Insys (NASDAQ:INSY) shares have taken a big hit this past week as allegations surfaced surrounding Medicare fraud by a neurologist in Michigan, one who happens to be a large prescriber of Insys' top-selling drug Subsys.

That news sent shares tumbling more than a third since the end of April, though the prescribing doctor accounted for just 3% of Subsys scripts year-to-date -- hardly a deathblow, given Subsys prescriptions grew 15% sequentially last quarter.

Additionally, Insys has a slate of new potential treatments that could diversify its exposure away from Subsys, including a promising new take on Marinol, a chemically synthesized form of the THC cannibinoid found in marijuana.

INSY Chart

INSY data by YCharts

First, some background on Subsys
Subsys is an opioid pain killer delivered by an under-the-tongue spray. The drug won FDA approval in 2012 and is used to manage breakthrough pain in adult cancer patients who have already received and become tolerant to around-the-clock opioid pain therapy. The drug competes mainly with Actiq, which held nearly three quarters of market share prior to Subsys' approval, and Fentora, both of which are made by Teva Pharmaceuticals (NYSE:TEVA).

Following Subsys' approval, Insys' marketing team has been aggressively calling on prescribers of Actiq and Fentora in a bid to get them to switch over to Subsys. That marketing approach has been successful so far, given that Actiq's market share has dropped from 72% to 35% over the past couple years.

While the news regarding the Michigan doctor is discouraging, investors should remember that Actiq, which is made by Cephalon, has had its own share of bad press over the past decade. In 2008, Cephalon, which was acquired by Teva Pharmaceuticals, paid more than $400 million in fines related to off-label marketing of its products, including Actiq (in a lollipop form). Despite that payment, Actiq remained a valuable pain treatment option and a top selling fentanyl product.

Whether a fine is in Insys' future is unknown. It appears that Subsys sales, which jumped from less than $10 million a year ago to more than $40 million in the first quarter, appear to be coming from prescriptions for use outside of its approved indication in cancer patients. While doctors have free reign in prescribing any drug for any patient based on the patient's condition, that red flag suggests a couple more quarters of sales data should be digested to see whether increased scrutiny is decreasing doctors' willingness to prescribe Subsys.

Innovating marijuana
Outside of Subsys, Insys is also close to applying for FDA approval of a new version of Marinol, a version of the cannibinoid THC that is used to treat nausea and vomiting in cancer patients and to stimulate hunger in HIV patients.

Marinol has been on the market since the 1980s, and was generating more than $100 million in sales for Solvay Pharmaceuticals as recently as 2007. In 2010, AbbVie bought Solvay's pharmaceutical arm, giving it control of Marinol, and while AbbVie doesn't break out sales of Marinol, the availability of generics has likely cut deeply into Marinol's revenue. In 2008, Solvay reported that Marinol's sales had already slumped roughly $60 million following generic introductions in 2008.

However, given that Marinol was once a popular drug with a nine figure sales run rate, Insys believes there's an opportunity to repackage the drug and win market share, as it's done with Subsys.

As a result, Insys has formulated an oral version of Marinol that it claims works faster and better while providing more dosing flexibility.

The company completed a bioequivalence study in 2012 and a pre-filing meeting with the FDA, and claims to be on track for an FDA filing by midyear. If the drug wins the FDA's go-ahead, it will be used as a second line therapy for patients whose nausea and vomiting is inadequately controlled by other measures.

Fool-worthy final thoughts
Insys has a lot on its plate and plenty of investors are wondering whether another shoe will drop in the future related to its marketing practices.

Subsys appears to have a stable group of prescribers, given that no one prescriber accounts for more than 5% of its prescriptions. Subsys, like Teva's Actiq and Fentora, is a highly controlled substance, and is only prescribed through doctors who are trained on and participate in a registry that is reported to the FDA quarterly.That insulates Insys a bit against risk, but there's nothing to say other doctors won't be targeted by regulators.

While oral Marinol could prove a more effective option than existing Marinol, it remains to be seen whether the FDA will approve it, and whether the market will embrace it. For all those reasons, investors should watch Insys, but approach it cautiously.