Marty Chilberg's  Instablog

Sequenom (SQNM) has offered quite a lot of information lately about MaterniT21+ for Trisomy 13, 18 and 21. Makes sense given the potential market available for this test. However the company currently offers 4 Lab Developed Tests (LDT's).

SensiGENE Cystic Fibrosis carrier screen (CF)

Sequenom launched this their first LDT in the fall of 2009. The launch press release included this paragraph describing the screen:

Carrier screening tests help identify individuals who may have an increased risk of having a baby with certain genetic conditions. Healthy individuals with no family history of the condition and that already have healthy children, may be carriers of a genetic condition; for example, cystic fibrosis. Approximately 1 in 30 Americans - more than 10 million people - are carriers of a cystic fibrosis gene mutation, making it one of the most common genetic disorders in the United States. Children have cystic fibrosis when they have two mutations in the gene that cause CF - inheriting one mutation from the mother and the other from the father. According to the American College of Obstetricians and Gynecologists (ACOG) and the ACMG, cystic fibrosis carrier screening should be offered to all Caucasian couples who are expecting a baby or are considering pregnancy, and further, should be made available to all patients regardless of ethnicity. About 1.1 million cystic fibrosis carrier screening tests are performed each year in the U.S. With an average reimbursement rate of $200-$400 per test; the U.S. market is estimated to be in excess of $300 million per year.

The company processes this test at its' first CAP accredited and CLIA-certified molecular diagnostic laboratory located in Grand Rapids, Mich. During a recent earnings conference call, Sequenom disclosed that they billed a total of 21,000 retinal and prenatal diagnostic tests in 2011. During a recent investor conference, they further disclosed that CF was by far the largest test processed. Without more specific guidance on tests and pricing, this is all educated guesswork. My estimate is that this LDT totaled 15,000 at an average revenue per test of $350 in C11.

SensiGENE Fetal RHD Genotyping (RhD)

Sequenom launched this their second prenatal LDT in February of 2010. The launch release stated:

In the United States, there are approximately 528,000 pregnancies in Rhesus D (RhD) negative women every year, and almost all of these women could benefit from an assessment of the RhD type of the fetus. RhD type can be determined by an invasive procedure, such as amniocentesis or chorionic villus sampling (CVS), but both procedures involve risk to the fetus. Currently in the United States, most RhD negative women are managed without knowing the fetal RHD status.

In the Q3-10 conference call the company stated that the early results of this test were disappointing relative to their expectations. In a recent conference, the company referred to the contribution from this test as modest. I've found no pricing information for this test, though considering the relative importance to financial performance, I've admittedly spent little time searching. My estimate is that this LDT only generated 2,000 tests in 2011 at an average price of $300.

RetnaGENE AMD

Sequenom launched this LDT in May 2011. The launch press release stated the following:

AMD is an insidious progressive eye disorder that starts with relatively harmless tiny yellow deposits on the retina (the light sensitive tissue in the eye) and increases in prevalence and severity with age. Neovascular or 'wet AMD', develops in 10 to 20% of all cases, causes profound loss of central vision and is the leading source of legal blindness in people over age 50 in the developed world. It is caused by abnormal growth of fragile and leaky blood vessels (choroidal neovascularization or 'CNV') in the macula (a small area where vision is keenest at the center of the retina) in response to chronic inflammatory stress.

A predictive test that identifies patients at higher than average risk to develop wet AMD has the potential to improve clinical management by transforming surveillance protocols and improve therapeutic decision-making. A patient's knowledge about being at higher risk also makes it easier to take certain preventative steps such as no longer smoking, and switching to a healthier diet rich in vitamins, antioxidants, certain carotenoids, and omega-3 fatty acids. Smoking and diet are reported to be among the most important modifiable risk factors associated with AMD.

AMD is the most common cause of visual impairment and the leading cause of blindness in the elderly population in the developed world, the prevalence of which increases with advancing age. It is estimated that there are currently 9.1 million patients in the USA with AMD, 1.7 million suffering with the vision-threatening late stage complications of choroidal neovascularization (CNV) or geographic atrophy. Moreover, it is predicted that the number of cases of early AMD will increase to 17.8 million by 2050 and if untreated, cases of late-stage blinding AMD will increase to 3.8 million.

The company stated that this test has a list price of over $2,200. They are recognizing revenues from this test on a cash basis until they have enough history to calculate the reimbursement rate by carriers. Absent further detail, I'm estimating that the company processed 3,000 of these tests in 2011, and that they will eventually received a blended $1,200 per test. This assumes a much higher Medicaid blend. The 23% Medicaid mix for T21 was based upon the hospital birth market. For AMD diagnostics, the average age will likely be in the 60+ range. Though I don't have any specific data to support this, I suspect that this group will have a much higher Medicaid mix driving a reduction in the reimbursement rate.

MaterniT21 Plus

This test was launched in October of 2011. The company disclosed that they processed over 1,000 of these tests in 2011. For additional details on this test, see my blog.

Summary

There is admittedly a lot of guesswork in the above estimates. The following table sums it up and compares it to the income statement.

Disclosure: I am long SQNM.

Sequenom (SQNM) is a molecular diagnostic testing and genetics analysis company committed to providing molecular diagnostic testing services, and research use only products, services, applications, and genetic analysis products that translate the results of genomic science into solutions for biomedical research, translational research, molecular medicine applications, and agricultural, livestock, and other areas of research. Their development and commercialization efforts in various diagnostic areas include noninvasive women's health-related and prenatal diagnostics, ophthalmology, and other medical conditions such as oncology, infectious diseases and autoimmunity.

