GeneDx targeted in short report by Grizzly Research

Investing.com -- Grizzly Research has shorted GeneDx, a genetic testing company, accusing them of widespread fraud. GeneDx specializes in advanced genomic testing, with a focus on rare and ultra-rare genetic disorders. The company’s stock has seen a substantial rise of over 2,500% since the beginning of 2024, making it one of the most prominent performers of the year. This increase is attributed to the company’s reported success in substantially raising revenue while controlling its cash burn.

Grizzly Research, however, alleges that the company’s growth is largely a result of fraudulent schemes and illegal tactics designed to exploit Medicaid and Medicare systems to artificially boost revenue. The firm cites testimonies from former employees and ongoing litigation as evidence that GeneDx has increased its revenue through an unlawful practice known as "code stacking." This practice, which has been prohibited since 2013, allows the company to bill insurance providers for services that do not meet the required criteria.

The company was sold by OPKO Health, owned by well-known microcap fraudster Phillip Frost, to Sema4 for around $330 million. Following the acquisition, Sema4’s operations were almost entirely shut down. GeneDx, which was previously known as Sema4, is now valued at $2 billion on the stock exchange, almost seven times its selling price, just 1.5 years after the sale.

CEO Katherine Stueland and CFO Kevin Feeley have been consistently selling their shares immediately upon vesting, without ever buying in the open market. This behavior suggests that company insiders may be aware of a significant risk that could greatly affect the company.

In 2022, before changing its name from Sema4 to GeneDx, the company had a dispute with UnitedHealthcare, which resulted in a settlement to repay $42 million over four years. Grizzly Research’s investigation suggests that the dispute was due to fraudulent code stacking, a fact that was not disclosed to investors.

Former employees have claimed that the company has continued the illegal code stacking practice, which is estimated to inflate revenue by approximately 25%. A former Vice President of the company stated that the scale of the code stacking scheme necessitates the active involvement of key executives, including CEO Katherine Stueland, CFO Kevin Feeley, and Chief Technology & Product Officer Matt Davis.

Grizzly Research anticipates that Medicare, Medicaid, and other health insurers will seek to recover overpayments made to GeneDx due to the illegal code stacking practices. The firm’s research also revealed an undisclosed whistleblower action against GeneDx. Whistleblowers have claimed that the company is operating illegal "independent" counselor entities that direct patients exclusively to GeneDx testing services.

Industry sources suggest that the Department of Justice is increasing efforts to combat Medicare and Medicaid fraud, particularly focusing on billing practices. Over $800 million in fines have already been issued against perpetrators, and Grizzly Research believes that GeneDx could be next in line for a substantial fine.

Since the name change from Sema4 to GeneDx, former employees testify that the company’s relationship with Mount Sinai, a renowned school and hospital network, has deteriorated. Former employees also claim that the company’s previous healthcare data platform, Centrellis, was merely a facade. GeneDx was using it to present itself as a data company rather than a diagnostics company to gain a higher multiple on the stock market. Achieving the company’s objectives for Centrellis would have required billions of dollars and several additional years of effort.

Clinical geneticists and industry experts have raised concerns that GeneDx’s tests do not offer superior accuracy compared to competitors, and the company lacks any sustainable competitive advantage in the marketplace.

GeneDx is also facing internal morale issues after Katherine Stueland laid off more than half of the company’s staff. Many former employees cite nepotism and favoritism towards ex-Invitae employees.

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