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Penumbra Inflates Discount Rate, Understates Lease Liability by Nearly $9 Million
Medical device company uses a discount rate much larger than its peers.
February 25, 2021
In the two years since Penumbra (PEN), a medical device company, adopted a new accounting standard requiring companies to recognize operating leases on the balance sheet, the U.S. 10-Year Treasury declined approximately 66%. However, the rate by which Penumbra discounts future operating leases declined just 0.64%.

In its 2020 10-K, Penumbra disclosed in the footnotes that it discounts operating leases by 6.16%. This rate is significantly higher than Penumbra’s medical device company peers, which report the following discount rates in their 2020 10-Ks:

-Abbott Laboratories 3.2%
-Edwards Lifesciences 2.7%
-Boston Scientific 2.4%
-Stryker 2.57%

Using an inflated discount rate hide’s a firm’s true liabilities from investors.

Penumbra has $64.4 million in future operational lease obligations. The present value of those obligations, according to Penumbra, is $48.8 million. If we use the blended average discount rate for Penumbra’s peer group— 2.7%— we calculate a lease liability of $57.4 million. It means Penumbra is understating its lease liabilities by nearly $9 million, or 14% of its future operational lease obligations and 4.8% of total liabilities.

Separately, in the event of an adverse event with one of its products Penumbra is required under Medical Device Reporting (MDR) laws to file an adverse event report with the FDA which the agency makes public. Penumbra is required to file MDRs if its products may have caused or contributed to a serious injury or death or malfunctioned in a way that could likely cause or contribute to a serious injury or death if it were to recur.

In December 2020, Penumbra recalled its JET 7 Xtra Flex based on the risk of unexpected death or serious injury while used for removing clots in stroke patients. The MDRs filed in connection were the basis, in part, of a report published by a short seller before Penumbra's catheter was recalled.

In its 2020 10-K, Penumbra adds new language that seems to suggest it goes above and beyond its reporting requirements:

“Our approach has been to file MDRs even in cases where reporting might not otherwise be required out of an abundance of caution.”

Penumbra warns that publicly available medical device reports, as well as what Penumbra calls short seller attacks, may harm the company’s reputation. Penumbra’s latest annual report mentions short selling 17 times, up from zero the year before. In its 2020 annual report, Penumbra suggests more short seller reports may be forthcoming:

“We have been in the past, and may continue to be in the future, subject to such attacks by short sellers.”

Prior to the recall, which cost Penumbra $18.4 million, one of the criticisms of CEO Adam Elsesser is that Penumbra did not act quick enough in pulling the catheter from the market. Interestingly, Elsesser was not mentioned by name in the warning in Penumbra’s 2019 10-K regarding the company’s dependence on key personnel. However, the company’s latest annual report adds Elsesser’s name and seems to suggest he is particularly crucial to the company:

“We believe that our future success is highly dependent on the contributions of our executive officers, particularly Adam Elsesser, our chief executive officer and president…”
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