Scenario Analysis Yields 15% Upside For Sequenom

 |  About: Sequenom, Inc. (SQNM)
by: Ravi Jain

Brief Background

Sequenom (NASDAQ:SQNM) is a diagnostics company that has commercialized non-invasive diagnostics tests, branded as Heredi-T™ CF, MaterniT21™ PLUS, Heredi-T™, SensiGene® and RetnaGene™. It sells the hardware platform (MassARRAY) and consumables to run those tests, as well as performing those tests as a service in its own laboratories. Instrumentation and customer purchase consumables, together referred to as Products, and diagnostics services, referred to as Services, comprise SQNM's primary revenue streams with an almost equal split. The company has not yet reached profitability.

2012 Performance Review

In Q4 2012, SQNM performed ("accessed") 33,000 tests, more than quadruple the 8000 it performed in Q4 2011. In 2012, SQNM performed 92,000 tests, also handily surpassing the 23,300 in all of 2011. The average revenue per test in Q4 2012 was $639, a significant rise from the rate of $505/test in all of 2012. The increase in average revenue per test implies that the company is performing its more expensive tests at an accelerating rate, or shifting the mix of tests it performs to the more expensive variety, while performing fewer of the lower-revenue generating tests. Given a list price of $2700/ test for MaterniT, there is room for pricing power trend shift to accelerate future revenues.

The Products side saw a ~10% revenue decline from 2011 to 2012. The Q4 2012 revenue of $12.6M would indicate that the drop was an anomaly, as annualized Q4 2012 Products revenue would pass the 2011 total. Alternatively, Q4 may have experienced a bump in spending. Regardless of which it is, there may be some cannibalizing going on between the company's Services side and Products sales. It's not difficult to imagine customers holding off on Products purchases in favor of using Sequenom's labs to perform the tests. Depending on the rate at which the Services business grows, the Products revenue decline could be well covered.

Net losses were reported as -$0.29 for Q4 2012 and -$1.03 for all of 2012. The greater than expected -$0.23 Q4 loss was attributed to an increase in labor costs for sales and marketing, meaning that the company accelerated building up its sales force. Sequenom still has over 50 positions open, with most being for laboratory and operational staff and less than five for sales, marketing and account management. It would appear that the company has nearly completed its sales force and support staff build-out, which points to stabilizing costs of revenue.

Estimating 1Q2013 Performance

To estimate revenue and net earnings numbers for Q1 2013, I made the following assumptions:

(1) 3% quarter over quarter (Q/Q) growth rate for number of tests performed (conservative);

(2) 2% Q/Q growth rate in average revenue per test (conservative);

(3) 10% Q/Q decline in Products revenue (mildly aggressive);

(4) no increase in cost of revenues (mildly aggressive);

(5) no increase in operational efficiency (mildly conservative).

The assumptions lean conservatively to generate a worst-case scenario. Applying them yields a slight decrease in revenue in Q1 2013, which improves in subsequent quarters, particularly in the second half of 2013. For Q1 2013, I calculate a loss of $0.26 per share. If the growth rates in tests performed and revenue per test are higher and the Products sales decline is lower, Sequenom could easily cut its loss to $0.20 per share. There are nine analysts following this company and their average estimated loss per share is $0.23, with a range of -$0.17 to -$0.27.

Currently, the shares trade at ~$4.00, with a market cap of ~$458M. As a gross measure, there's a >5x multiplier of Sequenom's 2012 revenues and its market cap. A high multiplier is not unreasonable for a non-profitable, fast-growing company. If we extrapolate my assumptions to all of 2013, use a more conservative 4x multiplier to get its year-end market cap and calculate a 2013 year-end fair value per share, I arrive at a stock price of $4.69/share. From its current price, SQNM presents at least a 15% profit potential. Again, this is a conservative estimate and there is considerable upside from there, provided the company performs and manages to keep its costs under control. The company certainly has the cash to support rapid growth going forward. The Q1 2013 numbers should shed light on the rate of pick-up Sequenom's Services business is experiencing and I may need to modify my assumptions accordingly for the next analysis. The Excel file detailing the Sequenom model is available here.


There is risk that competitors could slow Sequenom's growth. A recent WSJ article mentioned Ariosa Diagnostics, but there is also competition from Natera, which is far along in developing non-invasive prenatal tests based on next-generation sequencing (NGS) technologies. NGS has impacted every facet of the biological sciences and the pharma and biotech sectors. It is only a matter of time until it completes the leap to becoming useful and approved in the clinical setting. How well Sequenom competes both operationally and strategically will determine its success in the marketplace.

Disclosure: I am long SQNM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.