SQNM generates revenues from Genetic Analysis and Molectular Diagnostics. The Genetic Analysis segment is primarily equipment and software sales (i.e. MassARRAY). The Diagnostic Services revenues are fees paid for LDT (Lab Developed Tests). These tests include: MaterniT21 PLUS, RetnaGene AMD (Age-related Macular Degeneration), SensiGene CF (Cystic Fibrosis) and SensiGene RhD (RhesusD) fetal screening.

Investment style: Investment in SQNM falls into a long-term investment and short term trading category. The stock is extremely volatile with a high and active short community, leading to trading opportunities surrounding a core position. The long-term investment thesis is primarily based upon MaterniT21 commercialization. This LDT fetal screens for Trisomy 13,18 and 21 is a noninvasive blood test that uses fetal DNA in a mother's blood. The company misrepresented the results of clinical trials several years ago resulting in investigations by SEC and FBI. These have been settled. Harry Hixson (formerly President of Amgen) was brought in as CEO and has purged all management involved. Company is now overly conservative based upon Hixson's style, along with their desire to establish credibility.

Competition: Verinata Health, Aria Diagnostics, Fluidigm Corp, Natera.

IP: SQNM licenses the patent ('540') that is widely considered the dominant IP in the field. However, it has become clear that this will be a battle in the courts with numerous lawsuits already filed surrounding potential injunctions. Likely a multi-year legal battle.

Capitalization: SQNM has sourced significant capital to provide the base to challenge in the market place, as well as to defend the IP. They had $120m in cash as of Mar-12. They have 114m shares outstanding. They also have 7.8m options outstanding with an average strike price of $7.49.

Launch revenue recognition: SQNM is recognizing revenues on a cash basis for all diagnostic testing. This is because the ultimate reimbursement of these tests is not determinable until they have more reimbursement experience with carriers. As a result, it is challenging to get a fix on their eventual margins, as all costs are being expensed as incurred. The March quarterly revenues were disclosed to be primarily from tests done in their first release quarter (Dec-2011). Conversion to accrual basis for revenue recognition is expected in Q4-12 or Q1-13. The quarter in which conversion to accrual occurs, there will be a significant jump in revenues.

Short thesis: The short community has been very involved in this company, since the prior management mismanaged the clinical trial results of MaterniT21. Other issues driving the volatility include: Patent dispute uncertainty, lower-priced competition, FDA could decide LDT's require an arduous approval process in future.

Commercial launch: MaterniT21 was the first to market in Oct-2011 and has distanced itself from competitors through it's' CMM (Center for Molecular Medicine). This wholly owned subsidiary includes the labs that processes the diagnostic tests. They have a facility in San Diego that just increased their capacity to 200k tests per year. They also are building additional capacity that will be online later this year. The company has provided data about the ramp of tests being processed. In Dec-2011 quarter they received approximately 1,000 samples for T21 testing and had a total of 21k diagnostic tests for prenatal and retinal tests billed for the year. They announced that they have seen the weekly receipt of test samples increase consistently in 2012. They announced the annualized rate of sample received for T21 was 10k at end of 2011, 20k on Mar 3 2012, 30k for last week in March at 45k at the end of April. The number of tests processed for T21 during march-2012 quarter exceeded 4,900. Company has stated its' internal goal has been increased to at least 40k tests for C12.

Insurance carriers: Apr 19-2012 announced that MultiPlan signed up to provide coverage. They have a provider network of 900k with estimated covered lives of 57m. May 9-2012 announced that Coventry PPO network signed to provide coverage. They are the 7th largest carrier with 5k hospitals, 500k providers and 2.2m members. Obtaining coverage appears to be gaining momentum, primarily because this is non-invasive and priced less than Amniocentesis.

Estimated pricing: The company has not guided to their anticipated revenue per test for T21 but has provided enough information for an educated guess. The list price is $2,900. They have said they will likely see their mix parallel total hospital births, or 69% private coverage, 23% Medicaid and 8% uninsured. Uninsured has been priced at $1,900 per test. The copay has been capped at $235 per the company for private insured. They have hinted at a likely reimbursement rate by private insurers at around 65% of list in conference call Q&A. No info on Medicaid. My estimate of the ultimate price per test is $1,850. Using the company stated internal goal of at least 40k tests for T21 this year, that would drive $74m in billed revenues. My estimate is that this will exceed $100m given the current ramp. Competition is lagging substantially in making their test available. It appears that all the combined competition will generate a small fraction of the T21 revenues generated by SQNM this year.

TAM (Total Available Market): The initial TAM driving the investment thesis is high-risk pregnancies. The company has stated that there are approximately 4.3m births per year with 750k of these at high risk of aneuploidy. Using the estimated pricing, the TAM for the high-risk market amounts to $1.4B per year. Using projected $100m in CY-12 billed revenues, that would result in about 6.75% penetration into the high risk pregnancies market. The company recently announced clinical trials for non high-risk pregnancies which could grow this TAM by a factor of 4-6x, depending upon pricing assumptions. http://www.clinicaltrials.gov/ct2/show/NCT01597063?term=sequenom&rank=12

Disclosure: I am long SQNM.

Responding to some questions from followers, here is my look at TSYS revenues,  Let me say up front that I sold my position back in July based upon several factors including this analysis.  However, I've started rebuilding my position on the recent weakness and intend to complete my investment once the overall market becomes more stable.  I believe the pullback of around 40% from my exit point is overdone and coming as the company appears to be poised for more positive results going forward.