Penumbra, Inc. (NYSE:PEN) Q3 2020 Results Earnings Conference Call October 28, 2020 4:30 PM ET

Company Participants

Jee Hamlyn-Harris - Investor Relations
Adam Elsesser - President, Chairman and Chief Executive Officer
Maggie Yuen - Chief Financial Officer

Conference Call Participants

Larry Biegelsen - Wells Fargo
Bill Plovanic - Canaccord
Robbie Marcus - JP Morgan
Bob Hopkins - Bank of America Merrill Lynch
Joanne Wuensch - Citigroup
Margaret Kaczor - William Blair
Ryan Zimmerman - BTIG

Operator

Good afternoon. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to Penumbra's Third Quarter 2020 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

I would like to introduce Ms. Jee Hamlyn-Harris, Investor Relations for Penumbra. Ms. Hamlyn-Harris, you may begin your conference.

Jee Hamlyn-Harris

Thank you, operator, and thank you all for joining us on today's call to discuss Penumbra's earnings release for the third quarter 2020. A copy of the press release and financial tables, which includes a GAAP to non-GAAP reconciliation, can be viewed under the Investors tab on our company website at www.penumbrainc.com.

During the course of this conference call, the company will make forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995, including statements regarding our financial performance, commercialization, clinical trials, regulatory status, quality, compliance, and business trends.

Actual results could differ materially from those stated or implied by our forward-looking statements due to certain risks and uncertainties, including those referenced in our 10-Q for the quarter ended September 30, 2020, which is scheduled to be filed with the SEC on November 2, 2020, as well as those described in our 10-K for the year ended December 31, 2019, which was filed with the SEC on February 26, 2020.

As a result, we caution you against placing undue reliance on these forward-looking statements and we encourage you to review our periodic filings with the SEC, including the 10-Q and 10-K previously mentioned, for a more complete discussion of these factors and other risks that may affect our future results or the market price of our stock, including, but not limited to, the impact of the COVID-19 pandemic on our business, results of operations and financial condition. Penumbra disclaims any duty to update or revise our forward-looking statements as a result of new information, future events, developments or otherwise.

On this call, certain financial measures are presented on a non-GAAP basis with the exception of revenue. A reconciliation of GAAP to non-GAAP financial measures is provided in our posted press release.

We anticipate the prepared comments on today's call will run approximately 20 minutes. Adam Elsesser, Penumbra's Chairman and CEO, will provide a business update. Maggie Yuen, our Chief Financial Officer, will then discuss our financial results for the quarter; and Jason Mills, our Executive Vice President of Strategy, will join Adam and Maggie for Q&A.

With that, I would like to turn over the call to Adam Elsesser.

Adam Elsesser

Thank you, Jee and good afternoon everybody. Thank you for joining Penumbra's third quarter 2020 Conference Call. Our total revenues for the third quarter were $151.1 million, a year-over-year increase of 8% is reported and 44% sequentially. Looking at our largest market, the United States, revenue grew 22% year-over-year. Both neuro and vascular franchises outperformed our expectations.

Vascular revenue of $75.2 million grew 34% year-over-year and 62% sequentially. Our neuro revenue of $75.9 million declined 9% year-over-year, but increased 29% sequentially. Looking forward, both of these franchises are strong, our innovation accelerating and opportunities for growth in each are significant over the next several years.

During my prepared remarks this quarter, I will focus on five topics. I will address the impact that COVID-19 has had on Penumbra this quarter and its potential future impact. Then I will address the four growth engines at Penumbra; vascular, neuro, international expansion and the Real system.

First, let me spend a few minutes discussing our latest thoughts on the pandemic. We returned to revenue growth this quarter despite the continued pressures from COVID-19. Our efforts to deal with the pandemic this quarter were primarily focused on keeping our employees safe, while significantly increasing our manufacturing capacity to meet growing demand, a challenge our team took on successfully. We are not aware of any employee to employee transmission of the COVID-19 virus at Penumbra.

We kept our workforce intact indeed growing its size materially during the quarter and we made sure that at risk employees would be paid even if they were unable to work a normal schedule. This work obviously has had an impact on our margins in the short-term which Maggie will discuss in her commentary. We are all aware of the rising case numbers and increase in covert-related hospitalizations in many regions in the United States and abroad. It is impossible not to be cautious about these COVID related risks that may lie ahead, especially in the near-term.

