Penumbra, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Penumbra, Inc. is a global healthcare company focused on developing and marketing innovative medical devices and technologies to address unmet clinical needs, with a focus on neurovascular and vascular conditions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Penumbra operates in the medical device sector, which is characterized by high barriers to entry, a result of factors such as the lengthy and complex regulatory approval process, the need for specialized sales forces with in-depth knowledge of the products and the complex medical environment, high R&D costs, and the need for significant clinical data showing efficacy and safety.

Business Overview

Penumbra, Inc. is a global healthcare company that develops, manufactures, and markets innovative medical devices and technologies. The company’s products are used by physicians and other healthcare providers primarily for the treatment of vascular and neurovascular conditions, which it groups into the following categories:

  • Neuro: Devices used in procedures like thrombectomies, embolizations, and neuro access products designed for the brain, neck, and other parts of the head. These products are used to treat strokes, aneurysms and other brain-related disorders.
  • Vascular: Devices used for the treatments of peripheral and coronary vascular conditions, including thrombectomies and embolization devices and technologies. These products are used to remove clots from peripheral blood vessels.
  • Other Healthcare: A small number of products outside of their core business areas.
  • Transhemispheric Program: Tools to use in the prevention of stroke related to Patent Foramen Ovale.

Penumbra has increasingly emphasized thrombectomy solutions across its business, specifically focusing on stroke treatment technologies like aspiration systems and aspiration catheters, which are used to remove blood clots and treat strokes. This emphasis on innovative technology has been a major driver of their growth.

The medical device industry is generally characterized by:

  • Innovation: Constant technological advancements drive the need for newer and better devices.
  • Regulation: Strict regulatory requirements and approvals by governmental bodies like FDA.
  • Barriers to entry: The above mentioned regulatory landscape, along with R&D intensity and the need for skilled employees, makes it challenging for smaller companies to compete.
  • Changing Healthcare Systems: Healthcare systems are evolving, with focus on patient outcomes and cost-effectiveness. This affects reimbursement for medical products.
  • Growing aging population: Older populations are much more likely to have the kind of health concerns that PEN’s products address.

Competitive Landscape

Penumbra faces competition from established medical device companies, as well as smaller innovative firms. Competitors include:

  • Medtronic: A major player with various medical devices and a robust pipeline, who are also entering in stroke space with newly acquired devices.
  • Stryker: Another significant competitor with a large number of medical devices for various specialties.
  • Terumo: A Japanese medical device manufacturer with products in similar categories.
  • Boston Scientific: Another large medical device company with products similar to Penumbra.
  • Smaller Innovative Firms: There are many smaller companies looking to introduce new technologies in this market.

Despite the competition from large players, Penumbra tries to differentiates itself with a focus on innovative minimally invasive technologies.

What Makes PEN Different

Here are the things which make PEN unique:

  • Focus on Innovation: Penumbra emphasizes R&D and the rapid development of cutting-edge technologies. This is an important driver of their success.
  • Focus on Thrombectomy: Penumbra is heavily focused on mechanical thrombectomy products, a growing market segment driven by an increasing aging population and rising incidence of strokes.
  • Established Neurovascular Franchise: PEN’s Neurovascular franchise has a history of generating steady returns and has strong market positioning. The recent growth in vascular makes it an even better company overall.

Financial Deep Dive

Revenues

Penumbra’s revenue is driven by selling its products through direct sales and distributors in both the United States and internationally. Their key geographic revenue breakdown is:

  • United States: Their largest market, accounting for ~60% of their revenue.
  • International: Revenue from ex-US market accounts for 40% of the total revenue.
  • Product Type: Their main source of revenue is their neuro products, followed by their vascular products and a small number of products in their other segment.

The company has been growing revenue at a rapid pace, which is being driven by an increasing customer base and increased adoption of its innovative products.

Profitability

  • Gross margins: Typically range between 66-70% with a slight increase year over year, indicating that products are priced well and can withstand manufacturing and production costs.
  • Operating Expenses: The operating expenses are dominated by R&D and marketing efforts. These expenses are increasing at a faster pace than revenues. This implies that the company will have to increase its operating leverage to improve its bottom line.
  • Net Income: While there has been a recent shift to profitability, historical performance has shown losses, mainly because of R&D and SG&A spending.
  • ROIC: Return on invested capital (ROIC), is a measure of the profitability. The return is solid, but below the threshold to show that they have a sustainable moat, this highlights that there is room to improve their margins as more data comes in.

