Biotech Firm Accused of Price-Capping Scheme

SAN DIEGO (CN) - In a scheme to boost sales, Sequenom illegally capped the price of its genetic test for Down Syndrome at $230 for out-of-pocket patients but billed insurers $2,700 for the same test, a shareholder claims in a derivative action.

Bette Borenstein filed a federal shareholder derivative action against Sequenom Inc. and nine of its corporate officers.

Sequenom is a biotech company headquartered in San Diego that specializes in genetic testing.

"The company's flagship product is MaterniT21 PLUS, which primarily uses genetic analysis to detect Down syndrome in fetuses through application of a non-invasive test administered to the pregnant mother, according to the complaint. "MaterniT21 PLUS is reportedly over 99 percent accurate and is Sequenom's primary opportunity to obtain and consolidate market share in the rapidly growing, multibillion-dollar genetic testing market."

However, a MaterniT21 PLUS test costs $2,700, and insurance typically does not cover the full cost of the test, according to the lawsuit. As a result, many doctors are hesitant to order Sequenom's tests, as patients would need to pay directly out of pocket.

To resolve this problem, the company allegedly adopted a "capping scheme" that violated multiple federal and state laws.

"The capping scheme functioned this way: the company's sales representatives and marketing materials would represent to physicians that patient cost per test were capped at $230, and could potentially be reduced to $0," Borenstein claims. "Doctors would then be more likely to order the test for their patients, without fear of exposing the patients to thousands of dollars in costs. After a test had been ordered and analyzed, Sequenom would bill the patient's health insurance company the full cost of the test. If the health insurance company refused to pay part or the entire claim, Sequenom would not seek collection from the patient of the actual amount still owing, the actual deductible, or the actual co-pay. Instead, Sequenom would bill the patient $230, even if the amount owed was thousands of dollars."

This scheme had the desired effect, and demand for MaterniT21 PLUS tests shot up more than 150 percent between 2012 and 2013, according to the complaint. Executives were allegedly paid bonuses based on these results.

But the company "purportedly directed its sales force to cease marketing the capping scheme at the end of the first quarter 2013," the shareholder claims. "Immediately, the volume of tests ordered, and the company's revenues, dropped."

When Sequenom released its disappointing second quarter 2013 results, it "blamed the drop in tests ordered and revenues on 'molecular diagnostics coding changes,'" according to the lawsuit, and failed to disclose that the end of the capping scheme was the real reason behind the poor results.

"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," Borenstein says.

The lawsuit accuses the company of breaching its fiduciary duty and abusing control, and demands derivative damages and the implementation of stronger shareholder supervision.

Borenstein is represented by Blake Muir Harper with Hulett Harper Stewart, who did not respond to a request for comment.

Sequenom told Courthouse News that it could not comment on an ongoing investigation.

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