MiMedx: Flying Too Close To The Sun

Like Achilles, the hero who forgot his heel, or like Icarus who, flying close to the sun, forgot that his wings were made of wax, we should be wary when triumphant ideas seem unassailable, for then there is all the more reason to predict their downfall.

― Dwight Longenecker

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We see large undiscounted channel stuffing and kickback risks lurking beneath the surface at MiMedx (NASDAQ: MDXG). This report specifically exposes:

  • Undisclosed related party transactions and entanglements with distributors, including a key MiMedx distributor that has been controlled by an insider. These relationships are especially problematic because secret ties to distributors have featured prominently in historical channel stuffing schemes.
  • Detailed allegations that MiMedx’s channel stuffing scheme relies on at least three more distributors who have undisclosed special agreements involving millions in discounted product and favorable financing terms as “house accounts”. Not only does the alleged scheme now extend significantly beyond the VA, but MiMedx has allegedly manipulated its financials through multiple avenues to hit sales targets.
  • Documents showing that over 40 podiatrists across the country, including the current President of the American Podiatric Medical Association, received undisclosed membership interests in a MiMedx reseller linked to MiMedx affiliates. The HHS Office of Inspector General has declared physician owned distributors as “inherently suspect” in a special fraud alert.

The research mosaic at MiMedx stirs memories of ArthroCare, a medical device company with a similar revenue recognition policy that inflated sales by “parking” millions in product at distributors before period ends. ArthroCare’s fraud relied on a distributor secretly controlled by insiders, which metastasized alongside a scandal involving improper relationships with doctors.

ArthroCare’s channel stuffing was first dismissed by some investors as impacting only a small portion of its business and the CEO initially blamed short sellers before he was eventually sent to prison.

MDXG shares trade at a premium of over 5x sales, even though the business generates minimal profitability.  The risks facing MiMedx investors, in our opinion, are beyond elevated.


MiMedx’s origins date to the 2009 arrival of former Matria Chairman Parker “Pete” Petit shortly after a reverse merger.  After a transformative acquisition in 2011, MiMedx’s sales of its placenta-derived healing products have grown exponentially.

Mr. Petit has frequently touted MiMedx’s remarkable consistency in meeting or beating revenue guidance (25 of the last 26 quarters). Even with shares trading near all-time highs, Petit has complained of supposed “naked short selling”. Yesterday, the company scheduled a conference call for tomorrow morning to address topics including “short selling matters and proactive remedies”.

We fear MiMedx’s growth story is simply be too good to be true.

Last December, two former MiMedx sales employees filed a whistleblower complaint (here) alleging that MiMedx engaged in channel stuffing at VA Hospitals using a distributor named AvKARE.  Because MiMedx recognizes revenues as soon as product is shipped to stocking distributors, as opposed to when the product is implanted, the whistleblowers allege that MiMedx used AvKare’s consignment agreements to hit sales targets by filling shelves with excess product that the “VA did not request or initiate”.

The scheme was allegedly concealed through a secret agreement whereby AvKARE would “provide sales documentation falsely documenting the bogus VA sales” as well as “a dummy purchase order to MiMedx for the bogus sale to the VA”. Publicly available VA Documents suggest that MiMedx and AvKARE even shared a fax number.

According to the whistleblower allegations, some of the excess inventory was intercepted by sales reps and hidden in their home or car. One former MiMedx sales rep we spoke to in a different region than the whistleblowers corroborated this allegation:

“Products being kept at employees’ homes? Yes. Yeah. Absolutely. Yeah. Lots of cases. Yeah. I’ve heard stories, I’ve heard lots of crazy stuff, things buried or just thrown away. Really just stuff that turns your stomach”

Two weeks ago, The Capitol Forum, an investigative news company, issued a report stating it confirmed that “The VA Office of Inspector General (OIG) is conducting an investigation that involves documents related to MiMedx”.

In response, MiMedx issued a press release (one of 21 this quarter) dismissing the Capitol Forum report as “innuendo” and reiterating its contention that the whistleblowers fabricated the allegations to negotiate releases from their non-compete agreements.

MiMedx also disclosed that it is aware of an ongoing VA OIG investigation but declared that the company is not the target of that investigation. But MiMedx stated that one former employee has now pled “the fifth amendment rather than answer questions related to dinners provided to doctors” and that terminated employees have “provided gifts and meals to employees of the VA that potentially result in violations of federal law and MiMedx policies”.

Even though MiMedx says that “there has not been any testimony that the Company’s executives directed anyone to behave in such a manner”, we find this revelation particularly problematic because MiMedx recruited a material portion of its sales team from Advanced BioHealing (ABH).

ABH was the subject of a movie-worthy alleged VA kickback scheme involving falsified expense reports, gold Kruggerands, and cash in envelopes that led to the largest settlement in medical device history and a $650 million loss for Shire (ABH’s owner).

Based on our analysis of Linkedin, a significant portion of MiMedx’s Regional Sales Directors came from ABH.  Two current MiMedx Sales Directors were specifically named in a Qui Tam complaint alleging that they engaged in misconduct at ABH that included, for example, bribing VA doctors to flush product down toilets and falsify charts.