Financial Position

Their latest financials are:

  • Cash and cash equivalents: They have roughly 750 million to 800 million in liquid capital.
  • Debt: Roughly 1.05B in long term debt.
  • Liquidity: Despite having enough cash to cover current liabilities and short term obligations, it does present some risk given the growing size of their debt, and this should be monitored carefully.
  • Share Dilution: Penumbra has been frequently issuing shares through its stock-based compensation, and more shares may be issued due to future acquisitions.

Given all this, their financial position is reasonably healthy, however, their current debt must be looked at when deciding to invest. A detailed look into financial reports must be made before making a buy-decision.

Understandability: 3 / 5

The business itself is relatively easy to understand because they develop and sell medical devices to solve health issues and improve patients’ lives. However, their financial situation is complex with several factors that have to be considered. The regulatory hurdles also make their moat complex to analyze and judge. The technical nuances of the medical devices make it a bit difficult for many, as well as all the data involved in doing a proper valuation.

Moat: 2/5

Penumbra’s moat, at best, is narrow.

  • Patents and Proprietary Technologies: Some of Penumbra’s products are protected by patents, but those patents can be challenged and may be rendered less useful over time. They do need to keep innovating to keep up their edge.
  • Customer Relationships: Strong relationships with physicians and hospitals is helpful, but not exclusive because doctors usually take the best option available. Even though switching costs may be considerable, that doesn’t fully stop doctors from switching to a better device.
  • Brand Recognition: Though their brand has become prominent among specialists, it is not a recognizable brand among consumers.
  • Regulation: Although it provides a barrier to entry, it does not necessarily guarantee continued profitability.

Moat Rating

Given all the above points, we assign Penumbra a Moat Rating of 2 out of 5. The company has some key factors, like innovative technology and customer relationships, but its moat is easily eroded by new technological advancements and competition from other medical device companies.

Risks and Resilience

Here are some risks to the company:

  • Technological Risk: Constant technological advancements mean that their current technologies may become obsolete or outdated. A new type of stroke treatment may eliminate the need for their products altogether.
  • Regulatory Approval: Strict regulatory frameworks can delay or prevent the commercialization of new products, affecting the time it takes to reach profitability. FDA has also been known to reject medical devices, and it can be a challenge to have them approved for use, even in certain niche areas.
  • Competition: The medical device market is competitive, and they face rivalry from other companies, both established and new, that may bring equally or better products to the market at better costs.
  • Reimbursement Risk: Changes in healthcare reimbursement policies can alter the demand for PEN’s products and reduce revenue, if reimbursements are cut.
  • Dependence on Key Personnel: Penumbra’s success depends a lot on the leadership team and personnel which can be very harmful to their operations. If key personnel leaves the company, they may lose valuable know-how.
  • Economic Conditions: During recessions people might choose to avoid or postpone costly medical procedures, which can directly affect the company’s profits.
  • Litigation Risk: Lawsuits and other actions could affect the company’s operations and financial results.
  • Merger and Acquisitions: Although PEN has used mergers and acquisitions, they are still unpredictable and come with their own set of risks (like integration).

Resilience

Despite the risks, Penumbra exhibits resilience through:

  • R&D Focus: Their commitment to research and development is a key factor in driving innovation. This commitment to innovation allows them to stay at the forefront of their field.
  • Emphasis on thrombectomy: A large focus on specific areas, such as thrombectomy, can make them one of the leading companies in that specific space.
  • Strong Customer Relationships: Penumbra has built lasting relationships with physicians and hospitals due to its history. This helps them maintain sales, and it can be a barrier to competitor adoption for medical professionals who have already been trained and are familiar with PEN’s products and procedures.
  • Market Positioning: Their historical sales are fairly established in their neurovascular business, this means they already have a large enough share of the market.
  • Scalability: Given the nature of their product offerings, they have an opportunity to scale up if demand increases.

Recent Concerns / Controversies

Here is a list of recent concerns related to PEN:

  • Lower Revenue Guidance: In their recent calls and reporting, they have significantly lowered the sales projections for 2023 and 2024. This has caused concern amongst investors, and their stock price has plummeted.
  • Gross Margin Contraction: Their margins have seen some contraction due to higher operating expenses, which can be a concern to many investors.
  • Credit Rating Downgrade: Several ratings agencies have downgraded the company, a result of rising costs, and lowering revenue forecasts. This makes it more difficult for them to raise money in the debt markets.
  • Competitive Pressures: With more companies pushing in, it can be difficult to keep expanding market share, and this has also been a constant concern.

Management has been addressing these issues in the earnings calls by re-enforcing their commitment to innovation and profitability. They have stated that some external forces like global inflation, and unfavorable credit markets, have been hurting the company. Also, they have insisted that they plan on becoming profitable by the end of 2024.