The following comments were published in KapitallWire on 2/28/14. Bryan Brokmeier is an analyst at Maxim Group.
lTLSR: Can you mention another name?
BB: I really like Sequenom Inc. (SQNM). It's an out-of-favor name that has been severely impacted by molecular diagnostic reimbursement issues throughout 2013, and we believe its shares are severely undervalued. Not only should Sequenom continue to be the leader in the rapidly growing noninvasive prenatal test (NIPT) market, along with privately held Ariosa Diagnostics Inc., but we also expect the company to modestly diversify its revenues with penetration into the cystic fibrosis (NYSE:CF) market with its Heredi-T Cystic Fibrosis Carrier Screen for couples planning a pregnancy, as well as the introduction of other new diagnostic tests. The catalysts include improving reimbursements, which is most important, the narrowing of its cash collection cycle and the sale of the company's bioscience business, which we anticipate will occur in H1/14 and which should provide Sequenom with enough cash to achieve profitability later this year.
TLSR: What is the growth driver here? Is it still the MaterniT21, which tests for fetal trisomy 21 (a third chromosome 21, which results in Down syndrome) in maternal blood? Or are other tests, such as the CF test or the SensiGene Fetal RHD Genotyping test, which screens for Rhesus D incompatibility, also drivers?
BB: The growth driver is still the MaterniT21. Sequenom keeps adding content to this test. It's not just trisomy 21; it also tests for trisomies 18, 13 and some rare chromosomal abnormalities such as trisomies 16 and 22-and other things as well.
The company is also adding more payers to its list of contracted managed-care companies, which is increasing the number of covered patients and thus improving its reimbursement. Most of its revenues are still on a cash basis and not on an accrual basis. I expect that to improve during 2014 and into 2015. Another major growth driver for Sequenom is the penetration of international markets, which still represent a very small percentage of its total revenues but represents a huge opportunity for the company.
TLSR: You mentioned the other big player in the NIPT market, Ariosa, as well as Verinata and Natera (private), which are carving out market share. I know you like Sequenom very much, but how much pressure do you expect from competitors? What will be their effect?
BB: They are putting pressure on Sequenom, but it's a huge market opportunity, and I think there's room in the market for more than one player. Sequenom has a very strong sales force, and so does LabCorp, which is partnered with Ariosa. So does PerkinElmer Inc. (PKI). But I don't feel that Natera and Verinata have gotten as much traction in the marketplace as Ariosa and Sequenom have. They are starting to catch up, but Sequenom and Ariosa still have very strong leads over those other companies.
Over the long term, as I said, international markets are going to offer significant opportunities to all these companies. As the costs of sequencing come down and as throughput improves, it may make more sense to bring this kind of testing into the average maternal-fetal risk market, which represents a huge opportunity. Instead of about 700,000 (700K) annual high-risk births, you're now talking about 4M annual average- and high-risk births in the U.S. As the market grows, so does the opportunity, which will be huge if Sequenom's test is recommended for average-risk pregnancies.
TLSR: Your target price on Sequenom is $6, which implies a double from current levels. This stock is down about 45% from 12 months ago, and it's been weak all year. From your perspective, is this a good buying opportunity?
BB: It's a great buying opportunity for a stock that has a lot of upside. Given the competitive environment and all the lawsuits among the players in the space, there is certainly risk, but there is huge upside to the company.
Disclosure: I am long SQNM.
Additional disclosure: AROS is the symbol applied for by Ariosa in their recent S-1