Case of the Month: Foundation Medicine Faces Lawsuits from Shareholders & a Business Rival

Astart-up diagnostics firm on the precipice of a lab product breakthrough becomes a Wall Street darling. But, alas, the product fails to meet its lofty expectations. The firm's stock tanks and the investors left holding the bag sue the lab for fraud. No, we're not talking about Theranos. This case pitting a lab against its former investors comes from a different sector of the diagnostics market.

The Foundation Medicine Case
Established in 2009, Foundation Medicine, Inc. is a provider of molecular diagnostic information known for its next-generation sequencing-based cancer assays, including FoundationOne for solid tumors and FoundationACT for circulating tumors.

At up to $7,200 per test, Foundation's business is heavily reliant on major insurance coverage. So when Foundation and its officers made a series of statements suggesting that Medicare coverage of the tumor tests was likely, the company's common stock took off. But things didn't pan out. In July 2015, after nearly 18 months of optimism, the company disclosed that the expected coverage approval from Medicare would not be forthcoming any time soon and slashed its financial guidance for the year. The announcement caused a 24% ($7 per share) decline in stock price. In November, came more bad news and deeper guidance cuts causing the stock to plummet even farther.

Now Foundation's investors have filed a class action lawsuit in Massachusetts federal court (Foundation is based in Cambridge) claiming that the company's officers knew all along that the representations about Medicare coverage of the tumor tests were false. From now through Sept. 26, the trial lawyers are looking for investors who bought Foundation stock during the affected period (February 2014 to November 2015) to participate in the suit, including individuals who are willing to serve as the lead plaintiff.

Meanwhile, Foundation Renews Acquaintances with a Familiar Legal Adversary
Of course, Theranos is also facing securities fraud claims from its investors. But that is not the only similarity between the Theranos and Foundation cases. The other thing the labs have in common is a parallel consumer fraud lawsuit.

In the Theranos case, the complaint came from the Arizona Attorney General. Foundation's nemesis, by contrast, comes from the private sector. In June, Guardant Health filed a lawsuit in California federal court charging Foundation with making false and misleading claims by misrepresenting its tests as "best in class." In addition to being Foundation's competitor in the liquid biopsy market, Guardant Health is also a former litigation adversary. In 2016, Foundation sued Guardant Health for patent infringement. Now the tables have been turned and Foundation will occupy the defendant's seat.

Takeaway: Stay tuned. Both cases have just begun and will bear close watching in the months ahead. We'll keep you apprised on both fronts.