(Bloomberg Opinion) -- This is the second of two columns about MiMedx and the short-sellers. Read the first here.
Most of the time, Eiad Asbahi, the 40-year-old founder of Prescience Point Capital Management, is a short-seller.
According to its website, the firm, based in Baton Rouge, Louisiana, specializes “in extensive investigations of difficult-to-analyze public companies in order to uncover significant elements of the business that have been overlooked or ignored by others.” Such investigations usually lead to the discovery of problems that will cause the stock to fall once they become known.
“But every now and then,” Asbahi says, “we find a company that is incredibly hated and where the shorts have it wrong.” SeaWorld Entertainment Inc., which has been hammered for its treatment of its whales and dolphins, was one such company. Two years ago, Asbahi bought the stock, believing that “the mispricing was extreme.” He was right. Since it bottomed out in November 2017, SeaWorld’s shares have more than tripled.
On Jan. 8 of this year, Prescience Point released a report about its latest big investment idea: MiMedx Group Inc., a company that was under siege by Marc Cohodes and a handful of other short-sellers. After six months of research, Asbahi concluded that the thesis developed by the shorts — which had helped push the stock from $18 to $1.15 — was wrong.
Contrary to what Cohodes et al were claiming, Prescience Point’s research suggested that MiMedx products were “legitimate and sustainable”; that it had positive cash flow; and that, while “channel stuffing” to improperly boost revenue at the end of the quarter had taken place, the company’s critics had “failed to produce any smoking guns to support their claims of massive fraud.”
“In our view MDXG is one of the largest mispricings we have ever identified,” the report concluded. At the time it was issued, MiMedx stock was at $2.16. Prescience Point predicted that it would quadruple.
When I spoke to Asbahi a few weeks ago — by which time the stock had topped $5 — he went further in his criticism of Cohodes and the other short-sellers. In his view, MiMedx’s stock had tanked in 2018 as much because of what the shorts had gotten wrong as what they had gotten right.
“What we found,” Asbahi said, “is that they had some credible channel stuffing allegations” — and then they made a series of additional, less credible accusations. There was never any bribery or Medicare fraud, Asbahi said. And MiMedx’s products, often maligned by the shorts, were considered “best in class” by many doctors. “It is not a short activist campaign they’re running,” Asbahi concluded. “It is a smear campaign.”
Cohodes’s initial allegations were serious enough that the MiMedx board hired a law firm to investigate. That investigation led to the discovery of the channel stuffing and the dismissal of several top MiMedx executives, including chief executive Parker Petit. But as I noted Monday, even after Petit and the others resigned, Cohodes kept MiMedx in his crosshairs, vowing to take down the company “if it’s the last thing I do.” Once Asbahi released his MiMedx report, Cohodes added Prescience Point to his list of targets.
Within days of the report’s release, Cohodes was tweeting that it was “false & misleading” and that Prescience Point “will be ruined.” He has kept up a steady drumbeat of criticism ever since. Just a few weeks ago, he called Prescience Point a “pump-and-dump operation,” a charge he’s made several times before.
This last allegation is ludicrous. Prescience Point is MiMedx’s largest shareholder, with 7.7% of the stock. In May, it launched a proxy fight that led to the company agreeing to add six new board members. Three of them were Prescience Point’s nominees.
When I asked Cohodes what proof he had to back up the pump-and-dump charge, he replied (via email) that it was his understanding that Prescience Point had purchased the stock at between $6 and $10 a share — and was now “obviously attempting to generate positive interest to make back its investment.” He also said that Prescience Point had sold MiMedx stock after publishing “glowing information about the company.”
In truth, Prescience Point bought the stock at an average price of about $2.60 a share, a fact that can be easily found in government disclosure documents. Although the firm sold some stock, it did so only to avoid triggering the company’s poison pill. Once the proxy fight ended — and the poison pill was a nonissue — Prescience Point bought more stock. “We set up a single-idea fund to invest in MiMedx with a two-year lockup,” Asbahi told me. “Does that sounds like a pump-and-dump scheme?”
Today, MiMedx is a very different company from when Petit was running it. Of Petit’s 16 top executives, 13 are gone. Its new chief executive, Timothy Wright, has been a top level executive at a number of biotech and pharmaceutical companies, including Teva Pharmaceutical Industries Ltd, the big generics manufacturer.
Among the new directors is Richard Barry, a respected health-care investor. He is so bullish about MiMedx’s prospects that he bought 3% the stock.
All of this information is readily available. Yet Cohodes and his allies refuse to acknowledge that MiMedx has changed. Instead they are making the same allegations they’ve been making all along — except louder and more insistently.
Cohodes gave me two reasons. The first, he said, was that the company was still engaged in “criminal activity.” “Doctors have been bribed by MiMedx. And all the perps who carried out the fraud are still there doing it,” he told me.
The second reason, he said, was that MiMedx’s products are deeply flawed. “This is a public health deal. This stuff is so bad, and they are taking advantage(1) of veterans. I have to speak out.”
Let’s examine the bribery issue first. One doctor the shorts have targeted — including online — is Brandon Hawkins, a podiatrist in Bakersfield, California. He is a major buyer of MiMedx’s primary product, a wound graft made from placental tissue called EpiFix. Indeed, Hawkins told me he is probably the fourth or fifth biggest user of EpiFix in California. He has been paid by MiMedx to give occasional lectures, a common practice in medicine, which he discloses. His brother-in-law is a MiMedx salesman. And he lives quite well, something one can glean from the family’s Facebook page.
