Wed, Dec 16, 2020|Whitney Tilson

Penumbra recalls catheter; Loop's 'Independent Review' of Its Technology Falls Flat; Fashion Mogul Peter Nygard Indicted on Sex-Trafficking Charges; Why I bought winter tires for my car

My friend and former student Gabriel Grego, of Quintessential Capital Management, just released a short report on medical-devices maker Penumbra (PEN). You can read it and watch his 37-minute interview with famed short-seller Carson Block here...

I haven't independently verified Gabriel's work... but knowing him and his track record, I have no doubt that his report is correct – which is bad news for a high-flying stock trading at 16 times revenue.

Stunningly, PEN shares rose 7.7% that day to close at $261.15, as investors apparently chose to believe management rather than read Gabriel's report.

Big mistake, as the stock has been going straight downhill ever since – falling by almost $100...

The latest news hammering the stock today is that the company has finally done what it should have done long ago: recall its JET 7 Xtra Flex catheter. As Gabriel documented, this device has been failing at an alarming rate, killing at least 14 patients.

Here's the company's press release: Penumbra Announces Penumbra JET 7 Reperfusion Catheter with Xtra Flex Technology Voluntary Recall.

And here's the U.S. Food & Drug Administration's ("FDA") even stronger statement: Penumbra's Urgent Voluntary Recall of JET 7 Catheters with Xtra Flex Technology Due to Increased Risk of Mortality and Serious Injury – Urgent Letter to Health Care Providers. Excerpt:

The FDA has received over 200 medical device reports ("MDRs") associated with the JET 7 Xtra Flex catheter, including deaths, serious injuries, and malfunctions. Twenty of these MDRs describe 14 unique patient deaths, which include reports from different reporting sources for a single adverse event. Other MDRs describe serious patient injury such as vessel damage, hemorrhage, and cerebral infarction. Device failure modes reported in the MDRs include ballooning, expansion, rupture, breakage or complete separation, and exposure of internal support coils near the distal tip region of the JET 7 Xtra Flex catheter.

Bench testing performed by the manufacturer, where the catheter distal tip is plugged and pressurized to failure, demonstrates that the JET 7 Xtra Flex catheter is not able to withstand the same burst pressures to failure as the manufacturer's other large bore aspiration catheters used to remove thrombus in acute ischemic stroke patients.

Both press releases say that the recall was "voluntary." Yeah, right! I have no doubt that, thanks to Gabriel's report, the FDA – after looking into this situation – told the company: "You either voluntarily recall this defective product immediately or we're going to force you to."

Don't even think of bottom-fishing this stock. Not only does it still trade at 12 times revenue, but Gabriel promised in a press release last night that there are many more shoes to drop:

We hope that our activity will remind the public about the critical role of short sellers in promoting transparency and accountability in corporate America.

Our mission is not over yet: we have reviewed evidence suggesting that the JET 7 issues may just be the tip the iceberg of the extensive malfeasance at Penumbra. We intend to share such evidence with the public at the appropriate time and we will not rest until any responsible parties are brought to justice.

2) Following up on a similar saga, in my October 14 e-mail, I wrote:

Nate Anderson of Hindenburg Research – who wrote the report that exposed deception – released another short report yesterday on plastics recycler Loop Industries (LOOP), which crashed the stock by 33%.

Yesterday, he published this: Loop's 'Independent Review' of Its Technology Falls Flat. Here's the summary:

Two months ago we questioned Loop Industries' "revolutionary" process for recycling PET plastic that it claimed was "disrupting" the industry. Yesterday, Loop published an "independent review" that seems to indirectly confirm that its technology isn't effective or economical.

Loop claimed in its Q2 2020 SEC report that its new recycling process has "consistently high monomer yields, excellent purity, and improved conversion costs."

But Loop's "independent review" of its process immediately admits that the verification "was not intended to certify the yields or economic viability of the technology of the process." These omissions render the analysis largely meaningless.

As a hypothetical to illustrate this point, what if a company pays $1 trillion to process a warehouse full of PET plastic to achieve an end product that's "pure" but also the size of a dime? Information on purity without cost and yield is incomplete to the point of being irrelevant.

A former Loop employee told us that without quantitative details on the process yield "the results mean nothing." They pointed out that the testing left "a lot of room for interventions... from Loop's team."

Our 30-year chemistry expert called Loop's independent review "non-technical marketing material," "very misleading" and concluded that "implying that is easy, inexpensive, and cost effective based on their released information is just wrong."

The review was run on four total batches of Loop's process, yet data for several of these batches is reported with glaring inconsistencies or, in the case of one base chemical, incompletely reported.

Buried in the exhibit of the 8-K filed Monday and not included in Loop's press release was the review's finding that "some operations" required "minor interventions" that would "have to be addressed at commercial scale." With these issues arising at just a pilot scale, we believe an attempt at commercialization would prove to be a fruitless boondoggle.

Our original report asked management 15 questions, ranging from why Loop's initial funding was facilitated through a convicted stock felon to why the company's two top scientists were in their 20s with no post-graduate education in sciences. Those questions all remain unanswered.

It appears the market may have already started to figure out what we reveal in this report, as Loop stock has fallen precipitously since the company released the "independent review."

We remain short Loop's stock with a price target of $0 and continue to strongly believe that Loop's claimed technological advancements do not exist.

