MiMedx Group Inc. | MDXG

Prescience Point is long shares of MiMedx Group (OTC: MDXG), a Georgia-based maker of amniotic tissue grafts that has been the subject of relentless scrutiny and negative headlines for over a year. As frequent publishers of short-biased research, we believe short-selling is vital to the markets and agree with critics that MiMedx has engaged in wrongdoing. But we disagree on the extent of that wrongdoing, and believe that the company will overcome its current challenges and eventually thrive again.

For over five months, we have applied our forensic due diligence process to deepen our understanding of the extent of the company’s misbehavior, the consequences that might result and the future prospects for the business. We have spoken with former employees, large current MiMedx customers, industry and legal experts, competitors, physicians and others.

What we developed is a picture of the company that looks wholly different, and much more positive, than the prevailing public narrative. As such, we believe that MiMedx shares offer one of the most attractive investment opportunities we have ever identified. Based on conservative assumptions, we estimate that the company’s shares are worth roughly 4x the current share price. Further, we believe that over the long-term MDXG’s share price has the potential to retake or even exceed its all-time high of $18.25.

Some highlights from our report:

• Our analysis indicates that the chances of MDXG filing for bankruptcy are remote. MDXG has zero debt, had $33m of cash as of 12/31/2017 and has a highly flexible cost structure which enables it to generate strong FCF at much lower revenue levels. Even in an unlikely scenario where revenue contracts by 50% to around $200m in FY 2019, we project that MDXG will still have >$20m of cash remaining when its restatement process ends.
• Our investigation indicates that the majority of MDXG’s product sales are legitimate and sustainable. While MDXG likely did engage in channel stuffing, it appears to have amounted to just a small portion of revenue carried out at quarter-end. While we acknowledge that certain rogue sales staff may have participated in physician inducements on a one-off basis, we found zero evidence of widespread bribes / kickbacks.
• Despite more than a year of investigation, critics have failed to produce any smoking guns to support their claims of massive fraud. No internal documents or emails, or other direct evidence proving the existence of 1) a widespread inducement scheme, or 2) multiple years-worth of product stuffed in the channel have been produced. Furthermore, no key whistleblowers have alleged that MDXG has committed massive fraud. Instead, their allegations are centered around end-of-quarter channel stuffing.
• According to numerous former employees and physicians with whom we spoke, MDXG’s allograft products are some of, if not the best, in the industry. Given this, along with the fact that competitors Osiris and Organogenesis generate hundreds of $millions of revenue with products of similar or lesser quality, the claim that the vast majority of MDXG’s sales are fraudulent appears quite far-fetched.
• Concerns over the potential loss of the VA as a customer are overblown, in our view. MDXG remains on the Federal Supply Schedule and, according to MDXG’s IR department, continues to sell to the VA. Even if the VA stops purchasing from MDXG, our research indicates that the VA only comprises around 10% of sales.
• The government is highly unlikely to levy a fine that will force MDXG into bankruptcy. According to an expert on government enforcement actions, DOJ and SEC fines have been considerably dialed back under the current, more corporate-friendly, administration. Furthermore, regardless of administration, the government almost never kills companies due to the resulting negative impact on shareholders.