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Bull of the Day: Penumbra (PEN)

·7 min read
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Penumbra (PEN) is a nearly $10 billion medical technology company specializing in minimally-invasive instruments for neurovascular and peripheral vascular diseases.

The company leverages its expertise in catheter-based technology to develop access devices for treating strokes, aneurysms, deep vein thrombosis, pulmonary embolism, and other patient events caused by blood clots.

Penumbra takes its name from the shadow-like effect in pathology and anatomy where the area surrounding an ischemic event such as thrombotic or embolic stroke can become dark. Immediately following the event, blood flow and therefore oxygen transport is reduced locally, leading to hypoxia of the cells near the location of the original insult.

I last wrote about Penumbra in early January after a product recall hit PEN shares and analyst estimates. Since it has been one of my favorite mid-cap MedTech innovators, I had this to say about the events which took shares from $270 in November down to $170 in December...

Bottom line on PEN: I still believe this is a solid company with a strong, proprietary technology platform. It seems much of the bad news has been factored into shares, but the risk is still that more safety revelations could surface as Penumbra works with the FDA to resolve issues.

An Overreaction That Rewarded PEN Bulls

The good news is that the impact of the product recall was fully discounted and analysts began taking their estimates higher again in February. Unfortunately for investors who were waiting on the sidelines for the dust to settle, the analysts were too slow in recognizing the recovery.

But steady and smart investors who, like me, also loved the technology platform were rewarded early in January, as PEN shares took off and hit all-time highs above $300 by the end of the month.

I'll recap the Nov-Dec overreaction, but first let me tell you two reasons why I love this technology and have been a frequent investor.

The Catheter is Mightier Than the Scalpel

The first is that my father was a pilot for United Airlines and he taught me how to fly a small plane when I was fifteen years old. Then he had a mild heart attack and my instruction was halted.

More importantly, my dad was possibly the first commercial pilot to receive a catheter-based angioplasty procedure to open up an artery (circa 1980). He was able to return to service as a captain of 747 and 767 international flights for another two decades.

And I went on to earn my pilot's license at age 17, a story I just reminded my first flight instructor of, who turns 87 next month.

The second reason is that I am also an investor in Edwards Lifesciences (EW), the maker of catheter-based heart valve replacement technology. It still amazes me how many lives have been saved by the TAVR procedure (transcatheter aortic valve replacement).

TAVR works by inserting a folded-up synthetic heart valve (often made from cow or pig heart tissue) in the end of a specialized catheter that can travel to the heart, from a small entry in the leg or chest, where it can then be deployed to open, implant and make a home to replace to the old, worn-out biology.

The technology has given thousands of elderly patients extended life without open heart surgery. What's even more amazing and wonderful about the Edwards story -- besides saving so many lives -- is that the founder Miles "Lowell" Edwards was a hydraulic pump engineer who was simply very interested in the heart (inspired by a medical issue he had as a child) and he wanted to see what could be done to help people.

Product Recall Hits PEN and Estimates

Here were my notes from the early January article...

I last wrote about PEN as the Bull of the Day in April 2020 when shares had just recovered from the Corona Crash and were back trading above $160. In August, PEN grabbed new all-time highs above $240 and then in October eclipsed $260.

But in late November and into December, PEN shares plummeted over 30% in 3 weeks. And while the reasons aren't exactly clear, two news events were swirling about: notable insider selling and a short-seller with strong accusations about alleged fraudulent research from a company co-founder.

Then on December 15, the real bombshell hit: Penumbra announced a voluntary recall of its JET 7 Xtra Flex catheters, noting that the catheter could "become susceptible to distal tip damage during use." This potential damage to the instrument could cause blood vessel damage in patients that leads to injury or even death.

By the time this news was released, most of the damage to PEN shares had already been done, with a climactic selling even on Dec 16 that took shares down below $170, for the first time since June, on heavy volume.

But digging for more answers about "who knew what and when," I found that William Blair analysts profiled a company letter to healthcare providers in July 2020 "notifying customers of an updated Xtra Flex IFU that reminds users not to inject contrast media through the aspiration catheter."

Apparently the letter followed several injuries and deaths reported in the FDA MAUDE database (~0.05% of all units shipped), associated with distal tip expansion or rupture when contrast media was injected through the catheter. This letter to providers was not part of a company press release, to the best of my knowledge.

According to the Blair analysts, since the letter was issued, there was one additional patient injury and one event involving patient death.

Analyst Reactions

Back in December, here's how analysts were throwing in the towel on PEN...

Meanwhile EPS estimates have been slashed by analysts with the 2020 consensus dropping from -13 cents to -40 cents. And the new year was taken down 33% from $1.06 to $0.71.

One of the biggest and early bulls on PEN (who originally convinced me to buy) is Wells Fargo analyst Larry Biegelsen. On Dec 16, he lowered his price target on Penumbra to $215 from $265 and shared his reactions to the company investor call in conjunction with the recall announcement.

Biegelsen felt that the news was not completely unexpected given the recent adverse events with this device and concern that physicians would continue injecting contrast through a potentially damaged instrument despite Penumbra's revised instructions, which had recommended not injecting contrast through the catheter.

Canaccord Genuity analyst William Plovanic cut his price target on Penumbra to $204 from $292 noting that the reduction reflected his reduced neurovascular revenue estimates and a significant discount to the comp group due to the heightened uncertainty in the business going forward.

Fast Forward to March

The 2021 EPS consensus has only risen to $0.81 in the last 30 days. But the 2022 projection has vaulted back 38% from $1.16 to $1.60.

This tells you all you need to know about how Q4's bad news is now "out of the picture" already for next year.

But if you wanted to see an update as analysts scramble to catch up to the good news -- and PEN shares -- here are some recent calls...

Canaccord Genuity on 2/24: PT raised to $310

Wells Fargo on 3/2: PT raised to $310

Citigroup on 3/2: PT raised to $325

The new bottom line on Penumbra: Until we have nano-bots programmed to cruise through our bodies performing med-tech miracles, the experts in catheter-based technologies will be in high demand. I would be a long-term buyer of PEN on the dips toward $250.

Disclosure: I own EW shares for the Zacks Healthcare Innovators portfolio.

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