As with Penumbra, don't be tempted to bottom-fish this stock...

3) In my October 29 e-mail, I wrote:

I'm glad that Peter Nygard is finally being exposed as a sexual predator... How a Neighbors' Feud in Paradise Launched an International Rape Case.

I'm pleased to report this news from yesterday: Fashion Mogul Peter Nygard Indicted on Sex-Trafficking Charges. Excerpt:

Peter Nygard, the Canadian fashion executive, has been charged with sex trafficking, racketeering conspiracy and other crimes that involved dozens of women and teenage girls in the United States, the Bahamas and Canada, federal prosecutors in Manhattan said on Tuesday.

Mr. Nygard, 79, used his company's influence, its money and its employees to recruit adult and "minor-aged female victims" over a 25-year period for the sexual gratification of him and his associates, according to a nine-count federal indictment. He was arrested in Winnipeg, Manitoba, on Monday at the request of the United States under an extradition treaty, the U.S. attorney's office in Manhattan said.

The women Mr. Nygard is accused of targeting often came from disadvantaged economic backgrounds and, in some cases, had a history of abuse. Mr. Nygard sexually assaulted some of them, while others were assaulted or drugged by his associates "to ensure their compliance with Nygard's sexual demands," the indictment said.

Mr. Nygard's lawyer in New York, Elkan Abramowitz, declined to comment on the charges. Jay Prober, his lawyer in Winnipeg, vehemently denied the charges against his client. He said Mr. Nygard, now being held in a Manitoba jail, expected to be vindicated.

In February, the New York Times detailed how a long, ugly feud between Mr. Nygard and his billionaire neighbor in the Bahamas had led to a lawsuit accusing Mr. Nygard of sexually assaulting minors there. Interviews with dozens of women and former employees described how alleged victims were lured to Mr. Nygard's Bahamian home. The article documented a pattern of complaints about him stretching back 40 years and showed how he had used his money and threats to silence alleged victims.

The indictment features some of the same allegations as the lawsuit, filed in New York in February. More than 80 women, from the Bahamas to Denmark, have signed on as plaintiffs.

Mark my words: Nygard will spend the rest of his life in prison, where he belongs!

4) With the first big snowstorm of the season due to hit the Northeast this afternoon, I wanted to share this e-mail that I sent to friends and family recently...

Susan recently took our car (a 2018 Volvo XC60) to the Volvo dealership for its regular servicing, and they told her it needed new tires, which would cost more than $2,000.

Fortunately, she said no for three reasons: 1) Costco Wholesale's (COST) tire center charges less than $1,300... 2) they measured the tread and said our tires don't need replacing – we can get another season out of them... and 3) it prompted me to do some research about whether we should get a second set of winter tires for the upcoming season.

Having a second set of tires is expensive (especially if you buy wheels/rims, as I did), it's going to be a hassle to change the tires twice a year, and an extra set of tires takes up a lot of room in our storage bin in the basement of our apartment building.

So why do it?

One word: SAFETY!

I've become a total car safety zealot ever since Susan fell asleep at the wheel three years ago this weekend and got in a frightening accident – one of a half-dozen serious accidents that various friends and family of ours have been in, resulting in numerous terrible concussions and, tragically, two deaths. I wrote about it in this article: Why you should get a new car.

The evidence is clear: Winter tires aren't a little safer – they're a lot safer if you do any amount of driving on snow and ice. This New York Times article, What's on Your Car? Winter Tires, We Hope, explains three reasons why:

Unlike all-seasons, winter tires have an increased tread depth that helps channel away snow and slush and improves traction by packing snow in the tread grooves for what Bridgestone, the tire company, calls "snow-on-snow" traction. The idea is to take advantage of the stickiness that makes snowballs hang together.

More noticeable are the many added small slits, called sipes, in the tread surface. The sipes help the tire by presenting more edges that can dig into the snow for grip. Smaller voids in the rubber surface help to disperse the layer of water that often lies over snow. That's also a significant benefit when the surface has turned to ice, like it's done this winter.

What you won't see, though, is the rubber chemistry tailored to cold-weather duties. Winter tires are engineered with softer compounds to remain flexible at far lower temperatures. While a summer performance tire becomes stiffer and loses grip as temperatures dip toward freezing, a winter tire stays pliable, making it superior even when the roads are dry.

Winter tires' superiority is obvious if you simply look at the tires – here's a picture I took of our original all-season tire that came with the car (on the left, wrapped in plastic, ready to go into storage) and the new winter tire just installed on our car on the right:

Now watch this 3:20 video and read this related article: Are Snow and Winter Tires Worth It? It tests a new car with all the latest safety features like anti-lock braking and all-wheel drive accelerating, turning, and braking on a skating rink – the only difference is the tires. Going a mere 12 mph, it took 57 feet for the car to come to a stop with all-season tires vs. only 34 feet – 40% less! – with winter tires. And going around a corner at an even slower 11 mph, the car without winter tires skidded out of control.

Below are pictures of me with Foster, who took great care of me at the Costco Tire Center in Teterboro, New Jersey, and of our car with the tricked-out new wheels/rims that Susan picked out. (I decided to buy them so that I'll be able to change the tires rather than having to go to a garage.)

Best regards,

Whitney