Catheter-Linked Death Jolts Penumbra, a Target of Short Sellers

(Bloomberg) -- Penumbra Inc. assured the public last summer that it had addressed a problem associated with its specialized catheter that was linked to the deaths of more than a dozen stroke patients. Then came another fatality linked to the product.

The latest death associated with the Jet 7 Xtra Flex, a clot-removing catheter, was made public on Wednesday. It has fed an argument by some short sellers that the system -- approved by the U.S. Food and Drug Administration last year in an accelerated process -- has significant defects that will create legal liabilities for the company.

Shares of Penumbra declined more than 5% on Wednesday on the news. They’ve rebounded almost completely since then.

One short seller who’s been critical of Penumbra and stands to profit if its shares decline in value, Gabriel Grego of Quintessential Capital Management, has called for the company to withdraw the product from the U.S. market.

“The latest death caused by the Jet 7 device clearly indicates that the system is still critically unsafe despite the late and insufficient labeling changes introduced last July and makes the case for a product recall solid as rock,” Grego wrote by email.

“We have full confidence in our product which has been used in tens of thousands of cases to successfully remove clot from ischemic stroke patients,” a Penumbra spokeswoman, Gita Barry, said in a written statement. “Penumbra updated its instructions for use in accordance with its procedures that follow quality system regulations and other international standards.”

The company’s shares have fallen from their high of $273 just a few weeks ago, slumping to $191 on Thursday after the fatality disclosure and then rebounding to $208 in Friday trading. Overall, Penumbra’s stock price has climbed more than 500% since the company went public in September 2015.

Several Penumbra executives sold shares of the company around the time of last month’s highs. Bose Arani, a co-founder and the company’s “chief innovator,” sold a total of 10,000 shares between Nov. 5 and Nov. 9. The company’s president, James Pray, sold 5,000 shares on Nov. 17. Adam Elsesser, the chief executive officer, sold 8,000 shares on Nov. 11, consistent with his other monthly sales throughout the year.

The company says that all of those sales had been scheduled in advance based on long-term trading plans.

The latest death was reported to a voluntary FDA disclosure site on Nov. 4. It was shared with Penumbra on Nov. 17 and made public this week. It brings the total number of reported deaths attributed to the product to 18, with 15 occurring in the U.S. and three in Japan.

The FDA approved the Jet 7 system in June 2019. Over the next year, the agency said in a statement to Bloomberg News, it referred to “adverse events” related to the product. It then “asked the manufacturer to further evaluate the events and to modify their product labeling to help mitigate the events,” the statement said.

The FDA then advised Penumbra to issue a notice to doctors and health care providers. In the notice issued over the summer, the company made no mention of the fatalities that had been linked to the product but warned that injecting contrasting dyes into the catheter could result in injuries or death. The FDA gave its blessing to that statement.

Grego, the short seller, said the original instructions for use, issued the year before, warned doctors only against using any automated equipment for the injection of fluids. It didn’t advise doctors against making syringe injections by hand into the device. The new guidance says that doctors shouldn’t inject dyes through the catheter at all.

Barry, the Penumbra spokeswoman, didn’t address that contention in her statement.

In Japan, Penumbra’s partner paused distribution of the Jet 7 in June, the company told investors. It said it hoped to get the product back on that market once Japan’s regulator approves language similar to the FDA-approved wording on how the product should be used.

The majority of the deaths linked to the Jet 7 system occurred after fluids were injected through the catheter by doctors by hand, according to the disclosures in the FDA database, which is used by doctors. In some cases, weak sections of the catheters ballooned before bursting; in other cases, the ends of the catheters snapped off, the records indicate.

In the FDA’s statement, the agency said it “continues to carefully monitor the performance of the device and will take additional actions and notify the public if necessary.”

The company has previously come under scrutiny by short sellers, including Spruce Point Capital Management LLC in July 2019.

Penumbra short interest as a percentage of float peaked in mid-October at 14% and is currently at 13.7%, according to S3 Partners. Short interest in Medtronic Plc and Stryker Corp., which make competitors to the Jet 7 system, is under 1%.

In September, Stryker recalled a catheter system that competed with the Jet 7, citing one fatality linked to the product. A Stryker representative didn’t immediately respond to a request for comment.

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