With the news coming out today that Roche (OTCQX:RHHBY) settled on terms to purchase privately held Ariosa, one has to wonder when will Sequenom's (NASDAQ:SQNM) deep pocketed acquirer show up? Sequenom was the first to market with a Non-Invasive Pre-Natal Test (NIPT) targeting the high risk market. Through Q3 2014, Sequenom has accessioned the most NIPT samples amongst the competition. With Sequenom being the market leader, one has to wonder why companies continue overlooking Sequenom when looking for exposure to the NIPT market.
Acquisitions in NIPT
Ariosa is now the second company that has been acquired in the NIPT market since 2011. The financials surrounding the Ariosa acquisition have yet to be disclosed. Verinata was acquired in 2013 by Illumina (NASDAQ:ILMN) and now operates as a unit within Illumina. Illumina paid $350 million for Verinata, and if milestones are met prior to 2015, the price tag could bump up to $450 million. Besides Sequenom, Natera is the final major player in the NIPT market. Natera is privately held, so minimal information is available for the company regarding sales, profits and other metrics. The NIPT market has grown rapidly and is expected to continue growing rapidly for the foreseeable future. This leads me to believe that we have not seen the last acquisition in the NIPT space. Considering the number of independent players remaining has been narrowed to two, is it time for a deep pocketed biotechnology company to acquire Sequenom?
Sequenom and NIPT
Sequenom is the self-proclaimed leader in the NIPT market as they were the first to market with a validated test, have accessioned the most specimens to date and, per the company, still own the majority of the NIPT market. Additionally, Sequenom has agreements in place with insurance companies in the United States covering over 140 million lives. This coverage offers reassurance to patients and physicians that the test will be covered by insurance and not leave the patient or physician to cover the bill. One further thing that cannot be underestimated is the experience Sequenom has gained through processing over 350,000 samples. Sequenom paved the way for NIPT working with insurance companies gathering prior authorization, OBGYN physicians, genetic counselors and other clinical labs. This data that is critical for understanding reimbursement levels, how the test is being used and how to market the test going forward.
Additionally, news broke on the morning of December 3, 2014 that Sequenom and Illumina have reached an agreement to pool their NIPT patents. This further solidifies Sequenom as the market leader, as pooling patents creates a fortress of NIPT patents. This also creates clarity for competition interested in licensing these patents.
Why Not Sequenom
With Ariosa being scooped up by Roche and Verinata by Illumina, one has to wonder, why not Sequenom? Here are some of the reasons I believe that Sequenom has not been acquired yet:
- Sales Force - Both Illumina and Roche have strong sales forces in place. Sequenom also has a strong sales force in place selling their tests. Roche and Illumina do not need the additional sales force, as they can just use their current sales force to sell the NIPT and this would be additional acquisition costs. I realize both Ariosa and Verinata had/have a sales force, but not the number or training equivalent to Sequenom's sales force.
- Company Value - As of market close December 2, 2014, Sequenom has a market cap of $336 million and an additional $135 million in debt. This puts the value of the company around $470 million. With any sort of takeover premium, the acquirer is looking around at least $600 million just to get the conversations going. The financials surrounding the Ariosa acquisition have not been released, but I am guessing it is around $300-$400 million, similar to the Verinata transaction.
- Sequenom wants to remain independent - Sequenom has come a long way since launching the test in 2011. They have built the NIPT market and have the scars to prove it. They are right on the cusp of turning profitable and are not interested in selling now. As I discussed in a previous Seeking Alpha article, Sequenom is anticipating reaching cash flow positive in the fourth quarter of 2014. Why would Sequenom sell when they are so close to crossing the profitability barrier.
Personally, I think it has a lot to do with the final point that Sequenom has come this far, they want to see this thing all the way through. I am guessing that both Illumina and Roche began exploring acquisitions by contacting Sequenom, but Sequenom did not have much of an interest in selling.
On the flip side, Sequenom is still a very appealing acquisition target to the right acquirer. Both Illumina and Roche have strong sales teams in the diagnostic arena and were just looking for a validated test they could plug into their operations. What Sequenom offers is a complete end-to-end process. Let's take a look at why Sequenom should be acquired.
- Sales Force - This is a huge asset to Sequenom and could be a huge asset for a company looking to get into the diagnostic market. One company that comes to mind is Thermo Fisher Scientific (NYSE:TMO). Thermo Fisher Scientific has been on an acquisition spree lately and has the deep pockets to fund a Sequenom acquisition. Thermo Fisher Scientific would benefit from being able to offer an end-to-end test, and also could work with Sequenom to expand the laboratory offering.
- Market Leader - Sequenom is the market leader in NIPT and the experience Sequenom has gained in the market is highly valuable. The experience is valuable and applicable across all laboratory testing, specifically genetic and pre-natal testing.
- Patents - Sequenom has the largest patent portfolio in the NIPT space and has the potential to shut down the competition depending on a court ruling. If Sequenom receives a favorable ruling, the profitability of other NIPT assays will decrease due to paying royalties to Sequenom to license these patents. This point increased dramatically on December 3, 2014 with the pooling of patents between Sequenom and Illumina.
Personally, I think Sequenom has remained independent by sheer chance. They have the most advance company around the test which also requires the highest premium for a takeover. Sequenom deserves this premium and should get a premium price from the right acquirer. Thermo Fisher Scientific is my best bet to do the acquiring, but several others fit the same mold. Some additional companies that may be interested would be PerkinElmer (NYSE:PKI), Danaher (NYSE:DHR) or Agilent (NYSE:A). All these companies have plenty of cash, or the ability to raise the cash needed to fund this acquisition. Additionally, all four of these companies have limited exposure to the NIPT market and could benefit from all of Sequenom and not just the technology.
Sequenom has the most to offer an acquirer of the four main competitors in the NIPT market. I think the main reason Sequenom is yet to be acquired has more to do with the acquirer than the acquiree. Sequenom has a full business around the NIPT test and both Illumina and Roche were more interested in the technology. Illumina and Roche have the support staff to build the market around the test. A company such as Thermo Fisher Scientific that has limited exposure to a laboratory operation has a lot to gain from acquiring a company such as Sequenom. The likelihood of additional acquisitions in the NIPT space only increases the appeal of Sequenom.
Disclosure: The author is long SQNM.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.