The ArthroCare Parallels
We think we’ve seen this play before. It looks a lot like ArthroCare Corporation.
Here’s a side-by-side comparison of the ArthroCare and MiMedx cases.
| ArthroCare Case 2005-2010 |
MiMedx Case 2017 – ? | |
| Allegations | Channel stuffing to falsely puff-up reported revenues to investors | Channel stuffing to falsely puff-up reported revenues to investors and fraudulent insurance billing |
| Source of Allegations | Former employees and short sellers, notably Citron Research | Former employees and short sellers, Citron Research again. |
| Result of Audit Committee’s Decision Investigation of Allegations | Restate 3 years of financial statements (2007, 2008, 2009) | Restate 6 years of financial statements (2012, 2013, 2014,2015, 2016, 2017, 2018) |
| Executive Management Changes | CEO Resigned CFO Resigned VP of Spine Fired Dir of Sales Fired |
CEO Resigned President Resigned CFO Fired |
| Change Market Value from Start of Allegations to CEO Resignation | From $1.2 billion to $340 million | From $1.9 billion to $500 million |
| Total Amount of Sales Overstatement | $53 million out of a total of $1.2 billion sales over the 3 years. Restatement was 4% of reported revenues. | To be determined. MiMedx has stated that the issue is with only 2 distributors. |
| Penalties Assessed Against Former Management | Five of ArthroCare’s managers received jail sentences. CEO Michael Baker got 20 years. | To be determined |
Source: RRY Publications LLC
What’s Next?
In the case of ArthroCare, five years after the allegations of channel stuffing first emerged, the company was entirely recovered and growing as fast as it ever had before. In 2014 Smith & Nephew paid $1.7 billion to buy this fine company. It was the legacy of Michael Baker and his team that they built such a great firm. It was also their legacy that in their hubris they destroyed themselves.
For a paltry $53 million revenue overstatement—just 4% of the sales over those three years—CEO Michael Baker and his colleagues bought themselves serious jail time and cost their owners about $900 million in lost value.
Such a waste.
Pete Petit and his senior executives are in a special kind of hell right now and if these allegations prove to be accurate in any material way, then for what will likely turn out to be a very small revenue change, they will have cost their shareholders a massive amount of lost wealth and earned themselves the same kind of Greek tragedy that the ArthroCare Team experienced.
MiMedx, the company, will be fine. I predict, like ArthroCare, it will emerge even stronger.
