MiMedx: Not What The Doctor Ordered

| About: MiMedx Group (MDXG)

Summary

Company hands out over 1 million shares of stock and options worth over $7 million to doctor consultants and medical advisory board members.

Practices raise ethical questions, risk of federal violations that have damaged other companies.

Company market cap of about $740 million greatly exceeds estimated $500 million “skin substitution” market.

Doctors, insiders, employees hold options/warrants on over 16 million shares of stock at 90 cents to $2.46.

Analyst slaps MiMedx with lack-luster “market perform” and notes looming uncertainties, issues.

Human placenta products peddler MiMedx (NASDAQ:MDXG) is handing out company stock like candy to doctors who "evaluate technologies" or act as consultants, TheStreetSweeper has learned.

One doctor got tens of thousands of shares of common stock without paying one single dime. Another prominent doctor on the company's medical advisory board received options on 200,000 shares.

The company has doled out roughly 1.2 million shares of stock and options to its influential doctor friends - shares now worth more than $7 million - as its chief executive, Parker Petit, prepares to go on trial perhaps as early as next month for an alleged insider trading scheme.

Despite that, the company's stock price is screaming, shoving the market cap into the stratosphere. The company is now valued at about $740 million, much higher than the entire "skin substitution" market estimated at $500 million.

Paid to do what?

MiMedx uses doctors in speaking bureaus, consulting and research. But filings also say doctors educate others about "the efficacy and uses of our products." MiMedx's business turns mothers' placental membranes into "EpiFix" material used to cover injuries such as burns and diabetic foot sores, as well as "AmnioFix" for internal coverage uses such as spinal surgery and tennis elbow.

The company's filings - pages 14 and 15 - describe some doctors' duties this way:

"… speaking to payers about our products in support of our reimbursement efforts."

The company also works with doctors "who may order our products or make decisions to use them," according to this filing.

TheStreetSweeper asked the company for more details about the medical advisory board, including whether MiMedx encourages doctors to use their products. We got some answers back by email.

"Our selection of advisory board members is unrelated to their use of our products," said the company's lawyer, Roberta McCaw.

MiMedx uses doctors to help deliver exciting business deals while it tiptoes past kickback and false claims laws, suggests page 28 of this filing. But news reports show even big pharma sometimes fall down the slippery slope into an embarrassing, expensive legal hole that MiMedx could ill afford.

Just last November, Johnson & Johnson agreed to a $2.2 billion deal to settle government charges on false marketing claims and paying kickbacks to doctors.

Doctors get cheap stock

For investors, there's also a personal piece to the problems inherent in MiMedx's fraud lawsuit-saddled chief executive's use of the medical advisory board.

Unlike the average investor, some lucky doctors have had the option to buy their stock for virtually pennies-on-the-dollar. The doctors now also get paid on a services rendered basis, though the company lawyer wouldn't give details.

In recent years, each doctor is granted options to buy 15,000 shares of stock vested over three years upon joining the medical advisory board, which has been whittled down to about 14 members. So docs who joined in say, 2013, paid an average market value of $3.08 for their options, while those in 2011 paid only an average 63 cents.

MiMedx wasn't selling a nickel's worth of product several years ago. Back then, in 2008, the company had more than 30 "key physician opinion leaders" on the company's advisory board. The doctors' retainers ranged from $35,000 to $125,000 yearly and were allowed to snap up thousands upon thousands of shares for $1 to $2.40 apiece, filings show.

One doctor, who has since left, joined the advisory board and was handed 50,000 shares of common stock - absolutely free.

Two doctors, who have since left the board, received options to buy 50,000 to 100,000 shares apiece for just $1.80 each.

Recent information is sketchy because doctors' contracts typically have not been filed with the Securities and Exchange Commission in the last couple of years.

"Our agreements with them are not material to our business and are not required to be disclosed," said the lawyer, Ms. McCaw.