In addition to our efforts to safely keep up with product demand, the pandemic could impact some suppliers' ability to supply materials to keep up with our strong growth in certain products. And lastly, while hospitals have done an extraordinary job figuring out how to accommodate an increasing procedure schedule while meeting the needs of its COVID patients, we recognize that any further acceleration of COVID infections and hospitalizations could put a strain not only on our hospital customers, but also could impact patients attitude about scheduling procedures.

I'll now focus on our four growth drivers that we presented at Penumbra's Investor Day last December and have continued to discuss throughout this year. Let's start with our vascular franchise, which we have said will drive both near and midterm growth. Our vascular results this quarter are clear evidence of the enormous opportunity we have in front of us to help a large number of patients.

The vascular thrombectomy market is larger and less penetrated than our stroke business and ready for a paradigm change. So we are not surprised at all that our vascular franchise is now equal in revenue to our neural franchise, and will likely grow to become the company's largest business in the fourth quarter.

While our neuro businesses is on very solid footing, the vascular opportunity is simply larger and easier to access. Indeed the number of peripheral thrombectomy patients in the United States each year on the arterial and the venous side is more than double the number of treatable stroke patients.

What's more, vascular patients are already being treated in hospitals by our current customers with either lytics or surgical intervention. The innovation Penumbra is bringing to this market is already making a huge difference in patients' lives and could ultimately change the way the majority of these vascular patients are treated in the future.

I stated on our last earnings call that our launch of the new Lightning 12 system in mid July was the best product launch in Penumbra's history and I believe our vascular growth is proving this out. We are even more motivated by the positive impacts Lightening is having on patients. The anecdotal reports from physicians on the performance of Lightning 12 has been exceptional. We believe that Lightning, together with our larger highly torqueable catheter, has so far proven to be the right combination of size and power to address the vast majority of target venous cases in the United States. Now the hard work starts.

Over the next several quarters, our team will be busy navigating through the value analysis committees at hospitals to make Lightning available to a broad group of customers in the United States. We then look forward to introducing Lightning 12 into key international markets in the second half of 2021. We are just scratching the market surface with Lightning 12 and its impact on our vascular business is nascent. But we are also excited about investments we're making in additional innovation and clinical evidence, both of which we think will drive the Indigo power aspiration paradigm forward globally.

Of note, we recently received FDA clearance for Lightning 7 system and will commence our launch in the United States in early 2021 when we have appropriate inventory. Like Lightning 12, Lightning 7 utilizes our next generation hypotube based torqueable catheter technology and we think Lightning 7 could be a very important tool to help physicians remove arterial plaque.

Finally, our vascular embolization business also had its best quarter ever, notwithstanding incremental benefit from catch-up in some elective cases pushed back from Q2 to Q3. While it is impossible to know definitively, we estimate this benefit could have been as much as $2.5 million in the quarter and it is a testament to our vascular team and our unique products that we had a record quarter in vascular embolization even excluding this estimated benefit.

Let's turn to our neuro franchise, where we were pleased with improvement in our business coming out of the second quarter. We posted double-digit growth sequentially in ischemic stroke, neuro embolization and access. Before getting to our neuro pipeline, let me talk about JET7 XTRA FLEX. We have fielded a great number of questions from the investment community over the past few months regarding this product and the notification letter we sent to physicians at the end of July. First, it is important to state that JET7 XTRA FLEX is the most advanced trackable reperfusion catheter we have ever launched and its strong contribution to our Q3 results which I'll touch on in a moment, supports this statement.

Second, we are proud of our physician customers working together with the Penumbra team to take the time to re-familiarize and put into practice the important instructions on how to use JET7 XTRA FLEX to safely and successfully treat their stroke patients. Given the questions this quarter, we think it's important to share more detail on two fronts. First, JET7 XTRA FLEX revenue in the U.S. in the third quarter was within $400,000 of the product's highest sales quarter ever.

Secondly, and more importantly, we are not aware of any new reports either as reported to the company or the MOD [ph] database that was the subject of the notification and were related to events that occurred after the date of the notification. It is important to remember, competition in the neurovascular space has always been and will likely continue to be significant and aggressive. As I stated publicly at investor conferences in September, other manufacturers are using our updated instructions for use in a competitive manner to get physicians to try their products and this targeted effort drove trialing by some customers.

