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MDXG ~ Fable Of Fact Or Fiction?

Summary

C-Suite has been tossed out on their ass for cause.

MD satisfaction and Patient outcomes are extremely high.

MiMedx is currently restating 5 years worth of financials.

Pete Petit was a lightning rod CEO.

Is MDXG a zero shot, fairly valued or overwhelming value?

Let’s face the facts here, the C-Suite was aggressive on multiple fronts.

Does that mean they are a complete and outright fraud or a zero? My analysis points to an emphatic NO.

I will admit, management was aggressive and more than likely inappropriate dealing with Whistleblowers most directly tied to the unfavorable Veterans Administration news (approximately 10% of overall sales) in both South Carolina and Minnesota. That said, the sole publicly announced outcome is a settlement with a former employee in which said employee admitted he lied in his deposition and paid the company a multi six figure settlement. 

In terms of the unfavorable VA articles as of late, on October 2nd relating to the SC case...the doctors charged have been granted a continuance by agreeing to a pretrial diversion program. Essentially the Government has weighed the costs and balanced the public’s interest in pursuing such a case, likely resulting in charges being dropped.

Relating to the most recent WSJ article, regarding sales to the Veterans Administration dated October 5th, MiMedx has a federal supply schedule that requires the company to offer the lowest price of any of their products to government facilities. These records are audited. The government has access to all MDXG's products and chooses which products to include in the MiMedx supply contract. The VA does not take every product and MiMedx sells other products in the commercial channel. This is standard industry practice. Beyond that, there is a mention of a high prescribing doctor, which if you do the math, is significantly flawed from a number of perspectives.

For some amount of time, MiMedx did employ some very aggressive sales people with shady backgrounds, primarily before 2015. Some internal to MiMedx were against this, others were for it…in the end, their reputation which proceeded them, was the precise reason they were fired for cause in short order.

Based on my research and independent data points, Doctor and Patient satisfaction is and remains extraordinarily high due to the robust clinical results. Some of the statements I’ve heard from doctors and competing salespeople is, “until your products are shelf-stable, provide the same clinical outcomes and offered at a significant discount to MiMedx, I don’t have an interest in entertaining disrupting my practice or my patient’s life”. Moreover, beyond the core wound care market, where they are the undisputed #1 player, there are very compelling and open-ended markets of: Osteoarthritis, Plantar Fasciitis, Athroscopic Surgery, Prostate Cancer surgery and yes, even hair and transdermal augmentation, showing encouraging traction albeit, off label. Moreover, a company whose product does not work, is NOT awarded the coveted FDA RMAT designation (the 15th awarded and fast tracked trial activity) if the product is no more effective than placebo or has NOT shown clinical results superior results to competing products.

As it relates to financials, MiMedx was pressured by some to change from a regional, well-respected auditor to one of the Big 4 firms; they acquiesced. Like EBIX announced Friday (down 19.62% Monday), MDXG changed from Cherry Bekaert and Holland to E&Y. Subsequent, it is rumored that a famous short seller sent an scathing email to E&Y leadership accusing MiMedx of egregious practices, namely “channel stuffing” and other aggressive tactics which were unsavory in nature. Consequently, and following a botched internal investigation, there was enough there to warrant an independent audit by KPMG.

MDXG filed an 8-k on June 7th, 2018 documenting the nature of the investigation, the timing of revenue recognition, the possible implications for financial metrics and that the company is addressing the channel stuffing allegations, primarily related to the VA, but could include other instances as well.

If this is primarily around timing of revenue recognition, and cash balances are kosher, this will be an expensive lesson for employing aggressive sales practices and growing the salesforce aggressively. However you like to slice it, the end result will be, the most comprehensive data set of due diligence a potential acquirer could ask for ~ laying out the good, bad or ugly...based on my research from multiple data points, while not great, it's likely not a material financial restatement when you aggregate the nearly $1B in accumulated sales from 2012-2016.

While a very charitable individual, Pete is no angel and certainly a hard charger. That said, the same could be said for his apparent arch enemy and rival, a self-promoted Chicken Farmer, Marc Cohodes who’s dedicated his life to engaging in war with Pete Petit…if you care to, please reference Marc’s website petite parker the barker

Is MDXG a zero shot? I find it highly unlikely this is the case based on the company buying back close to $120mm worth of stock in the 2 previous years leading up to September 2017 when they had to suspend such, per the audit by KPMG and the fact they continue to expand their headquarters, continue with expensive clinical trials and hire sales people at a torrid pace to the mid-400’s up from the mid 300’s last year at this time. Any self-respecting sales representative, at this point in MDXG’s history, does NOT to flock to a name riddled with this much apparent controversy if...A: the product doesn’t work and B: they don’t get paid respectably for their efforts. The math doesn’t add up to a zero if the company, per a press release dated August 15th, stating the company continues to maintain positive operating cash flow, unless the audit is costing them $100mm, which is highly unlikely.

Fair value? I guess if you think growth is flat or low to mid-single digits. Yes, just over 2x’s EV/Sales might be appropriate, but all my research points to growth well into the 20%+ range while significantly handicapping historical growth rates with sales hiring is at a 30%+ clip, so I don’t know where sales growth is, but it doesn’t appear to be flat.

Overwhelming value? Perhaps…if the company is simply moving revenue from one quarter to the other, the cash is good, sales were NOT overstated in a material way, they can be given a stamp of good standing by E&Y/KPMG and growth has been maintained at 20%+ while facing the multiple headlines/headwinds….well then I would argue we are looking at a name for value/growth/long-term investors which represents a very compelling 3-5x return over the next 12-24 months. This return could potentially come earlier, given the 60% short interest, depending on what the company can communicate relating to 2018 YTD sales or additional settlements/benign/better than feared outcomes on the VA/Whistleblower/Audit etc. fronts.

Last and not least, MDXG would be a very attractive M&A candidate based on sales headcount, enviable product/growth portfolio and new end markets served.

In short, it seems the company is taking the necessary actions to “clean house” per the most recent “firings for cause”, the SC VA development, most recent request to dismiss Relator’s case (yet another Whistleblower), to which there doesn’t appear to be anything egregious and beyond industry standard sales tactics whether that be pharma, biotech or the med tech industry running for nearly 3+ decades.

As the old saying goes, time will indeed, tell...best to all!

Disclosure: I am/we are long MDXG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Full-Disclosure ~ I've known this company for 10 years, was not a shareholder until March and then added in June, but not in July when the bottom fell out due to an overweight position. My cost basis is breakeven at current levels.