A Private Deal For Sequenom

Interesting little deal today in the diagnostics space.  

Sequenom (SQNM) announced a private placement of 12.4M shares at a price of $4.15/sh ($51.6M total). The company definitely needs the cash to continue its R&D program, and the size of this deal should calm the funding fears for a while.Still, I can't help but notice that the investors in this deal demanded a pretty substantial discount to the prevailing stock price - nearly a 25% haircut to today's opening price.

To me, that seems like a pretty fair discount given the concerns and controversy around this company. There are plenty of places where you can read about the details, but the gist of it is that a major scandal hit the company last year; costing most of the sr. mgmt their jobs, costing the company several lawsuits, and throwing into question whether or not the company's lead test even works. On top of that, I'm still under the impression that the owner of the underlying technology (who had extended SQNM a license) wants out of that agreement.

So, in other words, this is a $340M market cap company trading basically on the hope that their test for Down's Syndrome works (but where the past data is all but useless because of the possibility of deliberate bias in prior studies) and that they still have the rights to develop and market it. Given all that, then, a 25% discount is not an unreasonable margin of safety.

On a more positive note, the company gave pretty clear guidance last week regarding the development timeline for this test, with test optimization expected to be over by the end of Q3'10, testing of samples conducted in the fourth quarter, and commercial launch by the end of 2011.Now, maybe I'm reading too much into this, but doesn't this sound a bit like "back to the drawing board?" If  they're having to go back to test optimization, that suggests to me that there were at least a few significant flaws in the old test. Whether that completely invalidates the old promise or not, I do not know. Unfortunately, I don't think anybody outside the company knows either, so it's basically an exercise of faith at this point.

I happen to think that the baseline technology the company is using is pretty sound, and I think there's some real market potential for this test. But with so many other options to chose from, and options that offer "clean" stories, I just don't see the need to take the risk here right now.