libre de droit/iStock via Getty Images Thus far this has not been a great year for Penumbra ( PEN ), as the shares of the fast-growing vascular therapy company have sold off pretty sharply since the start of the year. This weakness has actually been going on for a while, with the shares underperforming the broader market (the S&P 500), the broader medical device market, and many growth med-tech peers since my last update a year ago.
Fundamentally, I think Penumbra is in good shape. While the recall of the Jet 7 Xtra Flex catheter has absolutely impacted the business (along with improved offerings from Medtronic ( MDT ) and Stryker ( SYK )), the company has held up better than bears projected, and the company’s peripheral and coronary businesses are performing well.
Valuation remains challenging, but is considerably more interesting than before, when valuation was the main driver of my neutral stance. Barring truly horrible markets, you’re not going to get many chances to buy growth med-tech at attractive-looking multiples, but the current 9.5x or so forward multiple is pretty good for a growth med-tech subgroup that typically trades closer to 10x to 12x. With solid underlying momentum in the business, and multiple growth drivers, this is a name to consider for investors who can accept the risks and high multiples that go with growth stock investing. Mixed Results In Q4, But Strong Sales Are Arguably The More Important Takeaway
Penumbra’s fourth quarter numbers were mixed relative to sell-side expectations.
Revenue rose 23% year over year in the fourth quarter, beating expectations by 5%. Neuro revenue rose 14% YoY and close to 7% quarter over quarter, beating by 7%, with stroke up a stronger 11% QoQ. Vascular revenue rose 31% YoY and 7% QoQ, beating by about 4%, with sequential acceleration in the coronary business.
Gross margin declined about six points YoY (adjusting the year-ago number for recall costs) and fell 160bp QoQ to 61.5%, missing by almost two points, as the company is not immune to elevated labor and logistics costs. Operating income reversed a year-ago loss on an adjusted basis, but the profit was quite modest (a 1.2% adjusted operating margin).
I had expected small positive free cash flow for the full year ($3M instead of the negative $11M reported), but the bulk of the difference was driven by working capital changes. Growth Should Remain Strong In 2022
Management’s initial guide for the year was encouraging, with the bottom of the revenue guidance range ($860M to $875M) almost above the prior average sell-side estimate of $861M.
This year isn’t going to be a banner year for profitability at Penumbra. In addition to dealing with supply chain, labor, and logistics costs, management is choosing to accelerate business development, including more product development, clinical trial expense, and an expanded salesforce. While I had previously expected double-digit EBITDA margin in 2022, that’s likely now a FY’24, or maybe 2H’23, goal.
I’m more bullish on the near-term revenue opportunities, though. Stroke (Mechanical Aspiration)
The stroke business continues to reaccelerate, and it looks as though the company gained back share in Q4. The 2020 recall of the Jet 7 Xtra Flex and new competitive introductions knocked over 15 points or so off of Penumbra’s share (to the low-to-mid-40%’s), but it remains the market leader and has regained share back into the high-40%’s, helped in part by several product launches within the RED portfolio.
The next major launch in the stroke portfolio, the Thunderbolt, is likely a 2023 event. Management has been pretty tight-lipped about the details of this product, understandable given competitive concerns, but believes this can be a game-changing product for the business. Management has chosen to run a clinical trial to highlight the benefits of this new system, and while that will delay the launch, a launch backed by strong data could significantly reaccelerate those market share recoveries. Peripheral
Peripheral intervention has become a significant business for Penumbra rather quickly; while the Neuro business would likely have remained the larger one had the recall not happened, Peripheral would still be nipping at its heels. Strong clinical adoption of Lightning 7 (arterial) and 12 (venous) catheters continues to drive the business, and Penumbra’s peripheral market is about twice as large as the neuro market (in terms of pts/yr) but only about half as penetrated.
The potential of the peripheral market has not gone unnoticed by larger players, with both Abbott ( ABT ) and Boston Scientific ( BSX ) acquiring their way into the market in 2021, […]
source Penumbra A Little Beaten Down Despite Strong Growth Opportunities
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