Penumbra, Inc.

    • Penumbra, Inc. (“PEN” or “the Company”) is a one-trick-pony surgical instrument company which, in our opinion, produces a low-tech and undifferentiated product in an increasingly competitive space. Penumbra was first to market with an aspiration catheter (“AC”) FDA-approved to treat acute ischemic stroke (“AIS”). Major medtech companies have entered the space within the last 9 months and, per the medical community, offer neurovascular ACs at least as good as Penumbra’s at far superior economic terms, often as part of discounted bundles. While analysts are aware of the new competition, they seem blind to the pace of Penumbra’s market share losses: IQVIA transaction data reveals that its U.S. neuro AC sales growth has contracted in recent months. Heavy competition and a limited TAM will also curtail peripheral AC sales – a revenue stream which analysts see as a major growth engine for Penumbra. Non-core M&A, distributor acquisitions, and rising DSOs suggest that management – which has a history of promotional activity – may be reaching to defend its medtech hype train as competitors eat at Penumbra market share. We believe that underestimated competition could cut Penumbra’s expected sales growth by nearly half in FY20, from 20% to close to 10%.
    • Wave Of Competition Entering Penumbra’s Vertical For The First Time: Penumbra was the first to market with an AC cleared by the FDA for treatment of acute ischemic stroke. Major medical device companies left the space alone for most of the 2010s, instead focusing their efforts on stent retrievers – the standard of care in mechanical thrombectomy until recently. However, now that aspiration thrombectomy for ischemic stroke has gained wider acceptance as a cheaper (by 30-50%) and sufficiently-effective approach, four major device companies have entered the space within the last two quarters.
    • Rapid Pace Of Market Share Loss Deeply Misunderstood By Market: Analysts have grown to understand Penumbra as a dominant player in its vertical, with ~90% share. While they recognize that competition is coming, they have no historical basis for modeling the pace of market share loss, and appear to assume only low-to-mid single-digit annual losses through the coming years. IQVIA Medical Device and Supply Audit (MDSA) data, which project nation-wide sales for individual medical devices from a panel of 650 U.S. hospitals, indicate that, even as the mechanical thrombectomy market grows, Penumbra is losing U.S. share so rapidly that monthly unit sales have been DOWN through 5 of the last 6 months, with monthly declines of up to 28%. Our conversations with doctors corroborate this data, with many neurosurgeons indicating that, over just the last 6 to 9 months, they have shifted from using Penumbra in 70-90% of neuro aspiration therapy procedures to just 10-30% of these procedures.
    • Penumbra’s Core “Device” A Commoditized Plastic Consumable Sold Cheaply By Competitors: While Penumbra has had the only AC approved for acute ischemic stroke treatment through most of the 2010s, ACs are functionally little different from intermediate guide catheters, mechanical thrombectomy accessories priced 75% or more below ACs. Many doctors have used these catheters as “off-label” ACs due to price differences or product preferences. Large medical device companies will have, and have had, little trouble entering the market with products already equivalent or superior to Penumbra’s. They also sell their ACs in bundles with SRs and other adjacent products, which support per-item savings of up to 33%. Penumbra – an almost purely AC-driven company with a poorly-rated “3D separator” SR and few other products – cannot offer similar bundles and is likely to experience significant pricing pressure as the sector migrates to this purchasing model.
    • Promotional And Aggressive Management Playing Defense Against Slowing Growth?: Industry contacts indicate that management is highly promotional and liberal in their spending on medical professionals. Open Payments data from the Centers for Medicare & Medicaid Services reveal that Company spending on doctor travel reimbursement – often to sites like Las Vegas and Miami – is unusually high. They have also granted an unusually large quantity of stock to non-employee doctors, which we find suspicious for a young medical device company which has been eager to find clinical support for its products. Further, we observe hallmark executive actions which may signal a coming sales slowdown: rising DSOs, non-core M&A / distributor acquisitions, hyping up secondary businesses, and aggressive stock sales.
    • A Commoditized, One-Product Company Valued As A Growth Story: PEN is valued on par with high-tech medical device companies with significant IP protection. PEN’s products are far more commoditized and subject to competition, which it is now experiencing for the first time. Valuing PEN in-line with a more appropriate peer universe of commodity producers would reduce PEN’s multiple from 10x to 5-6.5x FY20 sales. Even bullish sell-side analysts have an average price target 7% below current levels as valuations have climbed to nosebleed levels through the past several weeks. Spruce Point sees 40-55% downside ($85-$110) in the stock after adjusting future sales growth to reflect the onset of competition and applying a more reasonable 5-6.5x FY20 sales multiple.
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