Due to the exceptional performance of JET7 XTRA FLEX, the vast majority of these customers have come back to using JET7 XTRA FLEX. That said, as we have regularly stated in the past, we expect competition to continue to be aggressive in the neurovascular space and our world class commercial team will continue to make sure our customers know the value of our products.

Looking forward, Penumbra continues to design and innovative products to treat patients who suffer strokes. We recently completed our initial cases for BMX96 catheter, which pairs with JET7 XTRA FLEX as well as future products to enable a quicker and more advanced stroke procedure. We are very optimistic about the benefit BMX96 will offer physicians and their stroke patients in the quarters ahead. We are confident in our current portfolio of market leading products in neuro, led by JET7 XTRA FLEX and we are very excited to deliver another new paradigm to physicians treating stroke in 2021.

Now let me focus on our international business. During the third quarter our international business recovered well, getting all the way back to Q1, 2020 levels in most geographies. Excluding Japan, our total international revenues grew 2% year-over-year, and 58% sequentially. Japan was obviously impacted this quarter by the pause in the launch of JET7 XTRA FLEX that I shared publicly in early September at an investor conference.

We have been told that our distributor partner plans on restarting that launch later this quarter following Japanese approval of the changes to the IFU. Japan is a potentially large future growth engine for Penumbra on both an absolute and relative basis as we launch new products, both neuro and vascular into Japan and build from the relatively small revenue run rate we currently have in the region.

Let me take a minute to talk about our strategy to increase our growth profile in the international markets. The overall growth of our business continued to shift toward vascular. We are evolving our international sales capacity as well. For example, we are creating dedicated commercial teams in both vascular and neuro in Europe as we look to accelerate the pace with which we can reach patients with our innovative products in both franchises. In addition, we continue to evaluate creative commercial strategies in certain key geographies as we seek to improve our ability to supply those areas with our newest products.

Now, let me turn to the REAL system. As we previously indicated, we were forced to delay the initial rollout of the REAL system due to the pandemic and we are just now starting to introduce the first systems to rehab clinics. The initial feedback we've been getting from patients justifies the commitment to and the material investments we are making in this product.

One example is a patient in the Southeast who had a stroke over a year ago, and went to traditional rehab for an entire year. Her improvement using traditional rehab plateaued quickly with her arm only regaining limited functionality. Following this difficult year, she started using the REAL system and in only about a month of use she has regained functional mobility in her arm.

This, and many other stories are so inspiring, and they motivate the entire team to push hard for the next phases of the REAL system, namely tele-rehab and home use, as well as additional applications targeting other large serious medical conditions. The myriad medical conditions to which our REAL system is applicable represents by far the largest total market opportunity that Penumbra has ever taken on and we are incredibly enthusiastic about the number of people we can help. We will publicly present the advancements we're making in both the REAL product portfolio and business model in the first half of 2021.

Finally, 2020 has proven to be a challenging year for our country and the world at large, as we have faced a pandemic, as well as unease, and uncertainty in our society. Throughout these challenging times the Penumbra team has risen to the occasion and helped the company achieve our current success while also putting us in the strongest position we have been for continued growth in the future. It is the measure of people on how they perform and act during challenging times and I am extremely honored to work with this team that has shown its character, professionalism and humility. I am proud to say the Penumbra team has measured up and met the challenge.

I'll now turn the call over to Maggie.

Maggie Yuen

Thank you, Adam. Good afternoon everyone. Today, I will discuss financial results for the third quarter 2020. Additional details will be contained within our quarterly reports on Form 10-Q to be filed on November 2, 2020 with the FDA. For the third quarter ended September 30, 2020, our total revenues were $151.1 million, an increase of 8.3% reported, and 7.7% in constant currency compared to the third quarter of 2019.

Our geographic mix of sales in the quarter was 73% U.S., and 27% International. U.S. and International reported sequential growth of 41% and 53%, respectively compared to Q2 2020. Revenues from our vascular business were $75.2 million in the third quarter of 2020, an increase of 34% reported, and 33% in constant currency. In the quarter, our vascular performance was driven by growth from both our thrombectomy and embolization franchises, augmented by the Lightning 12 product launch and recovery in embolization cases from the prior quarter.

