Penumbra Inc. (NYSE: PEN) develops and manufactures specialty interventional medical devices to treat individuals with serious and complicated medical conditions such as blood clots, aneurysms, neurovascular issues and peripheral issues, and products to treat surgical sites. The company’s focused on lowering overall surgical and treatments costs while still providing its main customers – specialist physicians – with innovative and advanced therapies to help their patients do well during and after surgery. Penumbra was founded in Bay Area biotech hub Alameda, California, in 2004 and has operations in North America, Asia, Europe and Australia.
Penumbra held its initial public offering on September 17, 2015, where the company offered 4 million shares at $30 per share. The company upsized its offering from 3.8 million shares and priced shares above an initial range of $26 to $28 per share. Penumbra shares began trading on September 18, 2015, at $40 per share, about 33% higher than the IPO price. On the company’s first day of trading, shares climbed as high as $42 and fell as low as $38 but ultimately settled at $41.49 on market close. Shares are currently about 38% higher than the company’s IPO price after just one day of trading.
Underwriters have a 30-day option to acquire an additional 600,000 shares. After the completion of its IPO, Penumbra has approximately 29.8 million shares outstanding, with Fidelity Investments (FNF) as its largest shareholder with an 11.6% equity stake in the company. The company generated gross proceeds of $120 million (without exercise of the underwriters’ overallotment option) which management expects to use for research and development, clinical trials, growing its sales force and other general corporate purposes.
Penumbra has never paid a cash dividend on its capital stock and does not intend to do so in the future. Management plans to retain all available funds for operations and expansion.
Since the company’s inception, Penumbra has launched 14 medical devices and currently holds 18 global patents for its advanced technology. In the Neuro segment, the company offers the Penumbra System for acute stroke revascularization, the Penumbra Coil 400 and SMART Coil for aneurysms of various sizes, and the Apollo System for fast and accurate removal of fluid and tissue from surgical sites. Under the Peripheral Vascular segment, the company offers the Indigo System for highly invasive surgical procedures (the Indigo system helps reduce lengthy hospital stays), the RUBY Coil for large volume embolic peripheral applications and the Penumbra Occlusion Device for high blood flow coil embolizations.
The company also has 31 pending global patents that will help it maintain a significant competitive advantage over competitors. In Penumbra’s S-1 registration statement for the IPO, management listed the company’s top competitors as Boston Scientific Corporation (BSX), Johnson & Johnson (JNJ), Medtronic PLC (MDT), Stryker Corporation (SYK) and Terumo Corporation (TRUMY).
As the leading intra-arterial stroke therapy manufacturer, Penumbra dominates a particular niche with a target market of over 15 million stroke patients globally. Penumbra estimates that its targeted neuro and vascular market is worth around $1.3 billion. The medical device industry in the United States is worth about $110 billion and is expected to grow to $133 billion by 2016. The US only accounts for around one-third of the global medical device industry market which is estimated to be worth around $350 billion. The industry as a whole has seen a drop in its growth rate over the last couple of years as several countries, including the U.S. rush to implement new healthcare laws but industry experts still expect at least 5% annual growth through 2020.
Both, the American Heart Association and the American Stroke Association, updated their guidelines for treatments of acute strokes in favor of stent retrievers over MERCI devices which are out dated. Penumbra specializes in thrombectomy technology with its ACE64 system. After positive results from the MR CLEAN clinical trials, the minimally invasive ACE64 system recently received marketing clearance from the Food and Drug Administration for patients with acute strokes and large vessel occlusions. The FDA noted that Penumbra’s therapy resulted in faster procedures with lower procedure time, and higher revascularization rates which cut hospital stay times and associated costs towards hospital stays. The ACE64 system also has a CE Mark for marketing within the European Economic Area.
For the six months ended June 30, 2015, Penumbra reported revenue of $81.3 million, up 41% from $57.6 million for the same period in 2014. Approximately 81% of its revenue came from the company’s Neuro segment while the remaining 19% came from its Peripheral Vascular segment. International sales accounted for about 34% of total revenue. The company also reported gross profit of $54.1 million, income from operations of $177,000 and a net loss of $34,000, or $0.01 per share.
Adam Elsesser, a co-founder of Penumbra, serves as Chairman, President and Chief Executive Officer. Mr. Elsesser previously worked at medical device company SMART Therapeutics Inc. and Boston Scientific. Arani Bose, the other co-founder, is Chief Innovator after 10 years as Chief Medical Officer with the company. Mr. Bose was an assistant professor of radiology and neurology at NYU from 1997 to 2004. Chief Financial Officer Sri Kosaraju is responsible for the overall strategy of the company and brings over 16 years of healthcare finance experience.
New technology is key in the highly competitive medical device industry, so management’s focus on R&D is a positive for shareholders and has led to the company’s innovative treatment systems. The company’s focus on R&D and sales and marketing in the U.S. and abroad reflects its desire on speedy physician education and commercialization of its products, and heavier expenses have led to a decline in profit margins in recent years despite a significant increase in revenue. But Penumbra is doing the right thing by staying focused on market growth at this stage. In addition to expanded sales, investors could see significant upside if some of a compelling range of pipeline products successfully clear clinical trials, with the approval of new medical devices that keep Penumbra ahead of its competitors.
At $41.49 as of 9/18/15, shares are trading at valuation multiples above the industry average price-to-sales ratio but are still attractive given the potential growth upside that industry analysts predict for the company’s 2H15 revenue. Shares should rise as new products come on line, with sizable upside and break out potential.