Source: Harvey v. Advanced BioHealing

Undisclosed Related Party Transactions & Alleged Channel Stuffing Outside the VA

Bulls seem to have taken comfort in that, although MiMedx charged off $11.1M in product returns over the past twelve months (a sharp increase), the company did not have to buy back significant amounts of inventory after its AvKARE agreement expired earlier this year.

But our research has also identified deep undisclosed entanglements between MiMedx and multiple other distributors.

Two of these distributors, CPM Medical and SLR Medical, are specifically identified in Florida court documents filed by one of MiMedx’s whistleblowers as having special undisclosed agreements along with an unidentified third having a “house account”.  The allegations (here) that MiMedx’s channel stuffing scheme extends significantly beyond the VA appear to have gone largely unnoticed by investors.

MiMedx’s accounting policy for its stocking distributors is similar to ArthroCare, whereby revenue is recognized as soon as product is shipped (page 9 of 10Q).  Historical channel stuffing schemes have abused this accounting policy to manipulate their financials through secret agreements to generate “sales” merely by shipping excess product to affiliated distributors (see ArthroCare, McAfee, Bristol-Myers).

This is precisely why the anecdote published by the Capitol Forum last month, of an alleged MiMedx scheme to load product onto a truck and be “driven around the corner like it was going to a wholesaler”, is so troubling.

Relationships we have concerns about include:

CPM Medical

The court documents filed by the whistleblower allege that CPM Medical received “significant product discounts as well as exclusive territory rights within Texas, in exchange for CPM Medical placing large orders for MiMedx products at the end of quarters”.

Specific order amounts are included with totals implying that CPM was over a 5% customer for MiMedx during 2015. For example, the whistleblower states that CPM made roughly $2.5 million of purchases immediately before the end of Q1 2015, an order that would have been directly responsible for MiMedx’s ability to meet its guidance of $40.8 million during that quarter.

Source: Palm Beach County Case No: 50-2016-CA-013806-XXXX-MB

If you have already read the SEC’s ArthroCare complaint, this allegation will sound awfully familiar. ArthroCare awarded a key distributor expanded territory rights in exchange for purchases that enabled the company to hit its sales targets.

Source: SEC Complaint

That distributor, DiscoCare, hired a former top ArthroCare salesman to help run the company along with a number of other former ArthroCare employees.

According to the whistleblower’s court filing, the owner of CPM Medical, Mark Brooks, “was personal friends with the MiMedx Vice President of Sales, Mike Carlton”.  An investigator from another investor paid a visit to CPM’s headquarters and asked for Mr. Brooks but was instead referred to a man named Bill Cochrane. Bill Cochrane is a former MiMedx National Sales Director.  

Asked about his role, Mr. Cochrane said he is “a consultant to distributors” before producing a card for a business named “AZ Biomedical”.

MiMedx told another investor that CPM has not generated any revenue for MiMedx since 2015, but Mr. Cochrane estimated that the business has over 100 employees and holds inventory that includes MiMedx product as well as spine & orthopedic hardware.

A web of at least 53 different LLCs are registered to CPM’s Richardson, Texas address as well as two tissue banks, CPM Medical dba AmBioMed and Palm Springs Partners dba Maxim Surgical. Both of these have filed FDA registrations that disclose storing and distributing unspecified amounts of MiMedx product.

We also discovered that CPM has an undisclosed OEM agreement to sell MiMedx products under the “AmbioChoice” trademark.  The most recent tissue bank disclosures for MiMedx, CPM, and Palm Springs Partners each report storing AmbioChoice inventory.

SLR Medical

After CPM allegedly defaulted on its credit line, the whistleblower’s court filings state that MiMedx began to “shift more of its channel stuffing efforts to AvKare and to SLR Medical Consulting”. Then, “SLR Medical Consulting would make end of the quarter orders of MiMedx products at MiMedx’s request on highly favorable financing terms” and was treated by MiMedx as a “house account along with the third unnamed distributor.

Source: Palm Beach County Case No: 50-2016-CA-013806-XXXX-MB

Documents show that SLR is currently owned by a now-former MiMedx Sales Director, Jerry Morrison.  Importantly, documents show that SLR was distributing product even while Mr. Morrison was still at MiMedx.  None of this, of course, has been disclosed to investors.

The FDA inspected SLR Medical in January 2015, a time when Mr. Morrison’s Linkedin says he was a MiMedx Sales Director.  We obtained the inspection records which name Mr. Morrison as “responsible for all operations” and state that SLR was storing and distributing Amniotic product at that time. Mr. Morrison’s Linkedin profile says he has been the President/CEO of SLR since 2010.

Above Left: 2015 FDA Inspection Records. Above Right: An undated photo of Mr. Morrison

SLR Medical’s COO is currently Jayce Holley, the former CFO of Stability Biologics.  MiMedx acquired Stability Biologics in 2016 and, according to his Linkedin profile, Mr. Holley moved to SLR Medical after the MiMedx acquisition.  The whistleblower’s court filing also alleges that excess SLR product was stored at the home of an unidentified former MiMedx employee that went to work for SLR.