Revenues from our neuro business were $75.9 million in the third quarter of 2020, a decrease of 9% reported, and 10% in constant currency compared to the same period a year ago. Our U.S. neuro business increased 15% reported on a sequential basis, driven by growth across all neuro businesses. In addition, our International neuro franchise saw improvement in distributor orders and total neuro International revenue increased 57% on a sequential basis, and decreased 18% compared to Q3 2019, driven by timing of JET7 XTRA FLEX launch in Japan.

Our gross margin in the quarter was 60% of revenue compared to 69% of revenue for the same quarter last year. The decrease compared to Q3 2019 is driven by three components. Keeping our employees safe and meeting demand are top priorities for us. In doing so, we have made incremental investments on COVID-19 related safety measures, which include trade-offs made in productivity and capacity.

Second, to support new product launches and meet increasing demand in less efficient manufacturing environment, we have accelerated investment in direct labor hires and production support to enable production scale-up in both our Alameda and Roseville manufacturing facilities.

And finally, and also manufacturing variances from Q2 also negatively impacted our gross margins as inventory sold through in the third quarter. We expect our gross margin to improve gradually in coming quarters with current demand trends and we think the investment in product resources and infrastructure will drive margin expansions further in the future. In the quarter we had one time non-recurring personnel related expenditures of $20.7 million associated with the launch of Lightning 12.

The following financial metrics will represent non-GAAP financial results excluding these non-recurring expenditures. In the quarter our adjusted operating expenses were $90.4 million or 60% of revenue, compared to $83 million or 60% of revenue a year ago, representing 9.5% sequential growth compared to the second quarter of 2020. As revenue momentum improved, we rebalanced some temporary cost control measures that we had put in place in the wake of COVID.

We also increased volume related hiring and related activities in the quarter and we continued to make strategic investments in a number of new product development opportunities at a similar level to second quarter of 2020.We achieved adjusted operating income of $0.5 million in the quarter, compared to an operating income of $13 million for the same period last year.

Turning to cash flow and balance sheet. Accounts receivable increased by $15 million, and net inventory increased by $8 million compared to second quarter of 2020. Working Capital levels were [Audio Gap]

Finally, in early April, we withdrew guidance for 2020 in the onset of COVID-19 pandemic. We are not formally reinstating guidance at this time because of the uncertainty caused by current increase in COVID-19 cases and hospitalizations. However, we do want to state that if there were no new negative COVID impacts in the medical device industry from this point forward, we would be comfortable with our fourth quarter revenue at or slightly above our record third quarter levels.

And now I would like to turn the call back to Adam for closing remarks.

Adam Elsesser

Thank you, Maggie. In the third quarter, Penumbra achieved the highest quarterly revenue in the company's history. This is a testament to our people and our culture, our products, and incredible capacity for constant innovation and most importantly, our customers. I applaud physicians, nurses, and healthcare professionals, whose extraordinary dedication is on display every day, but has been especially evident over the past several months. These heroes redouble their efforts to treat more patients suffering from neurovascular and peripheral vascular disease, as they continued to face enormous challenges fighting COVID-19. Thank you all for your extraordinary work.

And now we'd like to open the call to questions. Operator, please go ahead.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Larry Biegelsen with Wells Fargo. Your line is open.

Larry Biegelsen

Good afternoon, guys. Thanks for taking the question and congratulations on a really nice quarter here. Adam, you weren't kidding when you said on the last call that Lightning 12 would be the most successful launch in the company's history, so I wanted to start there. With U.S. vascular was there anything one time in Q3? Can you can you talk a little bit about the mix versus the volume benefit? And how do we, how should we think about, this level of sales, going forward?

Adam Elsesser

Yes, first of all Larry, thanks for the question. So, the vast -- as you remember, we started the launch of this product or the introduction of it sort of two weeks into the quarter so we really had 10 weeks in the quarter to do this. So the vast majority of this is just cases being done. There's very little sort of in stocking and other things that takes a lot of time, and particularly now, it seems to be taking even longer. So the vast majority of this is really, the increase for Lightning is really just case usage. And as I said on the last quarter that response to this just very easily and quickly, really, after one case, we've seen over and over again, it's been just that remarkable.

