Mox's Negative Orthofix Report; Cites 'FDA Issue And Accounting Manipulation'

Shares of Orthofix International NV OFIX plunged more than 10 percent Friday morning and hit a new 52-week low of $32.56 following a scathing short report by MOX Reports.

MOX Reports' Richard Pearson focuses on special situations investing in the United States and China with a focus on U.S. Food and Drug Administration (FDA) issues. On Friday, he released a report on Orthofix, a global medical device company that focuses on providing reconstructive and regenerative orthopedic and spine solutions to physicians.

According to Pearson, Orthofix is a "unicorn short" and offers investors a short trade with massive near-term downside with little downside potential. This "once in a blue moon scenario" stems from the fact that the company already enjoys market share position for its BGS (BioStim Bone Growth Stimulators) product, in which the entire size of the market is roughly $500 million and growing at just 1 to 3 percent a year.

Pearson noted that the sole reason why the company enjoys its market share leading position is because the BGS product is classified by the FDA as a Class III device, which severely limits competition.

Down Classification To Class II

A proposed move to down-classify BGS devices to Class II has been met with heavy resistance by the company, which even hired lobbying firm King & Spalding to sway the FDA.

A Class II classification implies far less regulatory hurdles for new competitors to enter the market. Cheap alternatives could flood the market and steal market share away from Orthofix.

"That lobbying effort appears to have failed badly and the down classification is still on track," Pearson wrote. "But despite its knowledge and the huge significance, Orthofix has failed to appropriately disclose any of this to investors."

Pearson further argued that the sell-side community has yet to highlight this problem to investors, but this may be due to the fact they "haven't done the work" or realized the FDA voted to down classify BGS back in 2006. The decision was reversed following the company's lobbying efforts.

In 2012, the U.S. Congress passed the Food and Drug Administration Safety and Innovation Act ("FDASIA"), which resulted in the FDA "re-reviewing" hundreds of medical devices for potential down classification.

Recent Developments

The FDA proposed BGS be down classified as part of its 2014–2015 strategic priorities, and now the "date of reckoning is now getting much closer."

Pearson continued that as of October 1, the FDA transferred the BGS down classification process to the department of Orthopedics and the process is "now active."

"The most important point is that the individuals within the FDA responsible for this evaluation are the same people who previously voted to down classify BGS in the first place," Pearson stated. "These developments are all very recent and have NOT been disclosed by Orthofix, even though Orthofix clearly saw fit to hire and dispatch a lobbyist to attempt to fight the threat."

Bottom line, Pearson expects Orthofix to see its revenue fall by around 30 percent or more as soon as it loses the competitive moat.

At last check, shares of Orthofix were down 8.72 percent at $33.81.