call back to Adam for closing remarks. Thank you, Jason, Maggie, and Chi.

I'll be brief in my closing remarks. This is the dawning of the age of computer orchestrated aspiration. With this technology, we can see to the point where removing blood clots from any part of the body becomes routine. It is very important to give special recognition to the entire team at Penumbra, who over the course of almost 20 years stayed focused on this arc of innovation. I admire you all so much. You never gave up. You kept working and working, sometimes against all odds, to deliver this extraordinary technology to the field. Also, it is important to give a special acknowledgement to Dr. Corey Teigen and Scott Teigen for their critical role in making this technology a reality. Thank you to them and the entire Penumbra team. Thank you, operator. We can now open the call to questions.

And at this time, I would like to remind everyone, in order to ask a question, please press the star, then the number one on your telephone keypad. And we'll pause for a moment to tell everyone the opportunity to signal. And our first question will come from Pito Chickering of Deutsche Bank.

Hey, good morning, guys. Thanks for taking my questions. We talked about sequential revenue growth, 3Q into 4Q into 1Q. Is there any color that you can give us as we're thinking about that growth with Lightning Flash in the first quarter? Are you comfortable with $150 million of revenues from Lightning Flash in 2023?

Yeah, so as you know, we don't guide quarterly, but we do expect the quarterly growth rate in the first quarter to be slightly higher than the sequential growth you saw fourth quarter over third quarter. As you move beyond the first quarter, the second quarter likely accelerates quite a bit with the launch of lightning flash still fresh and lightning bolts at the end of this quarter. And in the back half of the year, we expect strong sequential growth rates as well, probably better than the first quarter sequentially and sort of in line with where we would expect to see second quarter. Okay. And then...

The only color I'd like to add to that is that's sort of the, when you have a launch, not just one, but two, like we have with FLASH and Lightning Bolt, that's just sort of the normal sequence of what happens with getting into all these labs and making sure that you go through the value analysis committee and everyone has it. It just has that sequence to it. And as you know, we're knee deep in sort of responding to doctors asking for it as opposed to us asking them to buy it, which is a really, really nice phase to be in, and that's why you're going to see that kind of growth going.

Okay, and then sticking on lighting flash, can you give me details on what the reorder rate is from the physicians that are using it and any early color on either market penetration gains from shifting from medical to mechanical thrombectomy or market share shifts? Thanks so much.

Yes, you know, we're a month into the launch, so let's, you know, take that into account to give you guys some sense. Needless to say, I think it's fairly, I'm fairly confident in saying this lightning flash is without a doubt the best launch we've ever had, and I only have said that one other time, and it turned out to be true. The use of this product, the excitement around it, the speed and efficacy, the safety profile have made this really just an extraordinary product. Obviously, we're in the middle of the quarter, and we'll give a lot more color at the end of the quarter on the next call, but this is a great, great launch.

Great. Thanks so much.

And our next question will come from Robbie Marcus of JP Morgan.

Hi, everyone. This is Rohan on for Robbie. Congrats on a nice quarter. I guess I just want to touch on pricing and how we should think about better mix and how that reflects in gross margin profitability this year and beyond. Can you comment a little bit about how much of gross margin expansion this year is due to kind of the general productivity improvements that you brought up versus the mixed benefit that we should see from new products?

Yeah, Maggie, why don't you take a shot at that?

Thanks for the question. I'll just comment on the gross margin impact first. As we mentioned before, we're on track to our making great progress and on track to our 70% gross margin target. It is going to come from productivity improvements improvement in transferring over to Roseville, product mix and price impact, as well as longer-term lean initiative. All three factors are going to have an impact to our 2023 growth margin target, and it's going to continue to improve beyond 2023. In 2023, we expect to see a little bit bigger contribution from product mix.

Great. No, that's super helpful. Thank you. I guess another one is just more focused on near-term trends and you kind of touched on this, but I just wanted to get now that we're like almost done with February basically, and just wanted to see how, or if you had any more detail on how the launch for lightning flash is shaping up and the contributions you can expect from both flash as well as lightning bolt, um, in the near term, but as well as over the balance of the year. And I guess maybe kind of the specifics and split between those, if you can provide any color there, that would be really helpful.