When asked why the company stopped the more transparent practice of filing such contracts with the SEC, the company's lawyer took the time to write: "Unfortunately, I don't have time to educate you on public company disclosure rules. Suffice it to say that we have not changed our disclosure practices to be less transparent. The concept of what is a material agreement is determined at the time disclosures are required."

Money, reputation, Medicare funding at stake

We are not saying MiMedx is doing something illegal. Illegal payments are generally those that can be linked to a doctor's use of a certain device and violate federal kickback laws - whether payments and benefits are intended to induce doctors to use company products.

Bioethicist Arthur Caplan told TheStreetSweeper that it is not always wrong in his view to be a consultant for a medical company.

"What is wrong is to be paid to endorse or market products that a company is selling," said Mr. Caplan, PhD and New York University Langone Medical Center's medical ethics division director.

"Doctors should not be shills for pharma, biotech or device companies," he said.

"Serving on a DSMB (data and safety monitoring board) or working cooperatively to bring a product to market is one thing," he added. "Acting as a paid spokesperson to promote a drug or device only for the money is quite another."

Industry generally argues companies' payments to doctors can be a pathway toward better health.

But critics say the financial ties can unduly influence medical decisions, make healthcare more expensive through the encouragement of non-generics and keep patients in the dark about their doctors receiving these payments tied to medical device companies.

TheStreetSweeper has requested interviews with doctors tied to MiMedx in hopes of getting details, including whether they disclose these financial ties to patients. They have not responded. Investors may find other positive and negative takes on MiMedx here.

One of MiMedx's most prominent advisory board members, Dr. Thomas Zdeblick, a boyish-faced Wisconsin surgeon made The New York Times - and got first-hand knowledge of the problems that can develop from this touchy subject.

Dr. Zdeblick was paid $400,000 a year by Medtronics under a consulting contract that required him to work just eight days a year, the Times article noted. Those payments stopped in 2004 but that didn't make the situation any less trying when it hit the spotlight two years later. Dr. Zdeblick also did not respond to our request for comment.

Company filings note that such financially tied relationships could damage MiMedx's and doctors' reputations and, if found to be illegal, ultimately lead to fines, and civil/criminal penalties. Another business-killing risk is that the company "could also be excluded from federally funded healthcare programs, including Medicare and Medicaid, for non-compliance."

The last thing MiMedx would welcome now is more scrutiny from a federal agency that's already sharpening its teeth to attempt to convince the court that MiMedx leader, Mr. Petit, has broken federal securities laws.

Warrants, options

The company's insiders, employees, consultants and paid doctors all hold options and warrants to purchase tons of MiMedx stock as of the end of the year. A whopping 16.6 million shares.

These shares were super cheap. The stock sells for around $7 now. But those shares' exercise price range from an average of $2.46 down to just 90 cents each.

Concerning issues ahead

Just this week, a Northland Capital Markets analyst bloodied MiMedx's nose with a rather bearish report that slaps the company with a lack-luster "market perform."

The analyst's channel checks uncovered issues ahead, partially because the company's EpiFix use is now driven by "favorable billing, not necessarily clinical outcomes."

While the company should not miss numbers this year, he wrote: "The fear though is that beginning next year EpiFix would run into the same issues as other tissues are going through currently."

Under the new insurance plan changes forced by healthcare reform, he noticed an alarming but understandable worry. Target patients with foot ulcers and other wounds are finding that, without supplemental insurance, they're facing thousands of dollars in out-of-pocket costs when doctors use a skin substitution product on them. This is creating, he said, "a pause in the marketplace."

Conclusion

With MiMedx stock prices screaming near record highs - against the uncertainty of the CEO's fraud lawsuit, MiMedx's propensity to thumb its nose at federal regulators and investors, the market cap exceeding the estimated skin market, the lack of transparency, the looming market issues and now our exposure of those doctors' cozy payments - MiMedx is not what the doctor ordered.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: * Important Disclosure: The owners of TheStreetSweeper hold a short position in MDXG and stand to profit on any future declines in the stock price.•Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to scolberg@thestreetsweeper.org.