We were impressed by the Penumbra (NYSE:PEN) neuro and vascular technologies demonstrated in their roadshow. Combined with their meaningful revenue ($125M in 2014 which was up 41%) and profitability this is an IPO to watch and probably own. Being able to effectively treat stroke victims is a big deal. Although they have a portfolio of products the ability to remove blood clots that cause a stroke is what really caught our attention.
It was in late 2014 that a definitive paper was published showing that intra-arterial treatment was far more effective at treating stroke than medicinal treatments (like tPA). Someday this will be done by tiny robots but today Penumbra can accomplish this with a special catheter that can follow along a wire through a contorted and long pathway which is then able to be activated by the surgeon when it reaches the clot area to aspirate and remove the obstruction. There is a demonstration video in the roadshow that is alas not available on the company website yet. The video makes the technology much easier to understand and appreciate.
Management puts the “culture” component front and center in telling their story which is not a typical approach but one that we like because it’s often neglected. (An example of this on the negative side is TrueCar (NASDAQ:TRUE) which had a negative reputation in terms of corporate culture and leadership – now it’s a mess.)
The underwriting team is a bit unorthodox. The two lead banks are JP Morgan and BAML with Wells Fargo and Canaccord as co-managers. Not a bad line up but the “mesh” of these firms seems odd. Not a red or even a yellow flag though.
Penumbra is a traditional medical devices company that sells their products directly to hospitals through their own in-house sales teams. Most of their business is in neuro which is growing about 30% but peripheral vascular is growing at 100% YoY and helping to drive the current growth of 40%+. We expect the vascular category to continue at this rate for at least another year or two. Because Penumbra has a fairly diverse product line they have have some ability to react to market shifts so that they can remix their sales priorities to meet expectations.
Competition is scary but given in how the company has executed in the last several years they have proven their ability to launch products, generate revenue and make money against the a field of competitors that includes Johnson and Johnson (NYSE:JNJ), Medtronic (NYSE:MDT), Stryker (NYSE:SYK), and Boston Scientific (NYSE:BSX). These companies all demonstrate that very high margins and returns are possible in this market and tend to be acquisitive. So if Penumbra continues to execute they are a probably M&A target.
The proposed price range of $25 to $28 gives the company a pretty full valuation of $800M or about 6.4x sales. However as our IV model below illustrates it’s reasonable to see the shares at $34 in the near-term and $47 next year if execution continues to be solid. We’ve been fairly generous in both terms of growth, margin expansion and the multiple but the quality of the story and their history of growth and profitability is a good foundation.
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