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Marty Chilberg
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I'm a retired CPA who spent the majority of his working career in technology companies. My work included management stints at Atari Inc, Daisy Systems Corp, Symantec Corp and Visio Corp. My last position at Visio (VSIO) was as CFO and VP Finance and Operations.
  • Sequenom: Is Piper Jaffray Downgrade A Contra Indicator? 3 comments
    Jan 10, 2014 6:57 PM | about stocks: 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
    DateRatingTargetClose+30 days
    Jan 12 2011Overweight$8.50$7.50$6.55
    Jul 27 2012Overweight$6.50$3.20$3.85
    Sep 12 2012Neutral$5.00$3.91$3.62
    Mar 1 2013Overweight$6.50$3.58$4.07
    May 10 2013Overweight$6.50$4.04$4.19
    Jul 25 2013Overweight$6.50$3.30$3.07
    Sep 24 2013Overweight$6.50$2.69

    $2.32

    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.

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Comments (3)
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  • davis_kenneth66
    , contributor
    Comments (4) | Send Message
     
    Marty I'm comfortable with the fact that officials at Sequenom are getting there costs under control and that they are managing the cash flow better. My question to you is while I see CNN Money has them over the five years showing over 25% growth per year, I would like to get your feelings. I'm just curious with the current menu of services how you feel about there growth prospects in terms of revenue for 2014. Thanks I'll wait to here your comments.
    27 Jan, 03:24 PM Reply Like
  • Marty Chilberg
    , contributor
    Comments (364) | Send Message
     
    Author’s reply » Definitely agree with part one. They are clearly motivated to control costs and it looks like they have a lot of flexibility here. They are moving tests to NCar where costs are lower. Reducing costs on AMD. R&D is lower though they do appear to be adding a little in bioscience. G&A should at least stay flat and now that the systems are implemented for billings, they might see some decrease. Big variable is legal. They are spent about $15m in first 3 qtrs. So the nut is $5m per quarter. How much they reduce is based upon court calendar for appeal.

     

    The revenue growth is clearly the wildcard. CNN money, Yahoo finance, MSN, Nasdaq.com are all feeds so they don't do any forecasting. They just report what they have feeds for from other agencies. That said, the 25% secular growth rate is what most analysts are using still for their next 5 yrs. That's driven by the overall opportunity in the NIPT space.

     

    My summary of forward growth is:
    Positive macro for NIPT
    neutral regulatory (ie deficits/cms issues, insurance covered lives increases). Lots of negatives already baked in so I think neutral is reasonable.
    Unknown pipeline of new tests

     

    SO the keys are 1) get more competitive with low cost nipt and get more tests to market.
    27 Jan, 03:43 PM Reply Like
  • davis_kenneth66
    , contributor
    Comments (4) | Send Message
     
    Yeah I noticed they are spending over four cents a quarter on attorney fees. In fact it's close to four and half cents. Do we have any idea on how much longer before the patent inference case will last with Quake and Lo?
    27 Jan, 08:35 PM Reply Like
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