Monday, August 18, 2008

Marcial: Sequenom's Down Syndrome Test

Marcial: Sequenom's Down Syndrome Test

Shares of Sequenom (SQNM), a maker of genetic testing and molecular diagnostic products, have jumped off the charts recently—with the stock price zooming from 5 in April to 21 by Aug. 15. What's firing up the stock?

Sequenom is developing a noninvasive prenatal test to detect Down Syndrome in pregnant women. The genetic disorder causes mental retardation and stunted growth. Some analysts predict that Sequenom's product could be a game-changer in the field of medical diagnostics.

The "revolutionary" technology that's involved is part of Sequenom's MassARRAY system that seeks to establish its test as "the next-generation standard for prenatal and oncology molecular diagnostics," says Pamela Bassett, an analyst at investment firm Cantor Fitzgerald, who rates Sequenom's stock a buy in spite of its sharp ascent. She first recommended buying the stock in March when it was trading at 5.06 a share, with a target of 12. "It is one of my top picks for the year," she says. Bassett has since raised that target to 29.


There are tests for Down Syndrome already on the market, but, says Bassett, Sequenom's product removes prevailing concern about their accuracy.

Sequenom's test, called SEQureDX, screens a pregnant woman's blood for certain biomarkers from the unborn child to determine whether specific genes are functioning in a way that is linked to the syndrome. There have been lawsuits against physicians who have failed to detect the presence of Trisomy 21, the genetic variation that causes Down's—yet another reason for improving the accuracy of such tests, says Bassett.

To validate its technology, Sequenom has announced results from 200 clinical studies that showed its test identified all Down Syndrome samples with "no false positives," says Bassett. Based on those findings, the company expects to launch a 10,000-patient study of SEQureDX in the second half of 2008 in preparation for the product's commercial launch in the second quarter of 2009.

Bassett predicts that if the big study validates earlier results, Sequenom's diagnostics could become the front-line test in this large diagnostics market.

$6-$8 billion potential?

Sequenom CEO Harry Stylli says the SEQureDX test provides 99% accuracy in "sensitivity and specificity." In the U.S. alone, he says, where there are six million pregnancies each year, the potential market for Sequenom's test runs to about $1.5 billion to $3 billion. Worldwide, the potential could be up to $6 billion to $8 billion, he adds.

Peter Kolchinsky of RA Capital Management, which owns a 10% stake in Sequenom, says the test's value is enormous because the magnitude of the difference in accuracy when compared with existing tests "is so large." He considers it the Holy Grail to obstetricians who have been seeking a precise and noninvasive screening for Down Syndrome. Based on the millions of pregnant women each year in the U.S. who would surely opt for this more accurate test, he estimates that Sequenom will see sales of up to $2 billion by 2012. On that basis, he says the stock's potential is still underappreciated and ventures that the shares could again triple or quadruple from their current level in four years.

Sean Kavin, an analyst at Lazard Capital Markets, says that Sequenom's prenatal diagnostics represent a "home-run opportunity" for the company. The current tests available—amniocentesis and chronic villus sampling—are not only invasive but can cause miscarriages, says Kavin. Sequenom's noninvasive tests have the potential of changing prenatal care for the better, he says.

John L. Sullivan, an analyst at investment firm Leerink Swann, which has done banking for Sequenom, says the company's test can reach the market in mid-2009 and produce revenues of around $100 million in 2010. "With the 99% detection rate and zero false positives/false negatives seen to date in clinical testing, we think the test will immediately compete well in the Down Syndrome screening market," he says.

Sullivan raised his per-share target for the stock to 30 at the end of July, up from an earlier 15. He forecasts that the company, which has yet to show a profit, will start making money in 2010—about 18 a share for the year—on total projected sales of $165 million. Sequenom reported 2007 revenues of $41 million and a loss per share of 57.

The big question is whether Sequenom can meet the Street's lofty expectations. Execution is essential, of course, in launching the screening product. Investors will be looking for that baby to thrive in the years to come.

Unless otherwise noted, neither the sources cited in Gene Marcial's Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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