Monday, May 24, 2010

Sequenom (NASDAQ:SQNM): Bullish on the technology and Sequenom’s prospects for commercializing T-21 in 2011 - Barclays

Barclays Capital is out surprisingly positive on Sequenom (NASDAQ:SQNM) ahead of of forthcoming data on sequencing for trisomy-21 (T21) screening, saying they are bullish on the technology and Sequenom’s prospects for commercializing a test in 2011. Firm is raising their target to $9 (prev. $7) and is reiterating Overweight rating on the name.

Now that the funding overhang has been removed, investor focus is returning to the company’s in-development sequencing-based T21 test. Barclays has reviewed the history of non-invasive prenatal diagnostics (NIPD), academic literature on aneuploidy testing using sequencing, identifies and discusses major issues with sequencing, and updates their patient-based model assumptions.

Lo sequencing data likely to be positive. Based on evidence to date, sequencing is a valid, universal method for NIPD of aneuploidy, with the three small proof-of-concept studies in literature all demonstrating a 100% detection rate. The father of Sequenom’s technology, Dr. Dennis Lo, will this summer publish a ~700 sample T21 sequencing NIPD study, the first large-scale test of sequencing for prenatal screening. Barclays expects a positive outcome, and investors are likely to read-through to Sequenom’s indevelopment test; they think the risk-reward for SQNM over the coming months is favorable.

Target Market
Barclays notes they have changed their assumption for the test’s target market. Firm now anticipates that the test will be targeted as a first-line screening test for the high-risk pregnancies and secondline (reflex from serum screening) for low-risk pregnancies. “High risk” is likely to be defined as maternal age of 35+, and/or other risk factors.

The company’s clinical trials evaluate the high-risk population as a practical matter (it would be prohibitively expensive to run a prospective clinical trial on the general population for a condition with the prevalence of T21), so clinical performance in a high-risk population will be the data that the company uses to sell the test. They think there could be potential regulatory issues should the company launch the test and then market it as for use in lowrisk pregnancies without any data to this effect.

There are more than 600,000 pregnancies annually in the US by mothers over 35 years of age. The risk of aneuploidy increases substantially after this age.

The likely price of Sequenom’s test, somewhere in the $1,500 range, is significantly more expensive than other non-invasive tests (in the $100-$300 range), but cheaper than invasive sampling ($1,500-$3,000). The final price will be set based on the clinical performance of the assay, with higher clinical performance justifying a higher price. Some may consider this test to be very expensive, though we think that in a high risk setting this price could be achievable. Barclays' uptake assumptions are purposely low and slow as a result of price.

The molecular diagnostics market is relatively young, though there are clear examples of successful commercialization and managed care coverage of multi-thousand dollar tests. The most well-known example of this is probably Myriad Genetics’ BRACAnalysis test, which costs $3,340 and has reimbursement from managed care.

They estimate the cost of goods for the sequencing test at launch is likely to be approximately $400. This means that if the company can get $1,500 reimbursement as they have estimated, gross margin on the test could be as high as the mid-70s%. Barclays assumes 75% probability of success for T21, and U.S. risk-adjusted revenue of $326M in 2015. The company estimates the U.S.-only market opportunity for this test at $1.5B+. They assume ex-US introduction occurs with a 1-2 year lag to the U.S.

Notablecalls: First of all, I must say that I skipped about 16 pages of this 19 page call as the science part of the trisomy-21 test is just way over my head. So, Barcap's Anthony Butler, Ph.D is basically saying the test works. That is, at least in his opinion.

When you have a tier-1 firm out positive on a binary situation like Sequenom, people tend to notice. Despite their conviction, Barcap's $9/share target isn't even the Street high.

All in all, I expect the stock to be strong today. Should trade at least above the recent swing high, putting $6.30-6.50 levels in play.

Note that Lazard is also out positive on Sequenom this morning, following meeting with management. Firm remains bullish on Sequenom and expects the company to be able to commercialize a Down Syndrome test by the end of 2011. They expect shares could run upwards on Dr. Dennis Lo’s data this summer. Reits Buy and $13 target.

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