“the patient is disfigured”, “we cannot trust the information you relay to us on protocols, procedures, and post procedure care”
-Letter from a Doctor to an INMD Representative
IMPORTANT – Please read this Disclaimer in its entirety before continuing to read our research opinion. The information set forth in this report does not constitute a recommendation to buy or sell any security. This report represents the opinion of the author as of the date of this report. This report contains certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential,” “outlook,” “forecast,” “plan” and other similar terms. All are subject to various factors, any or all of which could cause actual events to differ materially from projected events. This report is based upon information reasonably available to the author and obtained from sources the author believes to be reliable; however, such information and sources cannot be guaranteed as to their accuracy or completeness. The author makes no representation as to the accuracy or completeness of the information set forth in this report and undertakes no duty to update its contents. The author encourages all readers to do their own due diligence.
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Please note that Marcus Aurelius, the author of this report, and the “Marcus Aurelius Affiliates” are not in any way associated with Aurelius Capital Management, LP, a private investment firm based in New York, and any affiliates of or funds managed by the latter company.
Note: This report references numerous lawsuits and online reviews and you should assume that InMode and the referenced defendants or individuals deny all allegations. Some of the referenced lawsuits may also have been settled, dismissed, or otherwise removed.
We are short InMode (NASDAQ: INMD). We believe the company’s promotional narrative is premised on falsehoods and that management has simply not been honest with investors or patients about the safety of its purportedly revolutionary aesthetic machines.
INMD’s shares have surged since its August 2019 IPO as management has fanned relentless hype about the company’s machines, which are routinely marketed as “completely safe” alternatives to cosmetic surgeries such as facelifts and liposuction. Indeed, UBS’s initiation report on the company claimed that “Since the launch of INMD’s devices, it has not experienced a single adverse event”. However, a broad pattern of undisclosed lawsuits, apparent out of court settlements, and online reviews we obtained allege that patients have suffered severe burns, permanent scarring, and even nerve damage from treatments conducted with INMD products. Perhaps out of concern for the IPO prospects, INMD’s executives have allegedly concealed the existence of these adverse events by failing to report them to the FDA as required by law. We therefore believe that patients across the country have been misled about the safety of these procedures relative to competing technology, a fatal flaw that we believe directly undermines the sustainability of INMD’s business.
INMD’s CEO, Moshe Mizrahy, has touted purportedly revolutionary aesthetic technology before when he was CEO of Syneron Medical (formerly NASDAQ: ELOS). Syneron’s shares also surged soon after coming public in 2004 before plunging more than 80% and eventually being taken private in 2017 below the IPO price. Mizrahy has re-emerged to recycle a strikingly similar narrative to promote INMD, declaring that his products represent a “paradigm shift” in the industry and pointing to a variety of studies to validate his claims. Yet our internal analysis shows that 37 of the 43 studies we could find on InMode’s website were published by doctors who have either received payments from INMD, hold stock in INMD, or are INMD employees. Indeed, INMD even currently touts a “scientific report” authored by none other than Amir Waldman, CEO Mizrahy’s long-time business partner and INMD’s former VP of Regulatory Affairs, who was charged by the SEC with fraud in 2017 for his alleged role in a multi-million insider trading scheme. Moreover, lawsuits filed by disfigured patients allege that INMD uses its so-called “Luminary Program” to route undisclosed payments in cash or stock to many doctors in exchange for testimonials and referrals, only increasing our skepticism about the company’s product claims.
This report also explains in detail why we believe the company is likely to increasingly struggle in such a fiercely competitive and highly cyclical industry that features notoriously short product cycles and is littered with tales of product fads and failures. Indeed, our research indicates that INMD has already deployed heavy product discounting and 100% financing terms to close deals. If INMD must use these kind of incentives to sell product, how can it possibly possess a revolutionary product that others can’t compete with? We note that INMD has curiously spent just $9.8 million in total R&D during the last two fiscal years, a mere fraction of key competitors, causing us to question if INMD has simply used marketing flair to dress up a relatively low tech, “me-too”, product offering. As the promotion fades and reality sets in, we believe shares could re-price dramatically and therefore see enormous downside potential.
