The shares of Sequenom (SQNM), a life sciences company, on October 31, 2013 plunged approximately 23% following the Court ruling for the patent litigation against Ariosa Diagnostics, a private molecular diagnostics company. The litigation was based on the patent infringement claim by Sequenom involving noninvasive prenatal diagnostics (NIPD). However, the court ordered that the claim was not eligible for a patent.
U.S. Patent No. 6,258,540 is a patent owned by Isis Innovation Limited and has been exclusively licensed to Sequenom. The patent stakes a claim on the detection of fetal origin paternally inherited nucleic acid, from a maternal blood sample. This enables a noninvasive prenatal diagnosis without any risk of miscarriage. The base of the Sequenom's MaterniT21TM laboratory developed test (LDT) is the above mentioned patent.
Sequenom Inc. and Ariosa Diagnostics have been involved in a patent infringement lawsuit concerning the noninvasive diagnosis. Ariosa Diagnostics filed a suit for declaratory judgment against Sequenom following the public threats made by the latter regarding enforcement of their patent. However, Sequenom filed a counter lawsuit for patent infringement against Ariosa Diagnostics. Sequenom further filed a preliminary injunction motion against Ariosa Diagnostics that barred the latter from manufacturing and sale of prenatal tests, related to the patent, until the resolution of the litigation that took almost two years.
On October 30, 2013 the U.S. District Court in Northern California invalidated the patent for the Down Syndrome Test, on the basis that it covered non-patentable natural phenomena. It was based on the grounds that the detection of fetal cell-free DNA in a maternal blood stream is a natural phenomenon and it can't be exclusively patented to one company. Resultantly, Ariosa Diagnostic won the summary judgment entailing that the lawsuit will not go to trial owing to the lack of material dispute. However, Sequenom stated in its SEC filing that it "vigorously disagrees with the Order and, following entry of judgment pursuant to the Order, intends to appeal the decision to the Federal Circuit Court of Appeals." The CFO of Sequenom, Paul V. Maier, said that the patent didn't involve the phenomenon but the novel use of that phenomenon.
Following the news of the court ruling the share prices of the company took a nosedive and dropped about 23%. This sudden drop generated a negative sentiment among the investors, who are apprehensive about the future stock performance of the company. Since, the patent invalidation could lead to entry of potential competitors, which could possibly harm the market position of Sequenom.
Another reason the news had a strong negative impact on the shares, was the fact that in case the court ruled in favor of Sequenom, Ariosa Diagnostics would have to make cash judgment. This would have helped Sequenom to bolster its cash position and avert chances of dilution to raise funds, in the near future.
The invalidation of the patent is indeed a negative blow to Sequenom, as it no longer holds the exclusivity, which could result in unbridled competition. Earlier this year a similar situation occurred, which was even cited in the court proceedings of the Sequenom suit, regarding Myriad Genetics (MYGN) patent issues for naturally occurring cancer genetics. This suit resulted in the court ruling that natural occurring DNAs can't be patented. The stock prices of Myriad took a plunge, but the company did gradually recover from the low.
However, the company will have face problems in attracting new investors till the time the share prices remain in the low, which is most probably a temporary blow.
Sequenom is the pioneer in marketing a noninvasive prenatal LTD for fetal chromosomal abnormalities that include Down syndrome, causing mild-moderate retardation, atypical facial characteristics and various other health problems. The invasive tests pose as a risk to the health of a pregnant female, thus increasing the prospects of noninvasive tests. Recently Sequenom entered into an agreement with Enzo Clinical Labs, a subsidiary of Enzo Biochem Inc. (ENZ), to market the MaterniT21TM in the north-east U.S. service area of latter. This is a lucrative opportunity for Sequenom and may help its future prospects.
The court ruling against Sequenom is indeed a major concern for investors, since the chances of increased competitions are inevitable. However, this doesn't mark the end of the company and is only a temporary setback. The company is indeed the pioneer in NIPD; however there is already competition present in the market. And what Sequenom must do is to expand the market of its NIPD tests before the competition does so.
The company plans to appeal this decision in the Appeals Court, though Sequenom doesn't have high likelihood of coming out as a winner from the appeal decision, but it still is a catalyst for the company.
The company has promising technology under its trademark, which has demonstrated positive results. The transition of the research-use technology into the clinical diagnostic field, as is already underway for IMPACT DXTM, would help the company rebound to its earlier position. Indeed the company currently is a risky investment owing to the swooning of the shares, but it still has important catalysts approaching which could translate into improved share prices. The conference call following the earnings announcement on November 7, 2013 being a highly anticipated event for the company, as the earnings performance will lead to the ability to better assess the condition of the company.