Penumbra, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter ended September 30, 2015; comparisons are to Q3 and the first nine months of 2014 unless stated otherwise. Penumbra designs, manufactures and sells interventional medical devices in neuro and peripheral vascular markets. The company completed its IPO on September 23, 2015.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $50.4m | $32.5m | $131.7m | $90.1m |
| Gross profit / margin | $33.5m / 66.4% | $20.8m / 64.1% | $87.6m / 66.5% | $59.0m / 65.4% |
| Operating income | $2.2m | $0.3m | $2.4m | $2.7m |
| Net income | $0.9m | $0.2m | $0.7m | $1.8m |
| Net income (loss) attributable to common stockholders | $0.3m | $(1.2)m | $0.2m | $(0.9)m |
| Basic / diluted EPS attributable to common stockholders | $0.04 / $0.03 | $(0.25) / $(0.25) | $0.03 / $0.02 | $(0.20) / $(0.20) |
- Q3 revenue rose 55.3%; nine-month revenue rose 46.1%. Neuro revenue increased 34.5% in Q3 and 32.8% year to date; peripheral vascular revenue grew 157.6% and 124.6%, respectively.
- Gross margin improved 2.3 percentage points in Q3 and 1.1 points year to date, which management attributed primarily to product and geographic mix.
- Operating expenses increased: Q3 SG&A rose 61.3% to $26.8m, and nine-month SG&A rose 62.2% to $72.7m, largely reflecting sales and administrative headcount growth, marketing, public-company costs and salesforce travel. R&D was $4.6m in Q3 and $12.5m year to date.
- Cash and cash equivalents were $159.1m at September 30, 2015, versus $3.3m at year-end 2014; working capital was $220.8m. No marketable investments remained at quarter-end. The company reported no outstanding credit facility or other debt.
- Nine-month operating cash flow was negative $12.6m, compared with negative $1.0m in 2014. Inventory growth used $18.0m and accounts receivable growth used $7.4m. Investing activities provided $43.6m, primarily from marketable investment sales; financing provided $125.2m, principally from IPO proceeds.
Material changes and significant events
- The IPO raised $124.8m net of underwriting discounts and offering expenses. The 4.6m shares were sold at $30 each. Existing preferred shares converted into 19.5m common shares at IPO closing.
- Revenue growth reflected salesforce expansion, wider adoption of existing products and new products or indications. Management cited stroke-trial results as supporting neuro procedure growth, and Indigo System expansion as a key peripheral vascular contributor.
- Neuro embolization sales declined year over year, including reduced demand for Penumbra Coil 400; management said it was shifting focus toward the anticipated Q4 2015 launch of SMART Coil.
- Management said IPO proceeds were intended for product development and clinical trials, salesforce expansion, working capital and general corporate purposes. It expected continued investment in products, manufacturing and international expansion, and rising R&D, SG&A and public-company costs. No specific financial guidance was provided.
Risks, contingencies and other items
- Penumbra disclosed potential U.S. and U.K. product-liability claims relating to procedures involving Penumbra Coil 400. No formal complaints had been served. U.S. claimant’s counsel indicated a jury might award $35m, an amount substantially above insurance coverage; the company said it could not assess the claims’ merits and intended to defend them.
- Risks include reliance on single- or limited-source suppliers, product acceptance and competition, regulatory approvals, clinical evidence, inventory obsolescence, sales variability, foreign-exchange exposure and dependence on specialist physicians. One distributor accounted for 11% of revenue in both Q3 2015 and Q3 2014.
- Management stated that cash and other liquidity sources were expected to meet requirements for at least the next 12 months. The filing also disclosed $49.2m of future minimum operating lease payments as of September 30, 2015 and $11.7m of non-cancellable supplier purchase obligations for the nine-month period.
- The nine-month effective tax rate was 65.9%, versus 32.8% in 2014; the company used a discrete tax-rate method because small changes in estimated annual income could materially affect the annual-rate estimate.
Important facts for investors to verify
- Whether rapid growth in peripheral vascular and neuro sales continues, and whether SMART Coil launches as anticipated.
- Whether higher SG&A, hiring, stock-based compensation and infrastructure costs can be absorbed while maintaining operating profitability.
- Inventory levels, cash conversion and operating cash flow, given substantial inventory and receivables growth.
- Developments in the potential Coil 400 claims, including formal filing, claimed damages and insurance coverage.
- Future tax rates, foreign-currency exposure and dependence on key suppliers and the distributor representing 11% of quarterly revenue.