You know, it's a great question and obviously in the middle of a quarter where we're talking about last quarter's numbers, it's a little tricky to start talking about that in the kind of detail maybe you want. That being said, as I've already said today, the launch of FLASH is going extremely well. You know, we're a month plus into it and The level of interest, the level of success we've seen is obviously driving people to want to order the product and continue to try it. So we're just knee-deep in getting through that process and getting the product through all the various value analysis committees and responding as fast as we can to that interest. We obviously haven't even launched Lightning Bolt yet, so let us do some cases and and we'll be able to report that next quarter. But needless to say, it's a great time. It's exciting. It's fun to see the level of interest and reaction to and the success we're seeing with this. It's just one of those things that you get to do very rarely in a career in med tech, and we're pretty excited about it.

Yeah, Fran, this is Jason. Just to add on to that, we believe, and maybe this sort of goes to the heart of your question with respect to our guidance, we believe we have very strong visibility into the lower limit of our guidance range at that $1 billion level. But as Adam mentioned, this is really early in the launch of two very important products with respect to So with respect to the upper end of guidance this year, we don't yet have the same visibility to put an upper limit on it. So just give us a quarter.

No, that's really helpful. Thank you so much.

And now we'll take a question from Michael from Jefferies.

Hey, Michael. Hello, and thanks for taking my questions. So just wanted to follow up on Maggie's comments around short-term disruptions in the supply chain in 4Q. And just wanted to get a little more color there. And just can you talk about if any of those are continuing into 23 and how they may impact gross margin through the year?

Yeah, thanks for the question. I did mention that the supply chain inconsistency disruption is just short-term. It affects only in terms of slowing down our growth margin improvement, but it likely will not affect the ability to meet demand and longer-term margin improvement opportunities.

Okay, thanks. And then do you think you can comment a little more just on how you're thinking about operating expense cadence through the year?

Yeah, I think this year we're going to, continue to invest, but we're going to start seeing more leverage on the GNA infrastructure investment that we had last year. We're going to gradually see sequential operating margin improvement, and I think in Jason's guidance comment, we will continue to see improvement throughout the end of the year.

Yeah, and the only thing I would add to that, Michael, is we expect to be profitable every single quarter. In the first quarter, as with every first quarter, we have two important national sales meetings as well as payroll taxes that are obviously germane to that quarter. As we move through the year, we expect to, by the end of the year, be approaching double-digit operating margins.

Okay. Thank you.

Thank you.

And next we have David Rescott of Trist.

Hi, David. Hey, guys. Hey, Jason. Hey, team. Thanks for getting the questions. First, so in the past, you've talked about market share gains, market growth, and then pricing as being contributors to growth for Flash. Not necessarily in that order, but I'm just wondering when you think about Bolt and then ultimately Thunderbolt, you know, if you'd be able to kind of characterize where you see the biggest amount of growth, you know, within each of those segments coming from, whether it's, you know, market share, growth, price, that would be helpful in the

You're talking about as it relates to Lightning Bolt or both, all three of those products? Lightning Bolt.

Lightning Bolt and then Thunderbolt.

Okay, so Lightning Bolt is sort of similar to what we've said about Flash, where price will be the smallest of those three. And as it relates to market growth versus share gain with that product, it's sort of, they're almost the same thing depending on how you define it. As you know, we're, you know, from a mechanical product, we have the vast majority of share in arterial already. But the biggest sort of opportunity comes from both people, physicians who are using TPA drip, catheter-directed lysis, or open surgery. And so if those are classified as market growth type things, then that will by far be the biggest gain. If you were to classify those as using another tool, if you will, then that would be share gain from those two. That's the biggest pool right now. All of those patients are still with our customers. if they're already getting catheter-directed laces or they're getting surgery, they're with our customers or potential customers already. And so that will be the first goal is to go there. And for those of you who in January saw the video of Lightning Bolt, it's pretty extraordinary and we have a fairly high level of confidence around that product in the clinic because obviously we've been doing stroke cases with similar technology. And so it's not starting from a blank slate. And I think we'll see a lot of excitement from patients, from physicians who are using one of those two modalities, which the soonest. So depending on your terminology, it's either one of those, but it's from those two sources.

