Suppose your company pioneered a product able to improve the health of millions of people. Suppose that over the past five years, you reported at least 50% year-to-year revenue growth. To cap it off, suppose Fortune recognized your company as the fifth-fastest growing public company in the US. How might your company’s revenue prospects appear to investors, and what would be the impact on its stock?
If you were prone to making understatements, you’d say the share price would increase. And that’s exactly what happened for MiMedx , a company that makes human skin grafts for surgical use, and whose market value once reached $2 billion. Then, in June, 2018, a load of financial poop went airborne, and traveled into the company’s twirling fan.
That’s when “the company said an internal investigation had shown that its reported financial results going back to 2012 were no longer reliable and would have to be restated,” according to a Wall Street Journal article, Highflying Medical Firm Falls to Earth, Its Sales Questioned (July 24, 2018). As of this writing (July 27), the market cap for MiMedx was under of $464 million. MiMedx’s president, Parker “Pete” Petit has resigned, and an interim executive now runs the company. His specialty: “restructuring troubled businesses.” I’m reminded of Icarus, yet again. Those ancient Greeks – they sure understood human foibles. Somehow, they did it without the benefit of social media, AI, predictive analytics, and all. Amazing.
Stories about companies that tanked after achieving soaring revenue seem commonplace. Often, it’s the result of scrappy competitors who saw an opportunity, and seized a cash cow that a company was contentedly milking. Sometimes, it’s the result of self-satisfied, complacent management, who paid little heed to oncoming trains that demolished their business strategy. “We’re going to get flattened? . . . I thought you said ‘fattened!’”
MiMedx suffered from none of these mistakes, and that’s part of the tragedy. “No one has suggested that MiMedx’s products are faulty,” the Journal says. According to a company statement, “[MiMedx] is operating its business as usual as it continues to grow, invest in its product pipeline, and focus on serving healthcare providers and their patients.”
“Business as usual.” A sound bite that analysts, customers, and prospective employees sometimes like to hear. But it turns out that there was a bit of revenue hanky-panky going on.
Well, a lot of hanky-panky – if the allegations are true. “A Wall Street Journal review of company emails, court documents and internal complaints, plus interviews with current and former employees paint a picture of a company seeking to grow at almost any cost.” Where have I heard this before? Sounds so familiar . . . Bells Cargo? . . . Fells Wargo? Help me out . . .
In the Wall Street Journal article, employees describe a potpourri of revenue inflation tactics. I can’t call them innovative – some have been around for decades – but what makes MiMedx especially disturbing is what happened to employees who blew the whistle. Among the techniques former employees described in The Wall Street Journal article:
- Channel stuffing. “MiMedx sometimes shipped more skin grafts than had been ordered, and booked them as sales . . . MiMedx sales records show the company recorded a shipment of 135 oversized skin grafts to a Las Vegas plastic surgeon’s office, which former employees said is way beyond the 10 or so smaller pieces in a typical physician order. The shipment was recorded at 8:00 pm on September 29, 2016, just before the end of a quarter. No one in the surgeon’s office had ordered the goods, according to a former employee of the office.””
- Browbeating the sales force. “What else can u ship by end of month?” read one message to a rep, which continued, “Need all u can put in today up to $100k if possible.”
- Booking consignment inventory shipments as sales. “Several former employees said that at times, near the end of a quarter, the company would book as sales some of the goods sent to hospitals on consignment but not yet used.”
- Mislabeling products for medical uses that receive higher reimbursement from insurance companies.
- Providing advisory services to physicians on how to maximize reimbursement for the company’s products.
Customers have the unfortunate habit of directing their ire about bad selling behavior toward salespeople. I understand. The front-line rep is a conspicuous target. Most customers never meet the Sales VP who hatched an incentive plan that encourages revenue production over anything else. They don’t hobnob with the VP of Human Resources who carries out heavy-handed sales management policies, especially the punitive firing part. If they did, they’d learn about the high-pressure manipulation under which salespeople work, and how that penetrates their customer conversations. They would understand that the objectionable behaviors salespeople display are almost always result from what management encourages, and ultimately, what employers pay salespeople to do.
But many salespeople are principled and resist adopting practices that compromise their morals and ethics. Or, violate the law. But for some, pushback comes at a cost. With MiMedx and Wells Fargo, management concocted penalties to ensure employees kept quiet, which allowed their devious machinery to continue operating. Both companies eventually poisoned themselves. Time will tell whether the dosage was lethal.
It would be easy to attribute the transgressions at MiMedx to good old fashioned greed, and leave it at that. Why attempt to fix what you can’t change?
But MiMedx illustrates a preventable problem. Four root causes:
- Flawed proxies. In the case of MiMedX, the flawed proxy was revenue growth, which investors often confuse as a sign that other things they covet are present: talented management making smart decisions, fast-growing industry or market, killer business strategy, great products, rapid customer adoption, loyal repeat customers. MiMedX demonstrates that revenue is a weak proxy because a growing company can be infected with problems, and revenue is easy to spoof.
- Misplaced and outsized financial rewards. As with Wells Fargo, when executive compensation plans put heavy emphasis on stock price increases, nobody needs to guess how managers will direct their energies.
- Ethics absent from corporate culture. Tom Tierney, a former MiMedx Regional Sales Director, described the company’s culture as “a mind-boggling level of sales and accounting irregularities,” which he characterized as a “win at all cost” company culture.
- Lack of safety for employees when reporting fraud and abuse. “MiMedx provided employees with a way to report issues that troubled them. Eight ex-employees said they were fired after they spoke up,” according to The Wall Street Journal.
There are plenty of sound reasons to pursue rapid revenue or market share growth. For companies that are first to market with an innovation, rapid revenue growth enables them to establish platform or production standards for an industry. It helps them build economies of scale, which raises barriers to entry. It gives them bragging rights as the market leader. All of these have positive strategic consequences. With MiMedx, the quest for rapid revenue growth appears to have backfired because its primary purpose became apparent: to line the pockets of the company’s owners.
I blame analysts and investors. We have better, deeper metrics than revenue growth to assess the future vitality of a company. It’s time to start trusting those numbers, because as we’ve learned by now, revenue is wicked-easy to fake.