Penumbra, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016; interim financial statements are unaudited. Penumbra designs, manufactures and sells medical devices for neuro and peripheral vascular procedures.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $65.1m | $42.3m | $123.0m | $81.3m |
| Gross profit / margin | $41.5m / 63.7% | $27.4m / 64.7% | $81.4m / 66.1% | $54.1m / 66.6% |
| Operating income (loss) | ($0.7m) | ($3.8m) | $1.2m | $0.2m |
| Net income (loss) | $0.2m | ($2.7m) | $1.0m | ($0.2m) |
| Diluted EPS | $0.01 | ($0.11) | $0.03 | ($0.01) |
- Q2 revenue grew 53.9% year over year. Neuro revenue rose 31.9% to $45.4m; peripheral vascular revenue rose 149.6% to $19.7m. For the half-year, the respective increases were 31.2% and 139.2%.
- Management attributed growth to 43% salesforce expansion, market penetration, new products and indications, and increased stroke procedures following published clinical-trial results. Product prices were substantially flat.
- Gross margin declined 1.0 percentage point in Q2 and 0.5 point for the half-year, which management attributed to product and geographic mix, launches, and hiring and training costs. Q2 SG&A rose 35.9% to $35.9m; six-month SG&A rose 50.1% to $68.9m. R&D increased 30.7% in Q2 and 41.1% for the half-year.
- Six-month operating cash flow was negative $12.6m, versus negative $8.3m in 2015, mainly reflecting working-capital investment, including a $12.0m inventory increase and higher receivables and prepaid assets. Capital expenditures were $3.7m.
- At June 30, cash and equivalents were $13.9m and marketable investments were $125.9m; working capital was $228.1m. Current liabilities were $32.2m. No debt is reported on the balance sheet. Management said available resources should meet liquidity needs for at least 12 months.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance was provided. Management expects R&D and SG&A to increase as it develops products, expands its salesforce and grows operations; further investment in products, manufacturing and international markets is anticipated.
- Management cautioned that quarterly results can vary with selling days, product and geographic mix, competition, regulatory timing, customer orders, product launches, supply costs, inventory write-downs and foreign exchange.
- The company relies on a single or limited number of suppliers for certain components and generally has no long-term supply arrangements. International sales represented 32.4% of first-half revenue; the company does not hedge foreign-currency exposure.
- A product-liability lawsuit concerning a Penumbra Coil 400 procedure seeks compensatory and punitive damages without a specified claim amount. Plaintiff’s counsel reportedly suggested a possible $35m jury award, substantially above insurance coverage. Discovery had recently begun, and the company said it could not assess the merits and would vigorously defend the case. The hospital defendant was dismissed in July 2016.
- Other notable items: foreign-currency translation reduced comprehensive income by $1.9m in Q2; the Q2 tax benefit was $0.6m, with a reported effective tax rate of 148.3%. Management said disclosure controls were effective and reported no material change in internal controls.
Important facts for investors to verify
- Whether strong growth, particularly in peripheral vascular products, continues and converts to sustainable operating profitability and cash generation.
- Whether margin pressure, elevated inventory and operating cash outflows persist as the company scales.
- The status, potential exposure and insurance coverage for the Coil 400 litigation as discovery progresses.
- Supplier capacity and availability, product adoption and regulatory developments, and sensitivity to foreign exchange and quarterly variability.