Okay, that's helpful. And then maybe stepping back kind of from a higher level on the neuro side, I think at the International Stroke Conference, you know, there was some positive data just around use of thrombectomy or the benefit of thrombectomy into some type of patients that, you know, are currently excluded in the guideline recommendations, meaning those with essentially larger infarct volumes, right? So when we think longer term about the potential market expansion opportunity from that indication, just wondering initially, one, what your view is on that, and then When you think about the new launch, maybe market expansion, just regaining share, some of the grassroots efforts that have been going on in the local kind of state and local levels to reaccelerate potentially underlying neurothermectomy growth rates, how would you just kind of think about the three or four of those, you know, in your view as it relates to reaccelerating your kind of U.S. neurothermectomy growth rates? Thank you.

Yeah, I think in the stroke market specifically, you know, we've, We've been successful in the last couple of years because of share gain. The REDD series obviously took back a decent amount of share, and that's continuing. We mentioned in the prepared remarks that we have REDD 43 and an access tool. I think that will continue to drive share gain. As it relates to the market growth, we're going to always remain not just hopeful and optimistic, but I think it's grounded in a good sense of reality that as you see data that comes out, like you alluded to at ISC, which is, I think a lot of the physicians in this field believe that, but it really, really is nice to see that kind of rigorous data that supports it, as well as products just getting easier and easier, you know, not just with the red series and the additions that I talked about, but then ultimately with Thunderbolts you're really set up for all of the things that could potentially limit people getting successfully treated to sort of make those excuses go away, if you will, and drive growth again. So, you know, it's hard to predict, and we've never been that good at predicting over the, you know, seven or eight years now that we've been talking about stroke growth, that growth in an exact way. But I think you're seeing everything line up in a positive way for a number of years now of sort of re-engagement and growth. And it's hard to put an exact number on that, but it feels like that's happening in the field now.

Thank you. Yeah.

And now we'll take a question from Ryan Zimmerman of BTIG.

Hey, Ryan. Good evening, and thanks for taking the questions. Very exciting to see all the products that are coming out. I wanted to just ask, first on the guidance, and the $1 billion plus kind of leaves a lot of room to go higher. And I'm wondering if you can elaborate on kind of how you think about what's implied in the guidance from a market share gain perspective. Because if I understand correctly, you're not assuming market share gains from Lightning Flash or Lightning Bolt at present.

No, we are. So let me walk you through it just a little bit, Ryan. First thing, let's start with the guidance itself. So the lower limit of $1 billion is, as I mentioned in the prepared remarks, an acceleration in growth to 18%. And I think you can appreciate at a company at this scale, comparing against nearly $850 million in 2022, that's a significant projection in and of itself. As I mentioned, given the profoundly important aspects of these two technologies and the large number of patients that Both of these new technologies, lightning flash and lightning bolt, can help. We don't have the kind of visibility right now that we do on the lower limit, we believe. So as we move into the next, give us another quarter, we think we'll have more visibility. But as it relates to share, as Adam mentioned, there are three components to our growth profile. The least catalytic is the price. The two most catalytic will be share gain and market growth.

Okay, understood. And then, Adam, I was reviewing the transcript, and I may have missed this, but I didn't hear timing on Thunderbolt enrollment completion and submission and then subsequent approval. And so I was wondering if you could maybe clarify. Maybe I missed it, but I don't think I heard it.

Yeah, no, I didn't give a specific prediction. And as you know, predicting the enrollment of an emergent disease like stroke is not something that anyone, if anyone says they can do that, I would discount that prediction. So we're not going to do that. What we have said is we're doing fine. It's on track. and we're feeling good about that. That being said, we also said that there is no thunderbolt in our projections for 2023 from a revenue standpoint. So we're not saying, and don't read that as it's not going well, it is, but we're also being cautious in our prediction that thunderbolt is But, you know, we will do fine and do all the things we said we're going to do without Thunderbolt in the numbers for this year.

Okay. Appreciate it. Thanks for taking my questions. Yeah. Thanks, Ryan.

And next we have Mike Mattson of Needham.

Hi, Mike. Good afternoon, guys. Thanks for taking my questions. I guess I'll start with just the red catheters. So it did look like the growth maybe improved a little on the neuro side. Can you just comment on how those are doing in Europe? I think you launched them kind of late in the third quarter. This is the first full quarter they were out there. And then I had a follow-up on red 43. Can you maybe just talk about sort of where that fits in the lineup and how it's different from the other catheters?