Undisclosed Patient Disfigurements Directly Contradict INMD’s Promotional Narratives
Certain sell side analysts now tout that INMD’s machines, which are typically sold to plastic surgery clinics and medispas for between $100k- $250k will revolutionize the market and grow at 20%+ rates well into the future. One of INMD’s primary product claims is that its machines are extraordinarily safe, a sales pitch that targets clinicians concerned about the reputational damages and malpractice costs that patient injuries can have on their practices. This narrative appears to have captured the imagination of investors such as CNBC’s Jim Cramer, who jested that “I’m going to use the product, maybe even on the show” during a TV segment on INMD last October. A sell side initiation report published by UBS in September 2019 even declared that “we found no evidence of safety issues” and “Since the launch of INMD’s devices, it has not experienced a single adverse event”. But our research demonstrates that this claim is utterly false.
Undisclosed injuries are specifically described in lawsuits, either filed against INMD (as well as its wholly owned subsidiary named Invasix) and/or clinicians, by twelve different patients as well as court filings demonstrating the existence of additional alleged victims who appear to have settled out of court with INMD. Problems with INMD’s machines surfaced in 2015, when a Dallas news station reported that two women, Susan Mardock and Mellisia Webb, were burned and disfigured by INMD devices and that INMD didn’t notify the FDA about the events. Pictures included in Mardock’s lawsuit against INMD show the procedure using the company’s Fractora machine went horribly wrong:
The Doctor who treated Mardock wrote a letter (here) to her INMD representative stating that “the patient is disfigured”, “we cannot trust the information you relay to us on protocols, procedures, and post procedure care”. Similarly, photographs included in Mellisia Webb’s lawsuit against the company show serious burns on her neck from a procedure with INMD devices:
More recent victims include Janice (Newman) Dean, a Fox News broadcaster, who filed a lawsuit against INMD in October 2019 stating that she suffered nerve damage “causing continuing facial paralysis” after undergoing an INMD procedure on her neck. The lawsuit states that “for months, Janice suffered symptoms so severe, she could not speak clearly and had difficulty eating and drinking”. In an op-ed published on Foxnews.com, Mrs. Dean explains that she was enticed into undergoing the procedure after being told it was safe and that it would only take five days to heal, instead she was unable to appear on air for two months.
After suffering “extreme pain” from a procedure with INMD ‘s Fractora machine, Anna Wang was left with “severe scarring” all over her face (below), according to a lawsuit she filed in June 2019.
In total, we found undisclosed lawsuits involving 12 women filed against INMD and/or clinicians, the most recent of which was filed last month, that similarly describe serious injuries and/or permanent scarring allegedly suffered from procedures with INMD machines:
|Alleged Victim||Injuries described|
|Amiri||Injuries to “nervous system”|
|Clinich||“permanent facial disfigurement”|
|Dean||“nerve damage, causing continuing facial paralysis, drooping and uneven smile”|
|James||“permanent facial disfigurement”|
|Jones||“scabbing ultimately turning to scarring over her entire face”|
|Mardock||“horrible pain”, “permanent, claw-like scars”|
|Mock||“hatch mark looking lacerations” , “swollen and scarred”|
|Rose||“nerve damage and horrific scarring”|
|Wanke||“the skin under her eyes darkened and burns left claw and moon shaped scarring”|
|Wang||“severe scarring” , “extreme pain”|
|Webb||“deep wounds” , “permanent claw-like scars”|
Court documents also reveal that an unspecified number of other patients have settled with INMD out of court (example here), thus shielding the details of their injuries from public view. In INMD’s recently filed annual report, a disclosure even admits the company experienced increased “expenses under our product liability insurance policy” (page 70). Also, for example, a New York doctor, Nosrat Khajavi, sued INMD in 2017 alleging that “during the several months that plaintiffs attempted to use Defendant’s [InMode’s] defective machines, multiple New York clients were severely injured after treatment” including “burns, scars, bruises, skin darkening, and reddened skin” (below). The doctor says he was forced to close his practice after negative word of mouth about the injuries from the INMD machine “began to spread like wildfire”.