It just works. It's just sort of the right balance of size, and power that we needed to sort of safely be able to get caught out of DVT and a host of other cases. So we're really optimistic. We had high expectations for this product and so far the market has responded favorably to it. But, as I alluded to in my prepared remarks, the hard work starts now. We have to go through the value analysis committee has now met, seems to be taking a little longer than it used to be. So that's going to take a number of quarters to do. But in the long run, we think we're on a great pathway with this product for it being able to help a significant number of people.

Larry Biegelsen

That’s great. And Adam on International, you talked about International upfront in your prepared remarks. Should we expect to see that improve sequentially in Q4? And I wanted to sneak one more in here Adam. You gave a goal of $1 billion dollars in sales in 2023 at the analyst meeting in December, is that still intact or should we think about that being maybe pushed out a year because of COVID? Thanks for taking the questions.

Adam Elsesser

Sure. To answer the first question, barring new changes in COVID and I just, I don't want to, I know nothing specific. This is not foreshadowing our October, it started out in relationship to every other October and the quarter before in a typical manner. So don't read anything into this, but you wake up today and read the headlines that France and Germany and Italy and Spain are all going on lockdown, and your question was International. So we don't know, but barring those issues, if we don't have those new impacts, yes we do expect international can continue to recover as you suggested.

As it relates to the question, we are absolutely confident that we will continue to grow and reach that goal. The exact timing of it and quarter, again given the fact that today we're facing headline-after-headline on COVID, particularly gives me just slight pause to commit to an exact moment in time. But I think this quarter shows you that our businesses are as strong as ever, and that we have a lot of confidence that we will not only get to the billion, but get into the plus world in a timeframe that is appropriate.

Larry Biegelsen

Thanks for taking the questions, guys.

Adam Elsesser

Of course.

Operator

Your next question is from Bill Plovanic with Canaccord. Your line is open.

Bill Plovanic

Great, thanks. Good evening. Can you hear me okay?

Adam Elsesser

Yes. Hi, Bill.

Bill Plovanic

Hi Adam. So to drill down into Larry's questions a little further, just in the peripheral market is there anything specific or any areas, you mentioned DVT, but DVT versus PE versus other areas that you're seeing the bulk of the growth come from? And then also piggyback on the international question, in the opening remarks you discussed some changes to the international structure of really splitting the sales forces, is that something that could be accomplished, rather quickly, where it's in place by year end this year and then you're kind of in '21 hitting the ground running or is this kind of a rolling adjustment we'll see over time to that channel?

Adam Elsesser

Yes, good question Bill. On the question of mix, it's really been all across the board, there's absolutely no one area that we can pin to, which really is not surprising, but gives us a great deal of confidence between those areas that we've really found sort of the just right spot or the sweet spot. So we feel particularly good about it.

And don't forget, that this is -- we're talking about Lightening 12 that is the new product, but the rest of our portfolio on the arterial side and coronary side have also been quite successful with and continue to grow independent of this product launch, albeit I certainly don't want to take anything away from this great product launch.

As it relates to the structure in Europe, those initial changes were just made in the last short period of time, to see the effects of those will take a little longer. We've created sort of the management structure and now we have some hiring to do, not a lot, but a little and also we have -- Lightning is not yet approved or cleared in Europe or C Mark. So once we get that, that will also drive growth and I alluded to that in my prepared remarks.

Bill Plovanic

Okay, and if I could ask a follow up, it's just on the $20.7 million in one-time charges with Lightning, can you give a little granularity on what specifically that would be for?

Adam Elsesser

Yes, without sort of getting into an area, where it could be competitive against us, there was, the primary bulk of that was related to work on the development side. That was part of an understanding that allowed Lightning to exist in the first place and that's why it's a one-time charge.

Bill Plovanic

Okay, thank you very much.

Adam Elsesser

Yes, it’s my pleasure.

Operator

Your next question is from Robbie Marcus with JP Morgan. Your line is open.

Robbie Marcus

Yes, thanks for taking the question and congrats on a nice quarter. Adam, I know you don't get asked a lot on REAL VR, but there has been reimbursement changes there and you highlighted in the script. I was wondering how people should think about that over let's say the next two to four years here. Is this something that can start to contribute to revenue at the closer end of that time range or is this really still some opportunity that's exciting or but further out?

