Penumbra: Impending Lockup Expiration And Short Opportunity

Penumbra Inc. (NYSE:PEN) - Sell or Short Recommendation - $43.25 PT

March 16, 2016 concludes the 180-day lockup period on Penumbra Incorporated. We highlighted this event, along with additional analyses of the recent IPO Penumbra on our IPO Insights platform.

When the lockup period ends for PEN, its pre-IPO shareholders, directors and executives will have the chance to sell their 26 million shares.

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The potential for a sudden increase in stock available in the open market may cause a significant decrease in PEN share price.

Business Summary: Manufacturer of Medical Devices that Address Certain Vascular Conditions

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Penumbra Inc. designs, develops, manufactures and sells medical devices domestically and internationally. The company's portfolio includes neurovascular access devices under the brand names Velocity, PXSLIM, DDc, BENCHMARK, Select, Neuron, and Neuron MAX; and aspiration-based thrombectomy systems and accessories under the brand name Penumbra System, in addition to a stent retriever for certain thrombectomy procedures called 3D. Its Penumbra Coil 400 and SMART Coil are neurovascular embolization coiling systems that treat aneurysms and neurovascular lesions. Its other devices are under the brand names Liberty Stent, RUBY Coil, POD, and Indigo System. The company sells its products through its salesforce and distributors to hospitals in the neuro and peripheral vascular markets. Penumbra, Inc. was founded in 2004 and is headquartered in Alameda, California.

Penumbra will announce fourth quarter and full year 2015 financial results on March 8. Net income for the third quarter of 2015 was $0.9 million versus $0.2 million the same period in 2014.

Solid Financial Performance Further Supports Possible Insider Selling Come Lockup Expiration

For the third quarter ended September 30, 2015, Penumbra reported the following financial results:

• Total revenue grew to $50.4 million for the third quarter of 2015 compared to $32.5 million for the third quarter of 2014, an increase of 55.3%, or 61.0%.
• Gross profit was $33.5 million, or 66.4% of total revenue, for the third quarter of 2015, compared to $20.8 million, or 64.1% of total revenue for the same period in 2014.
• Total operating expenses were $31.3 million, or 62.1% of total revenue compared to $20.5 million, or 63.1% of total revenue, for the third quarter of 2014.

Overview of Management Team, Competition from Boston Scientific, Terumo and Medtronic

Mr. Adam Elsesser is CEO, President, Chairman and Co-founder of Penumbra Inc. He previously served as President of Boston Scientific SMART and President and CEO of Smart Therapeutics. Prior to entering the medical device industry, Mr. Elsesser practiced law as a partner at the law firm Shartsis, Friese and Ginsburg, LLP. Mr. Elsesser received a B.A. from Stanford University and a J.D. from Hastings College of the Law.

CFO and Head of Strategy Sri Kosaraju has served in his position since March 3, 2015. He has over 15 years of experience in healthcare finance, including heading Healthcare and co-heading TMT Equity Capital Markets at J.P. Morgan. Mr. Kosaraju received a B.S. from Massachusetts Institute of Technology in 1999.

Penumbra competes directly with several enterprise-level biotechnology and medical device manufacturers that design and manufacture peripheral vascular and neurovascular products such as Medtronic (NYSE:MDT), Johnson & Johnson (NYSE:JNJ), Terumo, Stryker (NYSE:SYK), and Boston Scientific (NYSE:BSX).

Conclusion: Sell Prior to March 16th

With a strong IPO performance (opening higher than its expected range of $25 to $28 and increasing since - see chart below), PEN insiders could be ready to reap initial profits.

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The diverse group of major pre-IPO shareholders includes ~10 individuals, along with several major funds associated with Fidelity (see footnote in figure below).

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Together, these insiders hold nearly 90% of common shares outstanding.

We suggest selling ahead of March 16th to take full advantage of the possible impending declines.

Our research shows abnormal negative returns of 4.2% in the two weeks surrounding many lockup expirations, particularly for those, like PEN, which have performed well in early trading.