What happened

Shares of genetic testing specialist Myriad Genetics (NASDAQ:MYGN) dropped more than 13% today after it disclosed through an SEC filing that it had received a subpoena from the Department of Health and Human Services (HHS), Office of Inspector General (OIG), in an ongoing investigation into the company's billing to government-funded healthcare programs. The company is cooperating and has not faced any claims at this time.

The investigation is related to the company's hereditary cancer testing segment dating back to the first day of 2014. While Myriad Genetics has worked to diversify revenue in recent years, hereditary cancer tests provided 65% of total revenue in the most recent quarter, so it's easy to see why the news is shaking Mr. Market.

As of 3:11 p.m. EST, the stock had settled to a 12% loss.

A stock chart drawn on a chalkboard showing losses.

Image source: Getty Images.

So what

The news isn't good, but there's still too little information available for investors to gauge the impact, if any. However, GenomeWeb provided more details on the issue for investors. The investigation appears to revolve around the specific billing codes submitted to the Centers for Medicare & Medicaid Services (CMS).

GenomeWeb reports there are three different codes Myriad Genetics can use to be reimbursed for its lucrative BRCA genes tests: one for full sequencing analysis of the genes involved, one for less-detailed analysis of the genetic sequences involved, and one to denote that both services were conducted.

CMS created the third billing code specifically to prevent the stacking of the first two codes, which have a combined sticker price of $2,900. The third billing code results in a payment of just $2,253 in 2018 and falls to $1,825 in 2020.

While stacking the first two billing codes would result in more revenue for the company, it would place a greater strain on the health system by increasing costs for CMS. It may seem like a minor infraction, but GenomeWeb noted Myriad Genetics put the following summary of penalties in its most recent 10-K: "[T]he federal False Claims Act could include payment of up to three times the damages sustained by the government, civil penalties ranging from $5,500 to $11,000 for each false claim, and exclusion from the federal healthcare programs."

Now what

Today's news comes exactly one week after the U.S. Food and Drug Administration granted genetic testing company 23andMe the first-ever authorization to sell direct-to-consumer tests for variants of the BRCA1 and BRCA2 genes. Combine that with increasing competition from high-quality, high-volume, and low-cost genetic testing companies such as Color Genomics and Invitae, and it's clear that Myriad Genetics is under tremendous pressure to diversify its revenue -- and quickly. The uncertainty injected into the situation by the subpoena from the OIG only adds to the anxiety for investors.

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