Sure. Let me start backwards. We'll start with REDD 43 and then we'll answer the larger question about the REDD series in Europe and I can broaden that question to the U.S. as well. REDD 43, you know, early days, as you know, in terms of getting it out there and getting it through the various value analysis committees. But the cases that have happened and that people have done have really, really liked it. A great, you know, sort of coaxial catheter plus the ability to have a catheter that size that can go distal has been, you know, people have just really, really responded to it. We're particularly proud of the design work that has gone into that catheter, and I think it fits a clear need in the market. As it relates to the general franchise that REDD has brought, both in Europe and in the U.S. It's been a great launch. We really saw it start in the fourth quarter of 2021. We saw a bolus of that, which actually kind of hurts us a little on the top right now because it was a great launch. But that being said, it has continued really strongly and taken share. So even in a market that isn't now growing, that franchises continue to do well because more and more people are using it. And that's what you want. You want a product that's good, that is that good that word of mouth travels and people try it and they stick with it. And that's what's happening with the Red Series. And obviously that's critically important to the success of Thunderbolt because those catheters are paired with Thunderbolt. And so if those catheters are getting the the reaction that they're getting, they're that trackable, they're, you know, catheters people want to use, obviously, you know, moving on and adding Thunderbolt to that becomes that much easier.

Okay, thanks. And then just on the Thunder trial, I may have asked this on a prior call. I can't remember, to be honest. But will we see that data before you submit the FDA or after you submit it at some point before the product's actually launched?

You know, it's hard to tell. It will depend on when that data is ready. If it happens to be ready and there's a big meeting that it can be presented on before it's made otherwise public, sure, then you would see it. If the timing of that doesn't work, we're obviously not gonna wait to submit it to the FDA in order to present it at a meeting. So it really just depends on the timing. And at this point, that's hard to predict.

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

And next we have of RBC.

Great. Thank you so much for taking the questions and looking forward to 2023. So just with respect to the questions, I was just wondering if you could elaborate on any apparent, you know, clinical advantages of FLASH in early cases, you know, with respect to maybe clot removal, you know, time. You did mention speed, efficacy, and safety, you know, any way to quantify that. And are you seeing greater uptake in PE or DVT cases? And then with respect to my second question, I was just wondering if you can give us a little bit of an update on clinical trial activity. And then on thunder, I specifically just wanted to get a sense of enrollment. I think as I understand it, you know, patients have to be treated in a certain timeframe. Is that limiting, you know, enrollment in any, in any way, or is it on track? Thank you for taking the questions.

All right. I'm going to try to remember all these and try to write it down. I might need a prompt. The first you asked, Um, the question about, um, you know, safety and speed and all that. Um, and then the answer is yes, all those things are good. Um, and flash has all those things. Um, and, uh, again, it's one of those rare things, uh, in, in our, at least our experience in, in 20 some odd years in this field, um, that a product is that good and has the kind of word of mouth. that's following it around. So it's noticeable once you use it, and we're particularly happy about that because, again, it goes to how well patients can be treated. The next question was still flash, and I tried to write fast, and then we went into thunderbolt. So remind me of the next question.

Thank you. Well, actually, just to follow up, if you can quantify, like, you know, in terms of speed or anything, if you can quantify it. And then the question was really about if you're seeing greater uptake in PE or DBT cases.

Oh, yeah. That's right. So how do you quantify it? You know, every case is different. Obviously, DBT and PE are different. And you can have easy or basic PE cases and more challenging ones and vice versa and DBT. So hard to quantify that in terms of numbers if that's what you're looking for. The answer is the impression, you know, the reality is people who are using it are reacting to that very positively. Like, wow, that was amazing. That was so easy, so fast, you know, and powerful and it just got the job done. And so it's hard to quantify that. You know, we're not running a trial on it now, so there's no, you know, numbers that I can share with you that have, you know, any kind of validity. It's not like, you know, sort of a collection of little self-reported stuff. So I think it just, it is notably performing better than what they're used to. So that's that. Between DVT and PE, I think we're seeing a real mix. I think for people who are using it, I mean, many are using it in both, the doctors are reacting equally good or equally favorably in both of those. There's not a, at all, clear difference between, oh, well, I like it, but only for this versus that. If you are responding to it, and again, the vast, vast majority are who are using it, it's for both DBT and PE. On the Thunderbolt question, really hard, as I've said a couple times, to quantify enrollment for you, stroke enrollment, and I've done lots and lots of stroke trials. I've been involved with them over the years. It goes in fits and starts. You might go four days without a case, and then you'll have five cases in two days. That kind of thing, that's the nature of a stroke trial. That's not different in a stroke trial, but as I've said, we're in good shape, on track, and again, cautiously, we have, you know, made sure we aren't counting on this product in which we don't control the timing of the trial for any revenue in 2023. So, from that standpoint, I think, you know, everyone can rest assured that we're in pretty good shape and aren't out on a limb on that topic.

