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Sequenom Stock Testing Signs Of Life

Posted: Jan 14, 2009 11:59 AM by Eric Fox

Tickers in this Article: EXAS, GILD, CELG, SQNM

Investors in Sequenom (Nasdaq:SQNM) are pinning their hopes on a new non-invasive diagnostic product developed to detect Down syndrome prenatally. As a result, the company's stock is up to 30 times its sales of the last twelve months. While the product has a large and promising addressable market, investors should be aware that extremely high expectations come embedded with this stock, too.

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Biotechnology and related companies are known for trading at high valuations due to investor expectations on future products and discoveries. However, Sequenom trades at the highest price-to-sales ratio of any company in the sector, with a market capitalization of more than $1 billion. More established companies in the sector trade at much lower valuations. Celgene (Nasdaq:CELG), for example, trades at 11 times sales and Gilead (Nasdaq:GILD) trades at nine times sales.

New Product
Sequenom is developing a non-invasive diagnostic product that can detect the presence of Trisomy 21 in fetal blood cells. Current methods used to detect Down syndrome in fetuses - amniocentesis and chorionic villus sampling - are invasive and carry the risk of miscarriage to the mother. In addition, both tests can give false negatives as well as false positives.

In late 2008, Sequenom released a summary of results from its clinical trials during the company's analyst day. Sequenom President and CEO Harry Stylli said, "Our SEQureDx Trisomy 21 Down syndrome test correctly identified 100% of Down syndrome samples with no false positives and no false negatives, and these observations were confirmed by invasive procedures for the high prevalence groups."

The market for what the company calls non-invasive prenatal diagnostics is a large one. Yearly, there are 130 million births worldwide, with 9.4 million per year in wealthier nations like the U.S. and the European Union. 6% of all births have some sort of birth defects and 500,000 amniocentesis tests and almost 3 million other tests are performed to screen for Trisomy 21 each year. The market for these tests is estimated at $3 billion annually. Therefore, Sequenom seeks to expand this franchise by developing additional tests to detect the presence of other genetic abnormalities. (Learn more about how to evaluate these types of companies in The Industry Handbook: Biotechnology.)

Regulatory Strategy
Most new drugs and other products are typically approved through a lengthy process involving the Food and Drug Administration (FDA). Sequenom says that the tests it is developing are considered to be "laboratory developed tests" and fall under clinical laboratory guidelines. This means that the first version of Sequenom's tests do not require FDA approval, which will save the company from the lengthy approval process.

Cash Burn
Since Sequenom is an early stage company with little revenue and large research and development expenditures, the company is currently cash flow negative. The company estimates that its cash burn will reach $36 million for 2008. Sequenom's available cash balance was $114.1 million at September 30, 2008. And the company raised $80 million in June 2008 to help fund its development over the next few years.

Sequenom is attempting to expand its diagnostic product line and recently made an offer to purchase EXACT Sciences (Nasdaq:EXAS). EXACT Sciences, which manufactures diagnostic cancer tests, promptly rejected the offer.

Pulling Off The Band-Aid
An investment in Sequenom is not for the faint of heart as a result of the drastic price increase to an outrageous multiple of 30 times sales. While the company's new SEQureDx Trisomy 21 Down syndrome test is promising, investors should beware. Stocks with such high expectations frequently disappoint. (To learn how to find a healthy pharmaceutical investment in a market full of weak drugs, check out Measuring the Medicine Makers.)

By Eric Fox

Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.

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