Shares of Mindray Medical (NYSE:MR) rebounded a bit today after the Chinese medtech company refuted charges of fraudulent business practices leveled by a short seller yesterday and said it would begin buying back its own stock.
MR shares lost 11% yesterday after Ottoman Bay Research issued a report accusing Mindray of overstating its revenues and gross margins, making a string of questionable acquisitions and of claiming to have "phantom" facilities that don’t exist.
"We believe Mindray is inflating revenues by 30% and real gross margins are in line with peer levels of 45%-50% vs. the ~60% MR claims," according to the Ottoman Bay report. "MR appears to manage earnings through a myriad of accounting shenanigans, including moving cash through its complex maze of offshore subsidiaries to inflate sales, margins and cover expanding losses, significantly overstating the earnings power latent in the business."
Ottoman Bay also accused Mindray of claiming to spend millions on a pair of facilities in Nanjing and Zhonnuancun that it alleges don’t exist.
"We find evidence which suggests Mindray has spent millions of dollars on capex, yet at least 2 "facilities" were actually a substantial overpayment for empty fields of grass," the report alleges. "Mindray has spent hundreds of millions of dollars on R&D and [capital expenses]. We would like to see where the cash has gone, as the Nanjing and Zhonguancun examples raise serious concerns."
But Mindray said the photo Ottoman Bay claimed was of the Zhonguancuan facility is actually a shot of its operation in Changping, Beijing.
"By our initial investigation, we have confirmed 1 photo is of our completed Changping, Beijing facility (not our Zhonguancuan facility) and the other is not our Nanjing facility," according to a press release. "As long-term Mindray investors know, since Mindray’s IPO, the company has frequently hosted investor visits to its headquarters and other major facilities. The same applies to the Nanjing facility. For newer investors and others desiring to know the truth, the company will seek to accommodate investor requests for site visits. Alternatively, the addresses of our facilities are No. 666, Zhengfangzhong Road, Jiangning Technology Development Zone, Nanjing, Jiangsu Province, China and Building #5, Shangdi Qunying Science Park, Haidian, Beijing,China . Investors are welcomed to drive to such locations to prove it for themselves."
Mindray also denied the charges that its financials are overstated.
"Mindray stands by the integrity of its historical annual reports and press releases. The company believes that the allegations and accusations set forth in the research report released on December 12th lack merit and contain numerous errors of facts, misleading speculations and malicious interpretations of events. Further, the allegations fail to take into account various factors necessary to understand the matters addressed," according to the release.
The refutation and a conference call with investors (combined, perhaps, with some share repurchasing) seemed to allay investors’ fears today. MR shares plunged 11.0% yesterday to a $35.61 close after the Ottoman Bay report hit the airwaves, but had rebounded to $37.10 apiece as of about noon today, up 4.2%.