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Why the Sonic Healthcare Limited (ASX:SHL) share price is falling today

The share price of Sonic Healthcare Limited (ASX: SHL) crashed this morning on fears that the medical diagnostic services group is facing its own big bank de-rating moment.

The stock tumbled by around 3% at the opening bell before recovering some of its steep losses to trade 1.1% in the red at $23.70 during the morning session, when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is down 0.5%.

The stock could keep underperforming for a while yet as authorities investigates its involvement in the Irish cervical cancer scandal that could potentially expose Sonic to paying hundreds of millions of dollars in liabilities.

According to a report in the Australian Financial Review, Sonic’s US division is accused of being one of the laboratories that had given patients the “all clear” when it later emerged they were at high risk of cervical cancer.

The company’s US lab at the centre of the scandal, Clinical Pathology Laboratories (CPL), had to pay £2.5 million ($4.4 million) to an Irish woman after it misdiagnosed her pap smear and who’s now terminally ill.

The Irish government is now investigating how wide-spread the problem is after at least 208 women were given negative results but who were later diagnosed with cervical cancer.

The country’s cervical screening program is undertaken by three labs, including Irish-based Medlab Pathology, which works with CPL, according to the AFR. The other two labs have no links to Sonic.

Sonic is reassuring investors that this is an isolated incident and that the company has a good reputation in the market for best practices.

There’s nothing to suggests otherwise, but then many experts also thought the same of our big banks that include Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Group (ASX: WBC), National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ).

Investors are particularly sensitive about corporate bad behaviour given the big destruction in shareholder value when the Banking Royal Commission exposed “oversights” by the big banks and AMP Limited (ASX: AMP).

The thing is, the Irish scandal could prompt other countries to investigate practices at medical labs, including those run by Sonic.

Increased government scrutiny is almost always a value-destroying exercise for listed companies. Shareholders should pay close attention to this space.

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Motley Fool contributor Brendon Lau owns shares of Australia & New Zealand Banking Group Limited, National Australia Bank Limited, and Westpac Banking. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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