Adam Elsesser

Yes, thanks for asking about REAL. REAL, the exact timeframe of sort of the launch and the business model and all that will, again, I do more publicly, as I alluded to in the first half of next year. But I do think if you're defining the near term or sort of midterm as the first two years versus four years later from that and the answer is definitely, it can start to contribute. The most important thing is for that we want to have everyone understand is that as we have evolved the product and moved into more tele-rehab and other medical conditions, besides more traditional neuro-rehab, the TAM, if you will, has really, dramatically increased.

And again, we'll lay that out in more detail when we unveil this publicly. But it really has made this a huge opportunity. So we're going to be careful. We're going to be, sort of do it right and when we have everything organized and the product ready to go we can't wait to share it with everyone.

Robbie Marcus

Great, thanks. And maybe a quick followup. Your competitor in peripheral aspiration has a higher price point than you based on I believe your comments and some of the checks we've done. How should we think about the third quarter U.S. peripheral performance in terms of price versus volume? If you don't want to tell us exactly any qualitative measures would be really helpful of getting us in the right direction. Thanks.

Adam Elsesser

Yes, I think it's a totally fair question. The vast majority of this is volume as opposed to price. As you know there is a small uptick in price that is also bounced out a little by the less use of the separator in the case. So there is a little bit of price, but I would absolutely attribute the vast majority of these cases as new cases that we would not have necessarily gotten primarily.

I mean, this field is large, as I've said, the vast, the biggest competitor is physicians using catheter-directed lysis or tPA and that's where we focused our energies in time. And, as I said in my prepared remarks that this moment in time, this area is ripe for a paradigm change. And we found a very willing group of physicians, if you will, a large group who were willing to try it and realize the value of it immediately. So to answer the question, it's mostly volume and mostly patients that we weren't treating before.

Robbie Marcus

Well, that's great to hear. Thanks, Adam.

Adam Elsesser

Yes, thank you, Robbie.

Operator

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

Bob Hopkins

All right, great. Good afternoon.

Adam Elsesser

Hi, Bob.

Bob Hopkins

Hi, Adam. Thanks for the call and the results. Just a couple of follow-ups. One quick one, in the second quarter you talked about international destocking. Was that a factor this quarter and is that kind of pretty much done at this point?

Adam Elsesser

Yes, I think you would -- most of that is back. We didn't really see that as a factor. We didn't call that out specifically this quarter, so I would agree with that assessment, yes.

Bob Hopkins

Okay. And then I'm just curious in the quarter, thank you for giving the U.S. neuro number, I'm just curious when it comes to your U.S. ischemic stroke revenues, do you think that the, what you experienced in the quarter was fairly representative of what went on with the broader market?

Adam Elsesser

Well, I don't know, because a lot of the competitors have been manufacturers haven't reported. I would assume and I think I went out of my way to say that it might be a little less than the broader market because we had all the competitive trialing that was going on. I don't know that. As you know, this was a noisy quarter for our neuro franchise and lots of competitor behavior, not something again that we aren't used to. But I wouldn't -- I can't answer that until we know those numbers. What it tells me though in the long run, and where how we performed, and the reaction of our customers in the long run, is really heartening. Notwithstanding all the noise and effort are the vast majority of our customers have shown that they appreciate the value of this product and I think our business is pretty solid for going forward.

Bob Hopkins

And then last thing I want to touch on really quickly, because is this question of competition more broadly across the business, because three or four years ago, people really started to get nervous on the neuro side with competition, and there were a lot of false starts there. And you guys basically have remained very competitive all the way throughout that. So people got worried about competition much too early on the neuro side.

I just wanted to just kind of comparing contrast competition that you see coming on the vascular side from several companies that are announcing new products versus the neuro, would you characterize this as kind of a similar dynamic or are there differences you think we should be aware of as we evaluate competition on the vascular side, compared to the neuro side?

Adam Elsesser

Yes, I really, not to be disrespectful to any of the people who are in this space, they're great manufacturers really all together trying to do the right thing, which is to move the field to a place where removing clot in the body is a much more logical and better procedure than where we are and I have a lot of respect for them. But that being said, I don't think -- we think about competition in this field much the way we've always thought about it in neuro. It has always been acute in neuro. We entered the field after those companies. Here, it's a little different for most of them, and it's just so large, and we're all, our mechanisms are all a little different. We have different thoughts. So we don't really see competition at all in the same framework.