We also found numerous examples of online postings by dissatisfied customers who say they were seriously injured or burned, suffered claw like scars (similar to what has repeatedly been described in lawsuits), or had a very painful procedure and lengthy recovery period. For instance, after a patient posted photos and described suffering “significant burns” from INMD’s Fractora machine on realself.com (captured below), a doctor participating in the forum responded that “obviously this is not normal” and explained “the device is risky in my opinion”. A different review states that “I had 1st and 2nd degree burns” and that her doctor “gave the machine back. She said it is hard to control the heat on these machines” (here). Other reviews state that “fractora ruined my skin” (here) “it was like being electrocuted” (here), “I also have 3 vertical dents/trackmarks in my forehead which I fear may be permanent scars” (here), and another says she “came out looking like a monster” (here).
In another review, a patient says INMD’s Bodytite procedure left her with injuries that “ruined my arms” and “I still cannot raise my arms over my head”, even though she says roughly one year had passed since the procedure:
Source: Captures from realself.com posting
In yet another review (capture below), a patient says after undergoing a Bodytite procedure “I was severely burnt on my left of my abdomen, which to this day left a very ugly burnt scar”. Other reviews state that “Bodytite burned my legs and now I have scars” (here) , “the bodytite machine malfunctioned and I was badly burned” (here), “I had severe swelling, pain, bruising, and discomfort” (here). These complaints mirror a lawsuit we obtained (here) that describes “nerve damage and horrific scarring” suffered by a patient after a Bodytite procedure.
Source: Captures from realself.com posting
With such a clear pattern of patients allegedly suffering serious injuries and scars, we find it extremely problematic that we could only find three adverse events in the FDA’s MAUDE database for all of its products. Dean’s lawsuit alone states she is aware of at least eleven victims and that INMD has “unlawfully suppressed reporting of adverse events” alleging that “this practice emanates from those in the highest authority within Invasix”. In our opinion, this is indicative of significant corporate rot and we note that companies and their management teams can potentially face criminal or civil penalties for covering up adverse events. The last company we observed making false claims about having no adverse events was MiMedx, a pervasive fraud that recently resulted in criminal indictments of the CEO and COO by the Department of Justice for accounting and securities fraud.
Yes, many patients appear to escape INMD procedures uninjured, some patients have posted positive reviews with photos suggesting they experienced positive results, and some doctors say the devices work well. Yet many patients are being misled, in our opinion, because the procedures with INMD devices are clearly not “completely safe”. Indeed, this is exactly how the procedures are routinely being marketed by clinics to patients (examples here, here, here, here, here), with one website even declaring “Fractora is known as one of the safest and most effective skin treatments to ever exist”. Because INMD’s SEC filings admit that “from time to time, we participate in our customers marketing activities” (page 65) , we can only surmise that these kinds of marketing claims are supported or condoned by INMD’s corporate office.
We also are troubled by the reliability of many of the testimonials and studies used by INMD because of the poorly understood conflicts posed by INMD’s Luminary Program. Lawsuits filed by disfigured patients have alleged that INMD uses the Luminary Program to route undisclosed payments to doctors in exchange for testimonials and referrals:
A doctor alleges in a December 2019 lawsuit he filed against INMD that the company even promised to pay him 5,000 stock options to engage in a variety of promotional activities that included a junket to Las Vegas and his help in drafting a memo touting the purported financial attractiveness of buying the machines to other doctors:
Even worse, disfigured patients allege the doctors paid by INMD “downplay the risks to patients” and “exaggerate the benefits of the product by using it in a way significantly more aggressive than proposed by [InMode] in its 510(k) submissions to the FDA”. INMD procedures are sold to patients and clinicians as safe and effective alternatives to cosmetic surgery but, to try to get results, clinicians allegedly are encouraged to use the devices at the highest intensity settings which also “dramatically increases the risk of unintended injury to the patient”. Janice (Newman) Dean’s lawsuit specifically calls out Dr. Stephen Mulholland (below), a paid luminary who owns stock in INMD amounting to 13.5% of the company, for allegedly using non-FDA approved and risky techniques during demonstrations. With so much money at stake, we wonder if this dynamic could explain precisely why patients across the country say they have been severely burned or disfigured.
