Sequenom: The Last Chapter Is A Head Scratcher

| About: Sequenom, Inc. (SQNM)

Summary

The Sequenom transition is finally visible with clear growth ahead.

Natera is just starting their own transition to in-network pricing, elimination of unprofitable testing and cash reimbursement delays. The comparison will likely draw positive attention to Sequenom.

Unfortunately the last chapter for shareholders is another head scratcher. Sequenom accepted an offer from LabCorp which appears unreasonably low, all things considered.

After a particularly brutal year for Sequenom (NASDAQ:SQNM) investors, the current quarter reveals the long-awaited trend reversal has finally started. Revenues for the June 2016 quarter came in at $29.3 million beating expectations of $28.6 million. The gross margin showed remarkable improvement - 1100 basis points sequentially from 42% in Q1 to 53% in the June 2016 quarter. As promised, the company delivered on spending reductions, reducing operating expenses by $2.2 million from the previous quarter. The loss per share was $0.05 versus consensus of $0.09. All-in-all a very strong step closer to an increasingly bright future with average risk NIPT coming ever-closer. Unfortunately, this performance wasn't broadcast in an earnings release or a conference call because Sequenom accepted an offer from LabCorp to sell the company for $2.40 per share.

Anyone who reviews the Sequenom balance sheet can see that this was a distressed sale. The company previously chose to capitalize the company using convertible debt instead of equity. Now the more cash they burned, the harder the prospects were for a shareholder-friendly recapitalization. Selling the company was not a surprise. Selling it before releasing this earnings report showing clear evidence of renewed growth was. Worse yet the 10Q disclosed that Sequenom signed a term sheet with a third party lender for up to $150 million, subject to certain conditions. Unless one of those conditions related to the failed '540 patent appeal, I can't come up with a reason why that was never announced.

Comparing Sequenom results to those released yesterday by Natera (NASDAQ:NTRA) show some notable distinctions. Consider the following sequential comparisons of both companies from the March 2016 to June 2016 quarters:

  • Diagnostic revenue net change: Natera -16%. Sequenom +4%.
  • Gross Margin: Natera declined from 48% to 40%. Sequenom improved from 39% to 53%.
  • Operating loss: The Natera loss increased by 134% to $22.5 million. The Sequenom loss declined by 61% to $4.5 million.
  • Cash basis revenue: Both companies have suffered from the inconsistencies of cash based revenue recognition. Natera disclosed their Q1 cash basis mix at 88%. They didn't update Q2 on the call, simply reaffirming that the large majority remains cash basis. Sequenom reported the accrual percentage improved in Q2 to 42.6% from 41.3%.
  • In-network price declines: Natera responded to a question on their conference call that they were "in the third inning" of the transition, indicating expected further pricing deterioration during the remainder of this year. Sequenom did not provide any additional disclosure in their 10Q. They previously stated that the in-network price impact was largely complete on an earlier conference call.
  • Transition to licensing: Natera disclosed they had 20 licensees generating $753,000 in revenues which were starting to impact international diagnostic revenues. Sequenom disclosed a total of 50 licensees, including 32 validated and commercially active. These licensees generated $2.8 million of license revenues in Q2. They previously disclosed that they had absorbed virtually all of the negative transition impact to diagnostic revenues.
  • Accessions: Natera showed a modest decline sequentially and noted that they will see further volume disruption from licensees and elimination of unprofitable testing. Sequenom reported a modest increase sequentially and previously stated their volume declines from transition to licensing and elimination of unreimbursed testing is now largely complete.

I find it remarkable that Sequenom couldn't have timed their acquisition acceptance any worse. The market had no opportunity to react to this quarter or updated guidance moving into the last half of 2016. The final chapter in this story, if no other bidder appears at the 11th hour, is a largely unsatisfactory one. Investors can decide their own story line summary:

  • Equity is the lifeblood of a company and this result shows how damaging the alternatives can be. Not my favorite despite its validity. The $150 million term sheet signing seems to indicate that they had an opportunity to overcome and chose to ignore it.
  • Sequenom made what many investors would call another "rookie mistake". They continually bought high and eventually sold quite low.

Best of luck to LabCorp (NYSE:LH). I hope the change of ownership doesn't eliminate too much of the tax carry-forwards. If not you can probably pay for much of this from tax savings alone, by funneling all liquid biopsy and companion diagnostics to this operation. An unremarkable end to a remarkable story.

Disclosure: I am/we are long SQNM, ILMN.

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.