In fact, I'd be surprised if the other companies don't say the same thing. It doesn't have the same type of reaction and thing that neuro does and it's just so much larger. If you look at neuro there's, you know, how many 10 companies now in neurovascular, all chasing a relatively small group of cases. That's great and we're really proud of our work and proud of what we'll do in the future going forward because we think we can continue to compete very well.

But it's just not the same as the vascular opportunity. If you think about it Bob, it took us 13 years to build our stroke business to where it is today and it's taken five years to build our neuro or our vascular business to be the same size. I think that tells you what you need to know about how we see the future of this field.

Bob Hopkins

Yes, thank you. I appreciate the answer.

Adam Elsesser

Yes.

Operator

Your next question is from Joanne Wuensch with Citi. Your line is open.

Joanne Wuensch

Good afternoon. Thank you for taking the question. I actually have two and I'll ask them upfront. The first one has to do with research and development expenses. This number has risen significantly in the last two quarters and I'm just wondering if you think about this as a go forward rate, or whether or not, given some of the launches which you've been able to get out the door successfully, it comes down to a more normalized level on a dollar basis.

And then the second question is a little bit more big picture in terms of the neuro market. When we talk with physicians, we're still hearing stories about how the number of ischemic stroke patients are lower than they what they were last year in a pre-COVID environment. Are you seeing that or is it just the doctors I happen to be picking? And if so, why do you think that is? Thanks.

Adam Elsesser

Thanks, Joanne. Maggie will answer the first question and I'll do the second one.

Maggie Yuen

Yes. Hi, Joanne, thanks for the question. In terms of the operating expense, I think that after we exclude that one-time non-recurring expense that we highlighted, the baseline $90 million expense is a reasonable baseline to understand looking forward how our base operating expense trend with volume going forward. If you remember, starting from last quarter, we have a step up in R&D investments specifically related to a few new development programs and that likely will continue for near short-term quarters.

Adam Elsesser

And then as it relates to neuro question, you know it really is, I mean, it's a really insightful question and it's kind of mixed. We certainly have some customers that are seeing a significant increase in stroke patients at least sort of in the near term from sort of end of Q1 and into Q2. And then there are some customers who are available that can treat patients and have seen a small decrease.

I don't really know how to describe that other than the change, the real challenge of the stroke field that we've been talking about for the last five and a half years of getting patients to the right place. And, obviously, there's no evidence whatsoever, that people are having less strokes and then so, the question is, is this patient flow question and is something about the moment in time and COVID changing that flow, where patients are not getting transferred the way they used to get transferred?

And the answer may be true in those circumstances. It's certainly not across the board and other hospitals have seen an increase. But in those that, that maybe you've talked to, and that we know of it just, it I think highlights that challenge. It also, it's worth pointing out that challenge doesn't exist in the vascular business, which is probably why we're seeing that continue to grow and will because those patients are already where they should be.

And so, we're not giving up. Obviously, we've come a long way in stroke, and we have an incredibly optimistic view of our future stroke business. But I think that challenge is always going to be there about getting the patient to the right place, and there must be something about this moment in time that COVID that's making that challenging at least for the hospitals that I know of and the ones you're talking to.

Joanne Wuensch

Thank you.

Adam Elsesser

Yes, my pleasure.

Operator

[Operator Instructions] Our next question is for Margaret Kaczor with William Blair. Your line is open.

Margaret Kaczor

Hi, guys, good afternoon. Thanks for taking the questions. Maybe the first one from me is just following up on your commentary around the vax [ph] for Lightning 12. Obviously, despite the delays you're still growing really, really quickly, but what impact could this have around adoption over the next three to five quarters relative to your prior expectations? And really, can it catch up pretty quickly or not?

Adam Elsesser

So the way we see, I mean, this product as I've said, I've said it last quarter, a few weeks into the launches, it's the best product we've ever launched. It's -- the uptick is really extraordinary and we -- it's really on us and the hospital systems to get this now in through the process and that process is never easy as you know to go through the value analysis committee at a hospital. There are some hospitals that have made that even harder by -- because of the financial strain on hospitals systems this, this year have put outright bans on new products.

There's one system that did that, but we were able to get a quick waiver because of the value that this product brought. So really it is just that hard to predict the timing of that, other than to acknowledge that it's ahead of us and it won't be, linear or simple. That being said, the product itself I think is performing in a way that really can really capture so many of these patients that are, they're now getting catheter directed lysis instead of mechanical thrombectomy and that I think really gives us a lot of confidence in this.

