A tale of corporate greed and seemingly blatant disregard for patients’ lives
Report by Quintessential Capital Management
Tuesday, November 10, 2020
QCM is SHORT Penumbra, Inc. (PEN)
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QCM is SHORT the stock of Penumbra
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Quintessential Capital Management (QCM) has performed an in-depth investigation into Penumbra, Inc. (PEN), a U.S. manufacturer of medical devices for the treatment of stroke and other vascular pathologies. Our firm conclusion is that Penumbra’s flagship device, the Jet 7 Xtra Flex, has a structural design flaw that makes it prone to critical malfunctioning. Unlike competing devices that have a good safety record, in 14 months on the market, Penumbra’s “killer catheter” has already malfunctioned at OVER 200 times, killing 17 patients and leaving 35 others with brain injuries.
We have compiled compelling evidence that Penumbra knew or should have known about this issue early on but chose not to pull the device off the market, even though it continues to malfunction at an alarming rate. In a late and misleading notice to healthcare providers, Penumbra effectively tried to shift the blame to doctors for its device’s malfunctions, while at the same time not responding to some requests for information.
After receiving expert opinions from multiple surgeons and former senior FDA personnel, we strongly believe that Penumbra’s flagship device may be on the verge of a class 1 recall by the FDA. Moreover, the deaths and injuries that already occurred as a result of the device’s malfunctions make Penumbra vulnerable to a crippling product liability class action lawsuit (it has already attracted the attention of leading product liability and medical malpractice law firms).
The first signs of the looming catastrophe are already apparent in Penumbra’s accounting (collapse in cash generation and sharp drop in gross margins), staff (numerous high-level resignations) and trading patterns (insiders are dumping their Penumbra shares). Our sources in the field claim that elite U.S. institutions (e.g. Mount Sinai, the Mayo Clinic, Ascension and Stanford), may be discouraging the use of the device or of Penumbra’s products altogether.
Considering the current rich valuation (16.6x trailing revenue and 270x projected EBITDA), the large proportion of sales directly or indirectly affected by a Jet 7 recall, the likely extent of the reputational damage, the likelihood of numerous lawsuits, and the strength of emerging competitors, we believe that Penumbra’s shares are worth a fraction of their current price and are due for a catastophic price collapse. Our price target is $55, implying a 79% downside.
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Description and historical context
Penumbra is a U.S. medical device manufacturer trading on the New York Stock Exchange with a market capitalization of approximately $9.0bn and sales of $530m. The company was founded in 2004 in California and IPO’d in 2015.
Penumbra’s early success was rooted in its commercialization of a set of innovative devices for the treatment of acute ischemic stroke and other vascular pathologies through aspiration thrombectomy. Until Penumbra popularized its products, large blood clots (which cause strokes and other serious conditions) were frequently removed through a mechanical thrombectomy, effectively inserting a tool to “grab” and extract the clot from the clogged artery. Penumbra’s device, in contrast, works by inserting an aspiration catheter in the affected artery, reaching the blood clot and literally sucking it out. Extensive clinical studies show that aspiration thrombectomy is a superior technique, allowing for faster procedures with fewer complications.
Benefitting from a clear first-mover advantage, Penumbra dominated the aspiration thrombectomy market for several years, which led to rapid growth, expanding profit margins and the development of various related products. Penumbra’s stock price has reflected this success, increasing almost sixfold since its IPO.
Trouble starts with Sofia
Penumbra’s commercial success attracted the attention of large, well-capitalized competitors with significant R&D budgets: Medtronic, Stryker, Boston Scientific and Microvention, which all entered the market with competing aspiration thrombectomy systems. Most damaging to Penumbra, in 2018 Microvention introduced an aspiration catheter named Sofia. According to all of the doctors we interviewed, Sofia was far superior to Penumbra’s flagship device at the time, the Jet 7. It was more flexible, trackable and allowed easier and much faster navigation through the arteries (up to three times faster according to our sources). This is a crucial advantage, as faster thrombectomies translate into better clinical outcomes and less time in the operating room, with considerable saving for the hospitals. In summary, many doctors described Sofia as “a game changer.”
Predictably, Microvention and other competitors started grabbing market share from Penumbra at an alarming rate. We estimate that PEN’s market share in this industry segment decreased from nearly 100% to less than 60% today.
In response to these mounting competitive pressures, in July 2019 Penumbra released an upgraded version of its flagship Jet 7 system, the Jet 7 with Xtra Flex technology (the “Xtra Flex”). The Xtra Flex was an initial commercial success, as it seemingly achieved parity with the Sofia in terms of flexibility and allowed Penumbra to temporarily regain part of the lost market share. However, trouble was brewing under the surface…
Bad news from the Land of the Rising Sun
Hirata, Penumbra’s distributor in Japan, sent a notice to its clients on June 22nd, 2020 warning about a set of malfunctions with the Xtra Flex that had already resulted in 11 deaths (8 in the U.S. and 3 in Japan). The notice [click here for a Google translation] stated that the malfunctions seemed to originate from “an unexplained damage of the inner layer of the catheter” which causes it “to expand like a balloon and damage the patient’s vessel.” The note warned doctors not to inject contrast media through that catheter. Shortly after this communication, Hirata voluntary discontinued sales of the Xtra Flex, which to the best of our knowledge remains off the Japanese market due to the issues we highlight in this report.
Structural flaws and killer balloons?
Based on the data we reviewed on the Xtra Flex catheter and have reached the firm conclusion that it is structurally flawedandprone to critical malfunctioning. As Penumbra rushed to introduce the device to contain its market share losses, it altered the design of the existing Jet 7 catheter in a way that increased flexibility, but resulted in less structural integrity. It suffers from serious weaknesses that make it hazardous to patients in a number of situations, leading to the appalling number of malfunctions, injuries and deaths that we’ve seen.
The “breaking of the distal tip”
Of the 200+ malfunctions and 39 injuries recorded in the FDA Maude database for the Xtra Flex device, the overwhelming majority involve the “breaking of its distal tip.” The Xtra Flex is a catheter, basically a small tube. Many doctors complained that during the procedure, the distal extremity of the catheter breaks off (or otherwise malfunctions) and starts floating, uncontrolled, through the blood vessel. This will almost certainly prolong the duration of the procedure and may create serious complications, injuries and even death.
A damaged distal tip of a Jet 7 device
The “killer balloon”
Far more catastrophically, at least 17 patients died by the Xtra Flex when the distal tip malfunctioned and “expanded like a balloon” inside a brain artery, causing the blood vessel to rupture and the patients to die on the operating table due to massive brain hemorrhage. Most of these cases occurred upon hand injecting contrast media or saline solution through the catheter, a standard procedure that many doctors perform on a routine basis and that doctors affiliated with and working for Penumbra as consultants have been advocating until very recently.