NEW YORK (GenomeWeb News) – A shareholder is suing Sequenom and its board, alleging they breached their fiduciary duty and damaged the company by implementing an illegal strategy to drive up orders of the MaterniT21 Plus non-invasive prenatal diagnostic test.
The lawsuit was filed on Sept. 30 in the US District Court for the Southern District of California by Bette Borenstein derivatively on behalf of Sequenom, who also is a nominal defendant.
Through a spokesperson, Sequenom said that it does not comment on ongoing legal actions.
The lawsuit centers on a plan that Sequenom's board implemented in order to drive up physician orders for the MateriT21 Plus test, Borenstein alleges in a complaint. While the plan initially drove up test adoption, it put Sequenom at odds with federal and state laws, and when the strategy was discontinued, testing volume dropped, driving down revenues along with it.
According to the lawsuit, the plan, which Borenstein called a "capping scheme" in her complaint, worked as follows — Sequenom's sales representatives and marketing materials informed physicians that MaterniT21 Plus would be capped at $230, rather than the typical $2,700.
The lawsuit said that many health plans do not cover the test as medically necessary and do not cover Sequenom as an in-network provider. "Claims for the full cost of the test are routinely denied," Borenstein said. "As a result … many doctors were hesitant to prescribe Sequenom's tests because the high cost would often need [to] be paid directly by the patient."
By capping the test at $230, physicians were induced to order the test without concerns that patients would be held responsible to pay thousands of dollars for it. After the test was ordered and analyzed, Sequenom would bill the patient's insurer for the full cost of the test, but if the insurer denied the claim, Sequenom would bill the patient the $230 and digest the remaining cost of the test.
The plaintiff alleges that the capping scheme, which was implemented in September 2012, was never disclosed publicly.
According to the complaint, after implementation of the scheme, testing volume shot up. Between the third quarter of 2012 and the first quarter of 2013, the number of MaterniT21 Plus tests accessioned per quarter rose from 13,000 to 35,000, a more than 150 percent spike. Sequenom raised its annual run rate for the test several times from 65,000 in the second quarter of 2012 to 140,000 by the first quarter of 2013, the complaint added.
"On these positive results, senior executives and employees throughout the company were paid bonuses and incentive-based compensation," it said.
During the first quarter of 2013, Sequenom "purportedly" directed its sales staff to end the capping scheme without reason — though the lawsuit alleges that the company continued to offer capping scheme prices until at least April 1 — and "immediately, the volume of tests ordered and the company's revenues dropped."
The complaint points to the company's second quarter financial results, which showed that while revenues increased 91 percent year over year, the results fell short of analyst estimates on the top and bottom lines, and Sequenom blamed the disappointing numbers on changes to billing and payment codes for molecular diagnostics that led to problems getting reimbursed for some tests.
The company's stock was immediately hammered, and its share price currently trades at about 40 percent below its price before the Q2 earnings announcement.
"The defendants knowingly permitted the company to misleadingly fail to disclose the capping scheme as the cause of the rapid increase in MaterniT21 Plus accessions during the fourth quarter of 2012 and the first quarter of 2013, and they knowingly permitted the company to misleadingly fail to disclose that the end of the capping scheme was a major cause of the company’s disappointing second quarter 2013 results," the complaint said.
In addition, the plaintiff alleges that Sequenom's capping scheme "violated multiple state and federal laws.
"According to the company's own public filings, the civil monetary penalties imposed for practices such as the capping scheme can be up to $10,000 for each wrongful act and can result in exclusion from participation in Medicare and Medicaid, among other civil and criminal penalties," she said in her complaint.
According to the filing, the harm and potential harm to the company includes a decreased ability to obtain financing; costs incurred in compensation and benefits paid to defendants; "costs incurred in incentive and/or bonus compensation paid to employees based on artificially inflated test accession numbers"; a "substantial" loss of market capital; costs that have already been incurred from defending the company against government investigations, subpoenas, and litigation; and fines that may result from violations of federal and state laws.
The current Sequenom board comprises Chairman and CEO Harry Hixson; Ronald Lindsay; Ernst-Günter Afting; Kenneth Buechler; John Fazio; Myla Lai-Goldman; Richard Lerner; David Pendarvis; and Charles Slacik. All were also directors at the time of the alleged capping scheme.
The lawsuit seeks damages of an amount to be determined to be awarded to Sequenom. It also seeks exemplary damages, as well as relief deemed just and proper by the court.
Additionally, it asks the court to direct the company and its board to "take all necessary actions to reform and improve its corporate governance and internal procedures to comply with applicable laws"; to protect Sequenom and its shareholders from similar actions in the future; and to direct the company to allow shareholders to nominate at least three candidates for election to the board, among other demands.
The lawsuit comes amid efforts by Sequenom to find its footing following the second quarter results. In August, it said it would lay off 75 workers as part of a reorganization, and last week its board approved a strategic review of the company's Genetic Analysis segment.