Thank you so much.

Yeah, of course. Thank you. Good questions.

And now we'll take a question from Matt O'Brien of Piper Sandler.

Hey, Matt.

Hi, this is Sam from Matt.

Thanks for taking our question. I guess for first, I was wondering if you could provide any more information or any color on surgeon training for lightning flash and any feedback you've gotten from physicians there.

Sure. Surgeon training or interventional training, whichever the specialty is. Physician training, it's slightly different depending on if the physician has used one of our lightnings in the past. If they have, the setup is very similar. If they haven't, we just have to do an insert and get their lab squared away. But again, we've been doing that for a while, so it's relatively straightforward. The only real difference for people who have used Lightning either 7 or 12 versus Lightning Flash is the algorithm is different and the feedback is different. And it's a lot more powerful. So there's So just basic training around how to think about that and how to read what the visual cues are on the lights and the sounds. Again, not different than anything we've done in the past and certainly not providing any form of sort of barrier for adoption. And it can be done pretty simply by our field teams.

Great, thank you. And I guess just a little finer point on that. Would you be able to tell us how many previously used Lightning and how many have not previously?

Really hard to know that number. We don't certainly look at that and track that. I can tell you we certainly have had a number of our current customers want to switch over. Obviously, that shouldn't surprise anyone. But what has been really nice to see is you know, folks that for years and years have said, I need a bigger catheter, you know, are now very, very much, you know, responding to flash. And as we all know, what they wanted is a much more powerful system than maybe lightning 12 provided. And now they have it. And it's so for people who haven't been using us, the reaction and the response has been really, really heartening to see that, you know, what we did is, you know, we made and gave the product that everyone wanted. You know, what everyone's been asking for, we've really given up. And, you know, that's sort of what we're supposed to be doing.

So we're pretty excited about that.

Thanks so much.

Thank you. Thank you.

And now we will go to Lee Ho of West Fargo.

Hey, Leigh.

Hi, it's Leigh calling in for Larry DeBilsen. Can you hear me?

Yeah, I hear Leigh.

Hi, thanks for taking my question. I want to go back to gross margin. You talked about gross margin expansion of 1 to 200 basis points this year, and it sounds like most of that is coming in the second half of the year. Can you just give a little more color in terms of what gets better between first half and second half to drive that margin expansion? And as part of that, can you talk about how you're thinking about China VBP and how that's reflected in that outlook? And then I have a follow-up.

Okay. Yeah, no, thanks for the question. So two factors here. As we continue to increase Proportionally, from back to me, volume versus symbolization, you're going to see continued product makes impact to our growth margin. So that is one factor why second half will be stronger than the first half. And also in the first half where our operation team is mainly focusing on meeting demand for these new product launches. So their priority focus right now is not on achieving optimal level of yield performance and labor efficiency. And we can continue to see those improvements continue on in the second half of the year.

Yeah, Leigh, I'll take the question on China. we've been really, really happy with the bounce back, really, from the broader healthcare perspective in China. As you know, in the latter part of 2022, namely November and December, many hospitals were shut down or doing relatively lower levels of procedures relative to to what they typically do just because of the pandemic. And the doctors in China seem to be really bouncing back, working overtime, trying to help their patients. And that is a very positive thing. As you know, we have a very strong partnership with Genesis, really in the early stages of that from a long-term perspective. So we feel good about China writ large, including what we have in our forecast with respect to the volume-based pricing that you mentioned.