The MiMedx critics have linked these facts to claim that Hawkins is on the take. But Hawkins says he uses EpiFix for a perfectly sensible reason: It works better than competing wound grafts. “Wounds that would normally heal in 12 to 20 weeks sometimes heal in four weeks with EpiFix,” he said. He added that there is a high incidence of diabetes in Bakersfield, and EpiFix has been an important tool in healing the foot ulcers that often develop in diabetics.
Matthew Garoufalis,(2) a Chicago podiatrist, explained that diabetics are often “so immunocompromised” that their ulcers don’t heal. Studies show that some 20% of diabetics who develop foot ulcers will eventually have part or all of a leg amputated below the knee. But the placental-cell formula used in EpiFix “stimulates the wound healing cycle” even with ulcers that are not responding to other healing products, Garoufalis said. He also told me there are lots of good data affirming the efficacy of EpiFix. A 2016 study published in the International Wound Journal concluded that the technology used by EpiFix “is superior to standard care” in healing foot ulcers.
After my first MiMedx column was published Monday, several of Cohodes’s short-selling allies took to Twitter, saying they had proof that MiMedx was guilty of bribing doctors. As Bloomberg News reported last year, three employees of a South Carolina Veterans Affairs hospital were indicted for accepting payments and other inducements from the company that resulted in “excessive use of MiMedx products.” One of the three was a doctor.
The indictment, however, does not allege any wrongdoing by MiMedx. You see, MiMedx had contracts with the three VA employees — just as it has contracts with doctors all over the country. And MiMedx itself didn’t play a part in the conduct that got the VA employees into hot water. The employees were supposed to get the contracts approved by the hospital. But apparently that didn’t happen. The case wasn’t about bribery; it was about violating government rules. Within five months of the indictments, prosecutors had concluded that the case wasn’t worth going to trial over. The three employees agreed to “pretrial diversion,” meaning that if they paid the money back — about $3,500 in two cases, and about $20,000 in the third — the indictments would be dismissed. That happened in April.
What about Cohodes’s charge that MiMedx’s products are creating a public health hazard? This should also raise an eyebrow (or two). The product he is primarily criticizing is AmnioFix. It also uses placental tissue, but it’s processed in such a way that it can be injected. AmnioFix’s primary purpose is to relieve degenerative joint and tendon pain — pain that is currently difficult to treat. It’s a relatively new product, and many of those who are long MiMedx stock think it has blockbuster potential.
Cohodes, however, says that AmnioFix has never been proved effective for anything, and that it hasn’t been approved by the Food and Drug Administration. “MiMedx was and is selling unapproved products to an unsuspecting and vulnerable public,” he said in an email. “People in pain often search for solutions in the unapproved drug world when they have run out of options. MiMedx has exploited that vulnerability and that is tragic.”
Let me offer an alternate take. In December 2017, the FDA issued new guidelines for injectable tissue — and gave companies three years to come into compliance and get approved indications for their products. With a year and a half to go, MiMedx is in the middle of a Phase III trial for the use of AmnioFix to relieve plantar fasciitis, and a Phase II trial for osteoarthritis. MiMedx bulls think it will have the indications approved by the December 2020 deadline.
Studies indicate that the technique MiMedx is pioneering with AmnioFix works: One showed that three months after an injection, 91 percent of patients felt significant pain relief. And the FDA is on record as saying that AmnioFix “has the potential to address unmet medical needs.” My exchanges with Cohodes left me with the distinct impression that he views AmnioFix as some kind of rogue drug, operating outside the FDA system. Based on everything I've learned, it’s not.
Digging into Cohodes’s claims, I concluded that Asbahi is probably right: The short-seller and his allies are conducting a smear campaign intended to damage the company. I say this with a heavy heart. I’ve written in the past about companies Cohodes and his former partner David Rocker exposed, and I’m a big believer in the importance of short-sellers. Investors need to listen to skeptical voices as well as bullish ones. As a general rule, those who bet against companies are performing a service for all investors.
But it’s also important that short-sellers tell the truth about what they find and have an open mind if a company, say, changes its tactics and its senior management. Stretching the facts to push a stock down is as bad as stretching them to push a stock up. And flogging a misguided narrative about products that could help millions of patients is just wrong. Campaigns like Cohodes’s against MiMedx give short-sellers a bad name.
In an email, I asked Cohodes why he remained so obsessed with MiMedx. “You call it ‘obsessed,’ he replied, “but that’s the wrong word. I am committed to truth and always have been.”
There was a time when I would have believed him. Not anymore.
A postscript: On Monday afternoon, Bloomberg and I received a lengthy letter from Cohodes’s lawyer, David Shapiro, claiming that my first MiMedx column was “false and defamatory” and demanding a retraction. The letter reminded me of how this all started for Cohodes: with a presentation at a 2017 investment conference in which he denounced MiMedx and its then-CEO Petit for having sued three of the company’s critics. “Quit intimidating the shorts, the critics, the free speakers,” Cohodes said then. “It has to stop.”
Apparently, Petit isn’t the only one willing to use intimidation tactics to quiet his critics.
(1) Bloomberg’s standards regarding foul language prevent me from repeating his actual words.
(2) I spoke to a third doctor, Raymond Otto of Boise, Idaho, who also praised EpiFix as a superior wound product. I should note that all three doctors have given lectures on MiMedx’s behalf. Garoufalis told me that the typical lecture fee is $1,500 or less.
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Joe Nocera is a Bloomberg Opinion columnist covering business. He has written business columns for Esquire, GQ and the New York Times, and is the former editorial director of Fortune. His latest project is the Bloomberg-Wondery podcast "The Shrink Next Door."
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