U.S. Is Said to Probe MiMedx's Federal Contracts, Accounting

(Bloomberg) -- Biotech firm MiMedx Group, which jolted investors last week by delaying its year-end earnings announcement, is under U.S. Justice Department scrutiny related to a pair of business practices, according to people familiar with the matter.

Federal authorities are investigating whether the Marietta, Georgia-based company overcharged the government for its tissue-repair products, said a person with knowledge of the matter. The Justice Department is also looking into MiMedx’s distribution practices -- including whether it inappropriately booked sales of products that hadn’t been ordered, a practice known as channel stuffing -- according to several others familiar with that probe.

The company said in a statement that it isn’t aware of any Justice Department investigations. It has previously disclosed that it’s cooperating with a Securities and Exchange Commission investigation into how it recognizes revenue, and has denied wrongdoing.

Shares of MiMedx tumbled 14 percent to $6.75 at 10:13 a.m. in New York.

It’s already been a bad stretch for the firm, which has grown rapidly selling biomaterials to help heal tendons, ligaments and cartilage. The stock plunged 40 percent on Feb. 20 after the company said it would delay its 2017 earnings report until it finishes an internal examination of certain sales and distribution practices. The internal review follows a series of public allegations, and a vicious public battle with short-sellers, over how and when the company books some of its sales. 

Several former employees, in lawsuits and interviews with Bloomberg, allege the company has inflated its financials by recognizing revenue on products that had been shipped to certain distributors but not used. The company has said the lawsuits have no merit and that it conducted an internal review last year that it said showed no wrongdoing.

Manhattan Prosecutors

The SEC’s enforcement division is looking into the company’s practices related to distributors, and the agency’s Denver office has been working with federal prosecutors in Manhattan, several people familiar with that matter said. The prosecutors’ participation hasn’t previously been disclosed.

The Justice Department declined to comment through Sarah Sutton, a spokeswoman.

The company, in its statement, reiterated that its audit committee and independent legal and accounting advisers are looking into certain sales and distribution practices. 

“We expect this thorough review will be completed in as timely a manner as possible,” company spokesman Robert Borchert said, adding that MiMedx doesn’t expect it to affect its operational performance or clinical research. On an investor call Friday, the company said it expected it would continue to hit its revenue targets.

Sales to Government

In a second line of inquiry, federal agents are said to be looking into the company’s sales to the government. MiMedx charged government customers higher prices for what was essentially the same product it was selling to others, according to two former employees. One of them said that late last year, the Federal Bureau of Investigation collected emails, sales reports, marketing materials, pricing charts and pay details as part of an inquiry into MiMedx’s government sales.

If MiMedx overcharged taxpayers, it could face significant penalties. Federal prosecutors are looking into whether the company’s tissue-graft sales violated the False Claims Act, the government’s primary tool for policing fraud against federal agencies, according to the former employee who described the FBI’s inquiries on condition of anonymity.

MiMedx has “significant sales” to government customers including the U.S. Department of Veterans Affairs and the Department of Defense, according to its most recent annual report.

Allegations of channel-stuffing were raised in a lawsuit by two former MiMedx salespeople who accused the company of terminating them in retaliation after they reported what they said was a fraudulent revenue-recognition scheme. The employees had previously been sued by the company for allegedly violating non-compete agreements. 

The ex-employees withdrew their action and remain defendants in litigation brought by MiMedx. The company says the claims about its sales practices are without merit.

Three other former employees, who asked not to be identified, told Bloomberg in interviews that company executives at times asked salespeople to meet targets by shipping products that hadn’t been ordered. 

Earlier Review

MiMedx conducted an internal review more than a year ago into its sales practices. It said in March 2017 that the inquiry revealed no wrongdoing by the firm or its executives. The company has said it has submitted a summary of the report to the SEC.

The company hasn’t said when the current internal review of its practices would be completed.

Separately, the Wall Street Journal reported last week that MiMedx has financial ties to more than 20 doctors that it didn’t disclose. The company said a 2013 law that requires reporting payments to doctors doesn’t apply to its products.

MiMedx dropped its longtime auditor, Cherry Bekaert LLP, in August, and hired Ernst & Young. John La Place, an EY spokesman, declined to comment. A representative for Cherry Bekaert LLP didn’t respond to requests for comment.

--With assistance from Natasha Rausch and Matt Robinson

To contact the reporters on this story: Anders Melin in New York at amelin3@bloomberg.net, Greg Farrell in New York at gregfarrell@bloomberg.net.

To contact the editors responsible for this story: Jeffrey D Grocott at jgrocott2@bloomberg.net, David Scheer

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