got it um now my second question just bigger picture um the number is known for you know the technology improvement in iterations over years as you think about your new ai orchestrated technology how does that change the way you approach device iteration going forward in your competitive mode and thanks again for the question um well it there's two parts to that question one is how does it change our

innovation or ability to do things. The answer is it doesn't. It doesn't. We're going to keep working on this. What we have now with Flash is amazing. Can we make it better? I don't know. We haven't done enough cases in a month and a half to really say where the improvement is that hasn't been obvious, which is positive for us. But I'm sure there will be things that we can continue to tweak. We will always do that. And our R&D team over the years has proven that they're so good at doing that. What I said on the call, and I really mean this, we now for the first time really can see into the moment where getting cloud out is so routine. We're not there yet, but we can see it. And the innovation will take us from where we are to that point, which is a much shorter journey than the journey that took us all these years to get to this point. And that's, you know, very heartening, having spent a long time doing this. The competitive mode part, you know, I hate to sort of talk about our products that way, you know, because what we do is focus obviously on innovation and the patients. It's not about other companies and what they do. But obviously, you know, we have IP around this whole mechanism and the way it works and obviously we expect people will honor that IP and if they don't, we'll have a conversation about it. That's a different type of dynamic than we've ever had before where people can copy and do things and have, but I don't think it will slow down our drive to get these products tuned perfectly. Um, that being said, it's, you know, as I said, it's, it's a, it's the dawning of a great new era.

It's fun. Thanks, Clay. Thank you.

Okay. Now we'll take a question from Bill Polunek of Canaccord.

Great. Thanks. Good evening. Thanks for taking my questions. Um, first question is on lightning flash rollout. I was wondering if you could just help us understand. You know, when did you transition from LMR to full market launch? And when you do that, go into full market launch, do you initially start with your own customers or do you make it more broad based? And how do we think about that scale up over time? And then with the VAC process, you know, what does the time look like to get through the VAC at the hospitals these days? to where you're getting them, you're getting them trialed, but how long does it take to get through and can it get on the shelves into daily use?

Yeah, let me try to attack all those questions. The first is we went through our evaluation phase relatively quickly given the performance of this product. I think at the large conference in early January, we announced that we were already through that. We have been in the launch mode for about a month and a couple of weeks now. That being said, what did that look like? Every launch can be different. Different companies do different things. On this launch, we are basically just trying to get through all the order process. Anyone who wants it is starting the process in their hospitals to buy it. Some of those can be very quick and we can satisfy some of those orders for whatever reason that the hospital or wants it or the physician is able to push it through within a matter of a week or two or three. Others take much, much longer, and some can take several months to go through that process. So there's a wide range. What is happening now is we're just going through that process, and anyone, again, who wants it is starting that process with us. and some are being satisfied pretty quickly, and others will take more time. We can't really quantify that, obviously, but needless to say, that is what the team is doing in addition to obviously being there for their first cases and getting the folks reoriented to the algorithms of this particular product. So, again, we're in really good shape. As I said, this has been one of the most exciting times that I've ever had, and this will be our most successful launch. I say that with lightning bolt coming right behind it. So I hope I get to say it again soon. But it's a lot of fun. So thanks for the question, Phil.

And then when you launched, you launched your existing customers first?

Yeah, no, we don't discriminate. We're happy to have all customers. And what I've said, which is kind of a really unique aspect of this, is we're getting approached by people who typically aren't using Lightning at a pretty large scale. to try to use it and buy it. And again, they have to go through the process and go through value analysis committees and so on. But that is the level of sort of discussion and interest around this has made that a lot more fun, obviously. So it's just a matter of going through the process and doing it all right so that we're following all hospitals' rules and getting it in the right way.

And then on lightning bolt, if I could, You know, you're in the LMR or the eval right now. I think the comments were that you'll go into kind of full market launch exiting March. Do you, given that you've already kind of put Flash through, which is that similar technology, does that allow you to kind of accelerate the VAC process and uh, order process or is it the same kind of steps you got to roll through when that hits, you know, goes full market?

Yeah, it's a really, um, actually great question. Um, I don't think you get any bonus, um, if you will, for saying, Hey, now we want to do it again. You know, thanks for doing all this work and now we want to do it again. I don't think that helps us. Um, I do think there will be, you know, obviously, once that launch happens, the ability to potentially combine them. But we won't see that until, you know, into April, you know, timeframe and beyond. So for the next month, it's really going to be still flash, as I've said, and we'll sort of make sure lightning bolt goes through the early cases and, you know, all that stuff. But, yeah, once we get into the second quarter, I think you can combine these as one, you know, one, process through the value analysis committee might make it more efficient.

Thank you. Yeah, thank you.

And with that, that does conclude today's question and answer session. Ms. Hamlin-Harris, I'd like to turn the call back to you for additional questions and comments.

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.

And this does conclude today's conference call. You may now disconnect.