High-growth med-tech can often be a tricky sector in which to invest, as investors are often willing to bid great growth names up to impressive mulitples, but will quickly turn on stocks if there are any cracks in the growth story. Such has been the case for Penumbra (NYSE:PEN), which climbed as high as 50% from my last update before those cracks in the growth stories appeared and have ultimately sent the shares down more than 15% since the time of that last article, underperforming the broader med-tech space, but still outperforming chief rival Inari (NARI) by about 5%.
My feelings on Penumbra are pretty mixed at this point. I do think that core markets like deep vein thrombosis (or DVT) and pulmonary embolism (or PE) remain attractive and meaningfully under-penetrated, sufficient to support years of double-digit growth. I also think, though, that the valuation isn’t exactly low today and it will likely take some renewed confidence in the outlook for 2025 and beyond to get institutional investors to reconsider the name. I can argue for a bull-case valuation of $225 today, and at a minimum, it’s a name worth watching more closely over the next few quarters.
Okay Q2 Results Overshadowed By A Guidance Cut
Penumbra reported better than 14% revenue growth in the second quarter, which was good enough for a modest beat versus sell-side expectations. Thrombectomy revenue rose 25%, with 25% growth in the U.S. business (a 3% miss) and 27% growth in the international business (a 19% beat) offsetting a 3% decline in the Embolization & Access business. While this latter segment was hurt by the company pulling back from some markets where reimbursement has become unattractive, U.S. growth of 1% was not exactly compelling.
Gross margin improved almost two points from the year-ago period (to 65.5% on a non-GAAP basis) and operating income grew 57%. Operating margin improved almost three points from the year-ago period (to 10.6%) and came in better than expected.
Penumbra and Inari don’t report results in a directly comparable way, but using past management guidance regarding business mix, I would estimate that Penumbra’s venous thromboembolism (which includes PE and DVT) grew at a high-20%’s rate versus the 21% growth for Inari, with better growth in the U.S. business (high-20%’s versus 17%).
Share gains in the VTE market are welcome, and management’s commentary suggested good results across the thrombectomy business apart from coronary. Yet, management reduced guidance by a meaningful $60M (around 5%). Management blamed weaker conditions in China for $20M of the revision, delays in new product launches in Europe for another $15M, and a tougher U.S. thrombectomy market for $20M (the remaining $5M was from the removal of the immersive health business, for which the company is exploring alternatives.
An Unexpected Pause, Or A Rethink Of The Market?
With new guidance in place, Penumbra’s U.S. thrombectomy business is still expected to grow over 23% this year, which is hardly bad. Still, the overall deceleration to low double-digit growth for the full year is a tough pill to swallow for growth investors and readers can see the market reaction for themselves.
Making matters worse, the market itself seems to be slowing. Inari’s U.S. VTE growth has slowed from the mid-30%’s in FY’22 to 22% in FY’23 and FY’24 will likely come in around the mid-teens. Again, Penumbra’s numbers aren’t apples-to-apples comparable, but the thrombectomy business grew at a low-30%’s rate in FY’23 and will likely grow at a low-20%’s rate this year. While barely comparable in terms of the scale of the business, I would note that tiny rival AngioDynamics (ANGO) has likewise seen its thrombectomy business slow recently.
I don’t have a good answer for why the market is slowing, which makes it harder to make a compelling argument for why it will reaccelerate again in the near-term.
I suspect at least some of the issue is saturation of the easily-accessible market. Mechanical thrombectomy is still a relatively new approach to VTE, with most patients historically having been treated with anticoagulants. While there has been good initial adoption of Inari and Penumbra’s approaches, it could be the case that physicians eager to perform the procedures are more or less “at capacity” and it’s taking time to convert and train new practitioners – it is not uncommon for physicians to take a cautious approach with new-to-them procedures and perform their own “mini-clinical trials” before adopting them more broadly.
It may well also be the case that there is more pushback from payors on procedures. While there are compelling reasons to use mechanical thrombectomy for eligible patients (including avoiding the risks that go with anticoagulants), these procedures are not cheap relative to anticoagulant therapy and it is at least plausible to me that there’s been some headwinds here.
Longer term, I continue to believe there are compelling arguments for more mechanical thrombectomy. Even if only 30% or so of VTE patients are good candidates for thrombectomy, the market is only around 20% penetrated today. Not only does thrombectomy provide immediate resolution of the issue (something anticoagulants cannot do), it avoids the side-effects that go with longer-term use of anticoagulants (namely elevated risk of serious bleeding events).What’s more, there are multiple randomized controlled studies reading out in the near future, including NARI’s PEERLESS, and three more studies in both 2025 (NARI’s DEFIANCE, Boston Scientific‘s (BSX) HI-PEITHO) and PEITHO-3) and 2026-2027 (PEN’s STORM-PE, NARI’s PEERLESS II, and the independent PE-TRACT study). Assuming these studies read out positively as past studies have, it could be a further boost to usage and physician and payor acceptance. Along similar lines, PEN’s THUNDER study could perhaps help rejuvenate the neurovascular side of the business.
The Outlook
Modeling Penumbra is a little strange for me now, as although the market has clearly been disappointed with the recent cut to guidance, little has changed relative to my expectations a year and a half ago. Penumbra’s full-year revenue in FY’22 and FY’23 was <1% and <5% better than I expected, respectively, in those years, and now sell-side expectations have come back down to where I already was for FY’24-FY’27.
With that, I’m looking for revenue growth of around 13% over the next three years and longer-term annualized revenue growth of close to 11%. I do expect growth to reaccelerate in FY’25 as Penumbra moves past the impact of exiting some embolization markets, introduces new catheters (three major launches are expected over the next year), and continues to drive physician education and training events.
I expect profitability to continue to improve over the coming years as the company sees more operating leverage, and I’m looking for EBITDA margin to move from around 13% this year to 16% or higher in FY’26 and 20% over five years. At the free cash flow line, I still expect double-digit FCF margins by FY’28 and 20%+ margin down the line, supporting 20%+ annualized free cash flow growth.
Penumbra admittedly doesn’t look that compelling on discounted free cash flow, but the reality here is that investors who stick with discounted cash flow will almost never end up owning many growth med-techs.
For these stocks, I instead prefer to use growth-driven EV/revenue modeling. Based on my current 3-year expected revenue growth, 5.5x-6.0x would seem like a fair multiple today, but with growth set to reaccelerate in the coming years, I could argue for a higher multiple of 6.75x (a $225 target on my current 12-month revenue estimate). As is always the case, the possibility of beat-and-raise quarters (or miss-and-lower) could drive meaningfully different outcomes down the road.
The Bottom Line
I don’t think Penumbra is a broken company, and I don’t think that the VTE growth opportunity is played out yet. To that end, I would note that management recently announced a $200M buyback, with $100M of that through an accelerated share repurchase arrangement. These “resets” aren’t that uncommon in growth med-tech, and can be good “buy the dip” opportunities, but it can take time for investors to regain confidence in the stories, and it’s not uncommon for stocks to shoot up after a good quarter – in other words, you have to accept the risk of being early/wrong because by the time it’s obvious that the market/company has recovered, the stock is already a lot higher.
With my base-case assumptions not offering quite enough upside at this point to justify the risk, I’m sitting tight for now, but fully acknowledge I miss this name on the way back up.
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