INMD Is Reminiscent Of 2005 ELOS IPO That Left Investors with Massive Losses
Contrary to the promotional rhetoric, RF technology has been embedded in aesthetic medical equipment in various forms for decades and is currently included in various machines made by competitors such as Viora Medical, Syneron Candela, Vivace, Cutera, Cynosure, Lumenis, Endymed, Thermage, and Venus Concept. Yet with the assistance of Wall Street’s promotional magic, investors have been led to believe this technology has become completely “revolutionary” at INMD.
Indeed, RF was featured prominently in the 2004 IPO of Syneron Medical (formerly NASDAQ: ELOS) which also tripled soon after coming public before crashing more than 80% and eventually being taken private in 2017 below its IPO price. The architect of Syneron’s IPO is now INMD’s CEO & Chairman, Moshe Mizrahy, Syneron’s former CEO, who has hired several of his former Syneron lieutenants, including CFO Yair Malca, to hold key positions at INMD. At the time of Syneron’s IPO, its prospectus touted that “we believe that our ELOS technology represents a paradigm shift in noninvasive aesthetic medicine because it is the first approach that combines conducted radiofrequency energy”. More than fifteen years later, Mizrahy has recycled the same narrative at InMode, which now claims its RF products also “represent a paradigm shift in the minimally invasive aesthetic solutions market”. Mizrahy abruptly resigned as Syneron’s CEO just one year after its IPO and reaped a personal financial windfall by dumping more than $55 million worth of his shares at lucrative prices before the stock price tanked (here).
Mizrahy strikes us as something of an IPO artist who, having reportedly attempted three times to bring a different company he runs named Home Skinovations public (here), was able to use these frothy markets to foist INMD onto the NASDAQ. To support his claims, Mizrahy and INMD’s prospectus points to “44 peer reviewed publications” as purported evidence that the company’s equipment is superior. But our internal analysis shows that 37 of the 43 studies we could find on InMode’s website were published by doctors who have either received payments from INMD, hold stock in INMD, or are INMD employees. In 19 instances, the studies failed to disclose the author’s underlying conflict of interest with INMD, a practice we believe is highly misleading because it creates the false impression these studies are independent when they are not.
In one farcical example, INMD has posted a 2016 “scientific report” (here) authored by a Dr. Amir Waldman highlighting the purported advantages of INMD products. But the report fails to disclose any conflicts, let alone that Waldman was INMD’s VP of Regulatory Affairs, at least as of the time of the company’s 2011 FDA submission (here), and is a longtime business partner of Mizrahy’s and co-founder of Home Skinovations. Waldman was charged by the SEC in 2017 with fraud for his alleged role in a multi-million dollar insider trading scheme (here), yet INMD continues to tout Waldman’s paper as supposed clinical evidence. We note that Waldman has denied the allegations and the SEC has just made filings in February 2020 noticing that Waldman intends to settle by consenting to relief under the anti-fraud provisions of Section 14(e) of the Securities Exchange Act of 1934 (here).
While bulls may believe that RF is a “secret sauce” only possessed by INMD, the company’s own prospectus (page 28) admits that it currently sublicenses certain RF patents from Syneron. INMD itself even argued in its 510(k) submission to the FDA that its Fractora machine had “substantial equivalence” to a Syneron RF machine named Matrix (below).
Source: Captures of INMD FDA Filing
Ultimately, we believe INMD will increasingly struggle to differentiate itself within a marketplace saturated by machines sold by seasoned competitors, each of whom have their own set of patient testimonials and technological claims regarding why their products are superior. Bulls also point to INMD’s reported gross margins of more than 85%, which are far higher than the 40-60% range that a variety of competitors posted during their publicly traded histories. Yet INMD’s anomalous gross margins only increase our skepticism about the quality of the equipment INMD is producing, which is clearly far cheaper to make than competitive machines.
