Sequenom's Price Not Reflective of Its True Potential

Sequenom (SQNM) is a genetic lab company. We found it on an insider buying list when the CFO and other execs were buying a ton of stock in the open market. At first glance SQNM may look expensive. They have the best in breed gene sequencing system called MassArray that is growing 30% or so a year.

Recurring revenue (total 07 REV is about 42mil) comes from the service of these systems and disposable units used in the gene work. The Market Cap of the company is about 200 mil, so the question was why are the execs buying so much stock? SQNM is developing a series of non-invasive prenatal diagnostics for various birth defects. These tests are currently administered in the 3rd trimester through a fluid draw with an amnio needle. The SQNM test uses nucleic acid in fetal DNA found in maternal blood from a blood draw instead of the amnio fluid. What makes this significant is the amnio test has a 1% to 2% accidental abortion rate, is performed in the 3rd trimester, and has not proved to be 100% accurate.

The SQNM test in trials has proved to be 100% accurate in the 2nd trimester for detecting Down Syndrome and RhD (a condition where the mothers blood and the fetal blood do not match up) and has no risk of an accidental abortion. SQNM’s test is more accurate, earlier, and has no risk of accidental abortion. The RhD test should be ready for approval in the next few weeks and the Downs test by the back half of 08. During the last conference call the time line for the test was moved up significantly.

The market for the RhD test currently is small, 30mil to 50mil tests per year (as stated in the last conference call). Recently a panel of prenatal doctors recommended that all pregnant women be tested for 4 test (one being Downs) by the start of 08; now only women over 35 have to be tested. The market for the downs test, according to the company, is over 1 billion for 2007 and will grow into 2008. SQNM also announced in the last CC that they are constantly finding new applications for their testing system that could add even more potential market share.

If everything is approved, as it is much easier to get a diagnostic test approved then a drug, the downs test will become the gold standard for all pregnant women in the US. Overnight a billion dollars worth of amnio sales are going to go away from the large medical supply companies. SQNM will not be around this time next year if they are going to get approval. A med company like this should get at least 2x revs if not 3x so if you do the math, 1B in Downs test sales at 2x revenues makes SQNM $50 (1B x 2 / 40mil shares).

The latest Conference Call is about the most bullish CC I have heard in a long time. The company beat on revenues and bottom line estimates. The company would also be profitable if not for the diagnostic research.  They raised guidance and moved up all the timelines for the prenatal test.

SQNM 1-yr chart:

Comments

[SPEK]

Nicely done steve b. Looks like SQNM is under heavy accumulation.