Short-seller Ottoman Bay Research took another shot at Mindray Medical (NYSE:MR) this week, taking issue with the Chinese medical device company’s response to Ottoman’s initial accusations of fraud and mismanagement.
MR shares lost 11% Dec. 12 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. Mindray denied the some but not all of the charges, sending share prices back up but also drawing another riposte from Ottoman Bay.
"For management to believe it is acceptable to ‘pick and choose’ points to refute is clearly a disservice to the company’s shareholders. Mindray’s claim that ‘The company does not intend to enter into an item-by-item refutation of the false statements and errors of facts’ should be worrisome to investors. If Mindray can substantiate that our claims are false, they should be very easy to disprove," according to the latest Ottoman report, which levies additional accusations based on a Dec. 13 Mindray conference call with analysts.
Ottoman Bay originally accused Mindray’s management of inflating its revenues by 30% and boosting gross margins to roughly 60%.
"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 said last week, also accusing Mindray of claiming to spend millions on a pair of facilities in Nanjing and Zhonguancuan that allegedly don’t exist.
Mindray said the photo Ottoman Bay claimed was of the Zhonguancuan facility is actually a shot of its operation in Changping, Beijing and denied the charges that its financials are overstated.
But Ottoman Bay said Dec. 17 that Mindray’s explanation of the alleged "phantom" locations doesn’t hold water.
"Mindray responded to Ottoman Bay by falsely claiming, ‘By our initial investigation, we have confirmed one photo is of our completed Changping, Beijing facility (not our Zhonguancuan facility).’ Shareholders should question how on earth either photo constitutes a ‘completed’ facility. More alarmingly, if Mindray has a ‘completed Changping, Beijing facility’ why isn’t it mentioned in any of the company’s SEC disclosures/filings and why didn’t Mindray give the address for it along with their HaiDian address?" the short-seller wrote. "The answer is simple. Zhonguancuan Life Science Park, as MR should know since they bought the land there, is located in Changping. The Changping ‘facility’ is the abandoned 48,000 square meters of land we pictured and labeled Zhonguancuan, which the company claims is completed. To say that ‘this is not our Zhonguancuan facility, it is our Changping facility,’ is akin to saying ‘this is not our Manhattan facility, it is our Tribeca facility.’ Call it a Changping facility, call it a Zhonguancuan facility; whatever management cares to call it, it is a 48,000 plot of tumbleweed that Mindray has spent shareholder cash on and is certainly not a completed facility. When, exactly, does Mindray plan on developing it?"
Ottoman Bay also charged Mindray with failing to pay the medtech tax in the U.S., a 2.3% levy on sales of prescribed medical devices that began in January as part of the Affordable Care Act. During the conference call with analysts last week, Mindray CFO Alex Lung said the company is only required to accrue the tax amount.
"My understanding is we only are required to accrue the tax spend. I believe we haven’t actually made the payment yet," Lung said.
"Is this gross negligence or willful neglect?" Ottoman Bay responded. "How is it possible that MR’s CFO is unaware of a widely discussed excise tax in the company’s 2nd-largest country as a percent of sales? Is this gross negligence? Is something more sinister going on?"
Many medtech companies have been making semi-monthly payments since the tax went into effect this year. Ottoman Bay said Mindray could face penalties from the IRS for non-payment of the levy.
"MR will be liable for penalties to tax authorities: ‘Section 6662 imposes an accuracy related penalty for, among other things, negligence or disregard of the rules or regulations. Under section 6662(c), the term "negligence" includes any failure to comply with the provisions of the Code, and the term "disregard" includes any careless, reckless or intentional disregard,’" the short-seller wrote. "The IRS and Treasury allowed for a grace period through September, but MR has violated even those terms, given that it’s already Dec. 17, 2013."
MR shares were trading at $38.03 as of about 1:40 p.m. today, up 0.5% on the day but still 4.9% under their $40 close Dec. 12, the day the 1st Ottoman Bat report was issued.