Tuesday, September 21, 2010

Sequenom Back On Track?

At a UBS presentation the other day, Sequenom (Nasdaq: SQNM) confirmed that it was basically on track with the timeline that the company has been talking about for its trisomy 21 (Down Syndrome) pre-natal test.

According to the plan, the company hopes to launch a lab-derived test (LDT) test in late 2011 (fourth quarter), with a PMA filing in the second half of 2012. Along the way, the company says it expects to submit clinical data for publication in the third or fourth quarter of 2011, which should mean that the data is in print well before the FDA filing. Data from a 450-person validation test should be available around the end of the quarter, with the large-scale pivotal study following thereafter.

This company has had a helluva time over the past couple of years, with a scandal regarding the prior trisomy 21 test data costing the company its CEO, CFO, credibility, time, and money. It does appear, though, that the company's fundamental underlying technology does work and there was always a real market opportunity waiting for the right product/technology.

Sequenom is developing this test to run on the Illumina (Nasdaq: ILMN) HiSeq platform, as sequencing has been shown to be the better approach. Why Illumina's platform instead of Life Technologies' (Nasdaq: LIFE) SOLiD? Just look at the market share ... Illumina is clearly winning the sequencing market share battle today and it looks like the HiSeq is the better "box"

While it might sound like marketing a test to run only on a $700,000 piece of equipment (for the most basic model) is a profit-limiting decision, that likely will not be the case. I've seen a few analyst models that suggest that running the machine at full capacity will produce a gross profit break even in just 23 days of testing.

All in all, this trisomy 21 test could have a market potential of around $1 billion on the basis of high-risk pregnancies and reflex testing for lower-risk pregnancies. That's assuming very solid market penetration and reimbursement, but the limitations of alternative approaches reduce those risks somewhat. Given that Myriad Genetics (Nasdaq: MYGN) manages to pull over $3,300 from managed care groups for its BRCA test, it seems pretty credible that SQNM can charge at least $1,500 for the test (especially since invasive pre-natal tests cost $1,500 and up).

Keep in mind, too, that these tests are exceptionally lucrative - assuming just average manufacturing capabilities, SQNM should be able to produce gross margins in the 60's or 70's.

Does that make SQNM a good buy now? Well, even allowing for all of the garbage in SQNM's past, this looks like a pretty interesting test and one that should be less initially controversial than Myriad's BRCA test. By the same token, I would not rule out the risk of what I would call "social controversy" here.

The reality is that while some parents may use the results of this test to prepare for a child with special needs, others will elect to terminate the pregnancy upon learning the results. It does not seem unreasonable, then, to think that this test is going to be a flashpoint in that debate and a target of activists. That could create some complications for doctors who wish to offer the test, but it likely is something that can be worked around - at the bottom line, if the test works people are going to find a way to get access to it.

So, buy the stock here? I dunno ... maybe? My model says a fair price is somewhere around $8.50 to $9 a share ... certainly a higher level than today's price, but not a great amount of upside for a story that still carries some risk. On a dip, it would be more interesting but there are just too many other cheap names to reach too far for this one.

Quick update - Although I neglected to mention it in the original post, I had modeled the company doing a capital raise of about $125M (equity) when I originally did the valuation analysis. So, the shelf filing after the close today doesn't change anything for my analysis. The company needs to raise capital and the stock is at a price where doing so won't be punishing.

2 comments:

Patrick said...

what do you think about the $150M shelf filed today?

Stephen Simpson said...

Right ... forgot to mention the need to raise capital.

As it happens, I had a capital raise around that figure factored into my model - I just neglected to write about it.

So, it doesn't change my sense of fair value and I think it was something that they clearly needed to do. And given how the stock has recovered, it seems like they'll get a reasonable value on it.