SLR Medical is currently registered as a tissue bank housing amniotic product. Its website features MiMedx product and Linkedin suggests that SLR has been actively growing its sales force.

Other Relationships of Interest

Evidence also points to related party dealings involving a distributor named Spinelogix.  MiMedx’s current Texas Regional Sales Director is listed in corporate records as being a partner with SpineLogix in a different LLC named StreamLogix, indicating that a financial relationship exists.

Source: Texas Comptroller of Public Accounts

We also found a large network of other sales entities that report storing and distributing MiMedx product, often from residential homes or obscure locations, especially in Texas.

Our search through FDA records identified a total of 73 tissue banks that have disclosed storing and/or distributing MiMedx product at one point in time, 33 of which remain listed as registered or active in the FDA’s Tissue Bank Database.  We note that this likely understates the actual total because it omits entities who simply have not registered as tissue banks.

Examples include a MiMedx distributor named Arthomed, who says on its website that it has MiMedx territory rights in Florida, with representatives also in Puerto Rico and Central America.  Arthomed has registered with the FDA as a tissue bank that stocks and distributes MiMedx product out of the below residential home, located in the outskirts of Boca Raton.

Above: Arthomed’s tissue bank as seen from Google Street View.

Images of other “tissue banks” that have reported storing and distributing MiMedx product include:

Source: Google Street View

In many cases, it’s unclear to us if the tissue banks storing MiMedx product are distributors, resellers, or sales agents.  Based on MiMedx’s disclosures, it’s impossible to know how much distributors presently contribute to sales and the company has declined to break out the revenue contribution from independent sales agents.

On the most recent earnings call, MiMedx did go out of its way to downplay its reliance on distributors, stating that “sales from distributors are no longer material nor have they been for some time”.

But just weeks later, MiMedx announced that it would divest Stability Biologics, the distributor it had acquired last year. Ironically, MiMedx had acquired Stability in 2016 after allegations surfaced that Osiris, a MiMedx competitor, was using Stability to engage in channel stuffing.

The divestiture includes a new distribution agreement that will give MiMedx ongoing access to Stability’s large network of sales agents that Mr. Petit has previously lauded.  As a result, MiMedx should now be able to begin recognizing revenues as soon as it ships product to Stability, where it previously would have had to wait until the product was used or implanted by physicians.

MiMedx Product Is Sold Through Physician Owned Distributors

Although MiMedx’s 10-K states that “we do not directly sell to or distribute any of our products through PODs”, we discovered that MiMedx product is still sold through PODs.  A Special Fraud Alert issued by the HHS Office of Inspector General declared that PODs are “inherently suspect under the anti-kickback statute” (“AKS”).

Most notably, documents show that over 40 podiatrists across the country received membership interests in a MiMedx reseller named Fuse Medical that is linked to MiMedx affiliates.

Fuse Medical is a penny stock (OTC: FZMD) registered to CPM’s address and Mr. Brooks. Bill Cochrane told an investigator that he is also involved in Fuse.

According to its SEC Filings, Fuse derives most of its sales from amniotic tissue which is specifically listed in an exhibit as being MiMedx product.  Fuse discloses contracts with both SLR Medical and CPM Medical to purchase the product which Fuse then resells to hospitals and surgical facilities.  It appears the agreement with SLR was recently not renewed, leaving CPM as the principal supplier of Fuse.

Source: Fuse Medical 10-Q Filed 8/10/2017

Fuse Medical was created through a reverse merger of various physician owned partnerships.  A 2014 SEC comment letter reveals that the podiatrists exchanged their partnership interests for membership interests in Fuse Medical, with the doctors typically paying $100 along with a contribution of “general consulting services”.  Fuse’s 10-K explains that it “intends to utilize the ‘small investment interest safe harbor’ in the AKS [Anti-Kickback Statute] as a business model”.

The list of Podiatrists (variously obscured through LLCs) includes prominent doctors such as the current President of the American Podiatric Medical Association.  We have yet to find an instance where a listed Podiatrist has disclosed their Fuse Membership interests on OpenPayments, a website where doctors make financial disclosures pursuant to the Affordable Care Act. (Note: we are not alleging or implying that any Podiatrists have engaged in wrongdoing).

In light of the OIG’s Special Fraud Alert, we struggle to understand why podiatrists across the country would become involved in such a seemingly small MiMedx reseller like Fuse, which reports negligible amounts of revenues in its SEC filings.  Especially since the OIG specifically warned of “suspect characteristics” that include PODs resembling “a shell entity”.

We were able to get in touch with two of the Podiatrists named in the filings, but they were reticent to provide much detail. Both confirmed they are stockholders of Fuse and said they purchased MiMedx product directly from MiMedx and not Fuse.  One of the Podiatrists indicated that “Fuse has basically gone by the wayside” because of an unspecified “falling out” that led to “ongoing legal matters between the investors and the owner of the company”.