Sequenom Splattered, Exact Sciences Could Benefit

 |  Includes: EXAS, SNY, SQNM
by: Mike Havrilla

With Sequenom (NASDAQ:SQNM) losing about three-quarters of its market value in pre-market trading to around 3 bucks per share, Exact Sciences (NASDAQ:EXAS) is poised to continue its comeback from penny stock levels late last year and has a chance to close the year at a higher market value than its molecular diagnostics rival.

SQNM launched a hostile, all-stock tender offer for EXAS earlier this year for $1.50 per share (which would now be valued at less than 40 cents), but EXACT rejected the deal in favor of a strategic pact with Genzyme (NASDAQ:GENZ) which involved a $24.5M cash infusion. Click here for a link to my comment (pasted below) on a Forbes article that was bullish on SQNM while trading around 25 bucks in late January:
SQNM is a heavily hyped (e.g. CNBC) and heavily shorted (9.1M shares short at year-end or about 15% of the 60M shares outstanding) stock trading at over 31X sales. While it may continue heading up in the near-term, this combination of factors usually does not end well.
Terms of the deal call for GENZ to acquire select intellectual property (IP) of EXAS related to prenatal diagnostics and reproductive health. EXAS retains the exclusive global rights related to the IP covering its colorectal cancer (CRC) screening and stool DNA (sDNA) testing. EXAS will also receive a double digit percentage of any sublicensing income that GENZ receives related to IP it purchased outside of prenatal/reproductive.
Just as EXAS ran into trouble after the FDA issued a warning letter for the homebrew sDNA test for CRC screening; SQNM is on the decline after announcing a delay for its Down syndrome test last evening due to employee mishandling of test data and results. SQNM previously planned to launch SEQureDx in June, but now plans to wait for publication of additional data from an ongoing study in a peer-reviewed medical journal. Details were scant on how the data was mishandled but the market reaction today indicates the issue may be more than a minor delay in the launch of SEQureDx.
While Exact Sciences has proceeded in a backwards fashion in the development of its stool DNAbased non-invasive CRC screening technology; a major cash infusion and deal with Genzyme along with a new management team with a proven track record in clinical diagnostics from Third Wave promise better times ahead for the company.
EXAS managed to gain inclusion in the American Cancer Society guidelines for CRC screening test options before developing a FDA-approved, automated test to fully capitalize on this major commercial opportunity. Thus, LabCorp (NYSE:LH) currently markets ColoSure on a homebrew basis with little in the way of sales and this is unlikely to change until FDA approval is secured for the Company's V3 technology.
Third Wave was acquired by Hologic (NASDAQ:HOLX) last year for $582M, and the management team now at EXAS led the development through FDA approval for two human papillomavirus (HPV) molecular diagnostic tests in addition to a test for cystic fibrosis. The new team should bring back investor confidence and perhaps analyst coverage of EXAS once their strategic plan is communicated to correct the backwards development of the Company's promising sDNA technology for the average risk population in the detection of CRC.
Also, the deal with GENZ in February resulted in a $24.5M cash infusion while EXAS retained the rights to a FDA-approved version of its sDNA test for CRC screening. Terms of the deal call for GENZ to acquire select intellectual property of EXAS related to prenatal diagnostics and reproductive health, which were not even accounted for in Sequenom's (SQNM) hostile $1.50 per share tender offer. Meanwhile, EXAS retained the rights to its key asset, a FDA-approved version of its next-generation (V3) sDNA test, which represents a much larger commercial opportunity than prenatal diagnostics.
Disclosure: Long EXAS