Thursday, April 30, 2009

Sequenom (NASDAQ:SQNM): Colour on news

Several firms commenting on Sequenom (NASDAQ:SQNM) after the co announced it has delayed the launch of its Down syndrome (T21) test due to “employee mishandling” of R&D study data in both the RNA & DNA arms. As such, the company is no longer relying on previously reported results as “the clinical performance appears questionable”. SQNM is also reviewing data from its other Dx tests, and a special independent committee is investigating.

- Stephens is downgrading SQNM to Equal Weight from Overweight while lowering their tgt to $6 from $30. Clearly SQNM has taken a substantial credibility hit here and will likely lose a significant portion of its market capitalization today. Furthermore, they believe a delay in the launch of the prenatal diagnostics franchise exacerbates potential liquidity risk. Firm believes the best way to currently value the business is to look at a sum of the net parts. Given current uncertainty surrounding SQNM's diagnostic franchise, they recommend investors move to the sidelines until we receive externally validated data.

- JMP Securities lowers rating to Market Perform from Outperform noting that much to their chagrin, the launch of SEQureDx test for Down Syndrome is delayed by 1-1.5 years (originally scheduled for mid-2009). Sequenom has launched an independent investigation and suspended the four employees involved in the incident. As a result, the data published on June 4th, September 23rd, December 1st, January 28th, and February 3rd will be reviewed and the launch of Rhesus D, cystic fibrosis and Fetalxy tests will be pushed to 3Q09. Although management reaffirmed their confidence in the SEQureDx technology and reiterated a commitment to revalidate the T21 test with additional studies by 4Q09 (targeting 1,000 subjects, with data publication projected in 1H10), given the poor track record (note the erroneous data presentation at its analyst day on January 28 and its subsequent correction), the firm believes Sequenom’s tenuous credibility has evaporated, as have their molecular diagnostics (MDx) sales projections. Based on the limited information provided during the conference call, it is difficult to gauge the extent of this “data mishandling” and whether the NIPD test is salvageable, leading some to question the validity of the SEQureDx platform altogether. Thus, restoring credibility with the investment community could prove to be a long and treacherous road.

JMP believes that the stock may trade lower (potentially to $2, sum of the parts based on 2x FY09 revenue of $32 million plus FYE09 cash of ~$1/share) due to lost confidence in management and reduced growth prospects over the next 12 months.

- Barclays notes that needless to say, fraud changes the investment thesis in shares of SQNM. While much will be written about the who, how, and why, these events are now in the past. The question is what to do with the stock from here. The company's genetic analysis business is breakeven in a tough year and is likely to grow over time. They estimate the value per share of this business to be about $4. As for diagnostics, the market is likely to wholly write off any value for diagnostics, assuming that this setback does not merely represent a delay. Yet there is evidence that the company's technology is likely to result in an assay which may at some point become a commercializable test. While they and the market will remain skeptical in the absence of reliable peer-reviewed data, they allow for its possibility.

Barclays maintains Overweight but lowers tgt to $10 from $38.

Notablecalls: As you can see, the preliminary view on the shares is quite grim - very little info was given on the conf call which likely means even the management doesn't fully understand the situation (or there is freal fraud involved). Not a situation many are willing to step in.

On the other hand short interest stands at 26% of float which means there will be at least some short covering helping the shares. But do note SQNM will need to raise capital in the next 12 months or so to offset the cash burn.

There is ONE positive aspect to this situation, though: The stock will be very prone to move on any additional info. I'm sure Notable Calls Network (NCN) will do its best to be on the forefront when it comes to getting that info and putting it to work.

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