We also note that INMD has curiously spent just $9.8 million in total R&D during the last two fiscal years, a mere fraction of competitors such as Cutera, Viveve, Syneron, and Cynosure who spent an average of $19 million per year during their public existence. We struggle to understand how INMD has developed such purportedly revolutionary technology with such little investment. Also, in such an intensely competitive industry as this, which traditionally has suffered from ultra-short product cycles, we question how INMD’s product development will be able to keep up with better financed rivals. Indeed, on the most recent earnings call Mizrahy called out the growth prospects of the company’s newly launched hands-free devices, Evoke and Evolve. But these products bring INMD into competition with entrenched devices such as Zeltiq’s highly successful CoolSculpting device, a difficult task that we believe only exacerbates the challenges facing INMD.
Signs of Low-Quality Sales Fueled by Credit & Discounts Make Us Skeptical About INMD’s Prospects
INMD reported that its sales nearly doubled from $53 Million in 2017 to $100 Million in 2018 and then grew to $156 million in 2019. But we found evidence that this growth has been fueled, at least in part, by significant discounting and aggressive financing terms offered to customers. We therefore believe that revenues are likely to be of far lower quality and less resilient than many analysts currently tout, a feature that could prove particularly problematic in such an inherently cyclical industry. We also believe this activity demonstrates the company lacks pricing power. If INMD must cut its prices or use special incentives to close deals, how can it possibly have a revolutionary product that others can’t compete with? Furthermore, we wonder if the company could have used these methods to “dress up” the financials to paint a better picture for its IPO, increasing the likelihood that financial performance may disappoint in the future.
Although INMD offers its machines at premium prices relative to competitors, our conversations with multiple industry participants indicates that INMD has cut its prices by as much as 40% from the list prices during certain negotiations with clinicians. One former sales rep we spoke to specifically recalled the company offering discounts of as much as $100k off a $250k machine before the IPO. We also have repeatedly heard that INMD has offered to buy back obsolete equipment from clinics or dangled the prospect of cash “luminary” payments as an additional enticement to physicians. INMD also engaged in “fraudulent misrepresentation” when selling to a women’s health clinic, according to a lawsuit (below) which alleges INMD falsely claimed one of its machines could perform a variety of procedures it could not. Yes, some of these discounting practices and unscrupulous tactics have also allegedly been used by others in the industry to various degrees, but this merely supports our view that INMD faces significant challenges inducing customers to pay premium prices for its machines in such a competitive industry.
Source: Case No. CV-2018-5032, Bonneville County, Idaho
We also learned that INMD has partnered with multiple leasing companies to offer 100% financing programs with nothing down to INMD customers. For example, we obtained the specific financing terms embedded in INMD’s leases from a collection action filed last year by one of INMD’s leasing partners, Balboa Capital, against a customer who purchased $150k in equipment from INMD in 2018 (here). The customer defaulted soon after the end of the introductory period offered by Balboa, who financed 100% of the purchase price and required the customer to only pay $99 per month for the first six months. Similar terms were contained in contracts filed pursuant to collection actions filed against two other INMD customers who stopped making payments on the machines. These findings are problematic because bulls have touted the business as being predominately “cash pay”, when in reality a material portion of customers appear to be relying on credit to finance purchases. Once again, if INMD’s products are so superior, why are these financing programs necessary to sell the product?
INMD machines also appear to depreciate rapidly after being purchased. During our review last month, we found examples of more than 50 INMD machines, including recent models, that were offered for sale at a fraction of their retail list prices on EBAY or medical surplus websites such as Rock Bottom Lasers and DotMed. For example, the below 2018 machines likely sold for in excess of $100k but were being marketed for far less:
An investigator inquired as to several of these machines and received replies indicating that INMD’s machines end up in the hands of banks and wholesalers (example below). We wonder why, if these machines are as profitable for clinics as the company claims, they are being offered for sale at such large discounts relative to new equipment? We speculate that these examples could be reflective of the machines simply not living up to the hype that led them to be sold in the first place.
We See Enormous Downside Potential
History demonstrates that the aesthetic equipment space has been littered with tales of product fads and failures. Just last year, Hologix (HOLX: NASDAQ) announced that it would take a $1.4 Billion loss on its 2017 acquisition of Cynosure, a company which had a series of “hot” products at the time. We believe the promotional narrative that has sent INMD’s stock surging since its IPO is premised on falsehoods and therefore believe it may become the next touted equity in this industry to leave investors with massive losses.
All investors are encouraged to do their own due diligence into these factors.