BLAIR sees $SQNM "more attractive than ever as a #takeout candidate"
$ILMN $DGX $LH $RHBBY $TMO ... On Monday morning, January 12, Sequenom announced preliminary results for fiscal
2014 that were a bit lower than our estimates and consensus numbers, but more
important to us were the positive updates on the future opportunities and outlook for the
business. The preannounced results of $151 million in revenue and 162,000 NIPT tests
accessioned for the full-year were below our targets of $165 million and 167,000 tests.
While it looks like volumes fell off a bit more than anticipated in December, this
disconnect is in part indicative of the rapidly changing business model that now includes
multiple revenue streams not directly associated with MaterniT21 tests accessioned in
Sequenom’s own CLIA labs (e.g., Quest [DGX $68.10; Market Perform] agreement,
Illumina [ILMN $190.10; Outperform] IP licensing strategy) and highlights the
uncertainty with the revenue model as the business model continues to change. In reality,
modeling this business has never been easy, but lately it has become nearly impossible
given all of the revenue streams and limited information that is provided.
While our confidence in forecasting the business has decreased due to the rapidly
changing business model, our confidence about the numerous future opportunities is
growing as it is becoming clear this company is evolving beyond just a high-risk NIPT
CLIA lab business to include an IP and technology licensing arm as well as a company
expanding to broader molecular diagnostic markets.
Management indicated that test fees and royalties tethered to the Illumina IP pool should
range from $6 million-$14 million in 2015 (this goes straight to the pretax line) and is
calling for over 200,000 tests accessioned in Sequenom labs. This will be driven by
several new products as described below.
- The VisibiliT test, a low-cost screening product that launched in international
markets in August will be launched in the first quarter of 2015, which is a bit sooner
than we had expected.
- The company is launching a universal carrier screen to complement the existing
HerediT CF Carrier Screening test. This offering will meet the demands of customers
who are looking for more than CF Carrier Screening; the test will look for over 250
genetic disease and all ACMG, ACOG, and AJ recommended mutations.
- A noninvasive whole genome karyotype is expected to launch in the second half of
2015. This would be a differentiated, potentially game-changing product in the space
that would provide the ability to identify fetal chromosomal abnormalities that at this
point can be seen only with invasive procedures.

The company is leveraging its expertise in circulating cell-free fetal DNA (ccfDNA) to develop a test that detects circulating
tumor DNA (ctDNA) in plasma. Sequenom is expecting to launch a liquid biopsy Research Use Only (RUO) product in the
second half of 2015 targeted for stage III-IV cancer patients with solid tumors and metastatic patients where biopsy or rebiopsy
of the tumor is not an alternative.


Overall, our take is that while the quarter came in light of our expectations, we are incrementally more positive on the
opportunity in front of the company and continue to like the name as the only pure-play way to invest in the NIPT space. With
the major IP issues largely put to bed, the cash position and path to profitability as strong as they have ever been, the average
risk opportunity arriving sooner than anticipated, and multiple new product and market opportunities likely to bear fruit in
2015 and beyond, we believe the overall business is in a much stronger position as a stand-alone company and perhaps more
attractive than ever as a takeout candidate. While we acknowledge that the multitude of moving parts make this a tricky
business to forecast and value on a quarterly basis, we remain very positive about the long-term opportunity here and
continue to recommend purchase of the stock.
Stock Thoughts
We believe the combination of a strong place in the high-risk marketplace, the Quest partnership driving additional share,
high-margin royalties coming to Sequenom via the IP pool with Illumina, further expansion into international markets (today
about 10%-15% of revenues), and average-risk revenues emerging over the next couple of years should combine to $250
million in nicely profitable revenues.
While it is less clear what the revenue split will look like in the future, the majority is likely to be from the sale of the high-risk
MaterniT21Plus test, which should account for about 200,000 tests per year in 2017 (roughly a 30% share, which is down a
little bit from market share at present). At an average selling price of about $1,000, this would mean that the remaining
revenue streams available to the company would need to come in at $50 million or so to achieve the overall target, which
given the recent announcements and the explosion of testing in the space seems reasonable to us. Using 2017 revenue of $250
million at a multiple of 3 times (in line with peer group average for forward revenues), we arrive at a valuation of about $750
million (versus $500 million today), which the company should trade at 6 to 12 months before the end of 2017. Thus, with
several recent positive developments and a path to greater and more profitable revenues, we are maintaining our Outperform
rating on this often overlooked and rapidly changing stock.



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