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Sequenom: Is Piper Jaffray Downgrade A Contra Indicator?

|Includes:Sequenom, Inc. (SQNM)

As any long term follower of Sequenom can attest, the analyst community has not had a very good track record with this stock. Granted this was a market creation strategy in late 2011 when MaterniT21 was first introduced and over time became quite confusing. Factors over the past 2+ years included:

  1. 3 competing infringing products with lower average sales prices.
  2. Numerous lawsuits and conflicting rulings related to intellectual property protection.
  3. Cash revenue recognition creating a lack of visibility.
  4. The acquisition of an infringing competitive company (Verinata) by a supplier and "partner" of Sequenom (Illumina).
  5. Centers for Medicaid and Medicare (NYSE:CMS) decision to eliminate "stop-gap" reimbursement practices and to establish new CPT codes and reimbursement levels for diagnostic tests.

To me, these issues represented opportunities for analysts to show their capabilities. They have an access to information and management advantage which we hope will result in valuation insights that are investable.

Today it was reported that William Quirk of Piper Jaffray downgraded Sequenom to Neutral from Overweight. He also dropped his price target from $5.00 to $2.50. The following table represents their ratings and targets for SQNM.

Rating and target history
Date Rating Target Close +30 days
Jan 12 2011 Overweight $8.50 $7.50 $6.55
Jul 27 2012 Overweight $6.50 $3.20 $3.85
Sep 12 2012 Neutral $5.00 $3.91 $3.62
Mar 1 2013 Overweight $6.50 $3.58 $4.07
May 10 2013 Overweight $6.50 $4.04 $4.19
Jul 25 2013 Overweight $6.50 $3.30 $3.07
Sep 24 2013 Overweight $6.50 $2.69

$2.32

Click to enlarge

No comment on the track record, because none of the other 10 analysts did much better. What is most interesting was some of the narrative of the downgrade. He did not mention the EU patent announced yesterday, despite his suggestion that this test will suffer pricing issues as it is becoming a commodity. Hard to figure given this EU patent covers 600M people in Europe and the Patent disallowed and still disputed in the US is for about 350M people. He also didn't seem to mention the IMPACT Dx submission for mass spectronomy which is fast becoming an exciting growth opportunity. Finally, I noted his use of the statement that his reduction of the target price to $2.50 was a "realignment" even though he felt that short term this stock was in a relief rally and would continue to appreciate. Hard for me to figure, but I guess that's why I started doing my own analysis and modeling.

For the record, there is still much risk and volatility in this competitive market. That said, Sequenom is still the leader in:

  • Specificity and sensitivity
  • Breadth of test
  • Market share
  • Customer service
  • Alignment with the guidelines including high risk only use with genetic counseling availability

Sequenom is the only non-invasive prenatal screen that has labs certified to process tests in Europe (Life Codexx and Lab Cerba).

Sequenom has increased the number of US lives under contract by 26% in the past 90 days and over 100% in the past year. These lives have price points associated with them which is inconsistent with the view that price declines are inevitable in the short term.

The competition is growing and are worth reviewing.

Tests similar in approach to MaterniT21:

  • NIFTY (NYSEMKT:BGI) is likely most worrisome in non-US markets. They are based in China and funded by the government. They have a large footprint and are aggressively expanding.
  • Bambni (Berry Genomics) is China only at present and claims to have about the same market share in China as BGI.
  • Verifi (Illumina) has a small share of the market. Illumina has stated that their primary goal is to expand the market so they can sell more sequencers. They would like to achieve IVD status in US to do so. Likely a couple years out as the tests are expanding rapidly and the FDA would require a new review each time a new capability is added.

Tests that compete but are less comprehensive:

  • Harmony (Ariosa) is the lowest price in the market and most disruptive as a result. It is a solid test for risk assessment but will have a very hard time adding capability while keeping their low price point intact. They also seem to ignore the high risk only recommendation of ACOG and the FDA, especially in non-US markets.
  • Panorama (Natera) is a similar price point to MaterniT21 but has a different approach. They are hiring at an aggressive pace but not much is known about them operationally as they are still private. Look for an IPO in the next year.

Disclosure: I am long SQNM.

Stocks: SQNM