Margaret Kaczor

Okay. And so that seems kind of out of your control, but obviously you're trying to do your best to manage the situation hopefully gets better in '21. And then I wanted to follow-up a little bit on the commentary around Q4 performance. And I know there's a lot of uncertainty here, but I think you gave some guidance around, not assuming COVID continues, frankly I'm a little surprised that you wouldn't see further acceleration sequentially. We saw that in the year ago period and before that. So maybe walk us through those dynamics? How did you guys come up with those numbers? And anything you can give us in terms of European shutdowns if they've had any impact at this point as well? Thanks.

Adam Elsesser

Yes, it's totally a fair question. So first of all, to remind everyone, we did not give formal guidance. We were very clear about that. What we wanted to do is give you sort of a qualitative framework to sort of think about our business in the fourth quarter. We're pretty careful to look at what happened this quarter, last quarter and what are the sort of fundamental trends, which are positive?

That being said, we did call out some carryover, a couple of million dollars a little more on our peripheral embolization business that obviously doesn't repeat in the fourth quarter, so that came -- gave us the numbers. Again, if things don't get worse, we think that that's attainable. If things get worse we don't know and it's escalating. Obviously, this morning alone, we all woke up to the news and the market reacted to it, so we don't know that. But let me make sure everyone understands beyond fourth quarter, we are in the strongest position as a company we've ever been in.

I mean, I hope you heard me say that. And we feel that as we navigate COVID on top of that, we also have the strongest portfolio, we've had of products, and we think we're going to have significant growth, when the certainty of COVID is out, we're in really good shape. We're proving that even with COVID we can do pretty well. But we're being cautious around those numbers, we got that.

Margaret Kaczor

Got it. Thanks, guys and congrats on the quarter.

Adam Elsesser

Yes, thank you.

Operator

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

Ryan Zimmerman

Thank you. Just Adam, we've seen some preliminary clinical data noting increased clotting as a result to COVID. And speaking with some of the vascular surgeons, they've certainly confirmed that they're seeing a higher number of patients as a result. And I'm just wondering if you could speak to what you've seen in the business that would support or refute this trend, and whether that can be an incremental tailwind over the coming quarters, as physicians treat those increase cases? Is it fair to assume that these patients would be above and beyond kind of that 400,000 that you've previously outlined?

Adam Elsesser

Yes, Ryan? That's a very good question and the answer is yes. The numbers that we've been giving around arterial and venous cases of 430,000 that are treated by some means, either surgical intervention or capital rejected license or just to let it -- is before COVID. So there's no question that, that number in the short term could go higher? What we don't think is that these COVID patients are uniquely the ones that we're treating right now, where they're all just increasing that pool for the short-term.

And one of the things that I think is really making us optimistic about this is that as people who have moved, particularly catheter-directed lysis in the past, and have tried Lightning 12 their reaction to with this product, we might just convert. And so in that case, to the extent that there are, more patients in the short-term that they can treat, that's great, but that it really goes to the larger market that we're just tapping into.

So, I mean, we've got a long way to go before we're treating 430,000 patients in the U.S. We're still single digit penetrated, so we've got a lot of work ahead of us. But yes, right, it, it does add to the pool a little bit in the short-term.

Ryan Zimmerman

Okay. I appreciate that answer and then just one for Maggie. We've talked a lot about Lightening this quarter and given the price premium, you are getting with Lightning, I guess measured against less utilization of separators. Maggie, I'm just wondering if you could comment on kind of the margin impact this may or may not have for the company as Lightning continues to really be one of the key drivers in the vascular business?

Maggie Yuen

Yes, in terms of margins, gross margin impact, Lightning could have a very like accretive impact to our margin, but as I discussed about our margin performance, there definitely is not a material impact in our gross margin this quarter that is related to specifically price on mix.

Ryan Zimmerman

Understood. Okay, thank you for taking the questions.

Maggie Yuen

Yes, thanks.

Adam Elsesser

All right, thank you.

Operator

There are no further questions at this time Ms. Hamlyn-Harris, so I'll turn the call back over to you.

Jee Hamlyn-Harris

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 fourth quarter call.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and you may now disconnect.