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William Raasch

SQNM AT A GLANCE

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Sequenom, Inc. (NYSE:SQNM)'s flagship product is the MassARRAY genetic analysis system, used to identify and describe the genetic mutations involved in diseases such as Down's Syndrome and cancer. When combined with all of its complementary software, chips, and reagents, the MassARRAY system accounts for all of Sequenom's revenue. The MassARRAY system has been sold globally since 2000 and while revenue growth from the system has been strong in the past three years, it holds only 7% of the genetic analysis market and competes with Illumina (ILMN) , Applera (ABI), and Affymetrix (AFFX)^[1][2].

Most of Sequenom's revenues come from the systems that it sells and most of its costs also arise from the production of these machines. Sequenom and its competitors make most of their profit from selling complementary products to these systems, such as single-use reagents, software, and complementary hardware after customers commit to their genetic analysis system^[3]. This makes market share particularly important.

In 2007 Sequenom acquired exclusive worldwide rights to test fetal genetic material in maternal blood as a means for prenatal screening^[4]. This marks their entrance into the prenatal screening market. Sequenom has diagnostics in development for sex determination, RhD incompatibility, and Down Syndrome. Prenatal diagnostics represent a multi-billion dollar market opportunity for Sequenom, but there are many barriers to entry including regulation through the FDA, the need for alliances with diagnostic companies and clinics, and market acceptance of their tests in a new market^[5].

Corporate Overview

History

Sequenom was founded in 1994 by Dr. Hubert Köster, who developed the core technology around which the company's major product, MassARRAY, is based. Sequenom held its IPO in 2000, after the launch of its MassARRAY system into the genetic research market^[6].

In 2007, New York State approved the first noninvasive prenatal test based on Sequenom's SEQureDx^TM Technology^[7]. This approval marks Sequenom's commercial entrance into the prenatal testing market.

Revenue Breakdown

Since 2005, Sequenom's revenue has grown over 40% annually, though the company has yet to achieve positive net income since its IPO in 2000. In 2007, Sequenom's product sales, which represent MassARRAY hardware, software, chips, and reagents, represent the majority of its revenue (91.2%), followed by its in-house service (8.5%) and research (0.2%) segments. All of Sequenom's revenue comes from the sale or use of its MassARRAY system^[8].

2007 Revenue Breakdown^[9]

Operational Cost Structure

In 2007, Sequenom's Cost of Goods Sold (COGS) were 44.1% of total revenue, for a gross margin of 56%. Selling, General & Administrative (SG&A) costs represent the bulk of costs within Sequenom, at 75.9% of revenue. Sequenom expects these costs to grow as it continues to build on its infrastructure and salesforce and as it enters the prenatal screening market. According to Sequenom, Research and Development costs will also increase as it develops new tests for prenatal screening^[11].

Major Products

MassARRAY:

Sequenom's main product and primary source of revenue is the MassARRAY system for genetic analysis. The MassARRAY system identifies genetic mutation and expression in tissues samples, which can help researchers create "DNA fingerprints" for diseases that can be later used to develop diagnostics for those diseases. MassARRAY also includes a very fast method (<1 hr) of characterizing tissue, food, or substances, which is used in food safety, clinical research, biodefense, and environmental monitoring applications.^[13]

Customers for MassARRAY products include clinical research laboratories, biotechnology companies, academic institutions, and government agencies^[14].

SEQureDx^TM:

In 2007, Sequenom began to apply its SEQureDx^TM technology to diagnose prenatal abnormalities such as Down Syndrome and Rhesus D (blood type) incompatibility between the fetus and mother.^[15].

Sequenom exclusively licensed rights for the general use of fetal genetic material in blood samples of the mother for noninvasive prenatal diagnostic testing from the technology transfer office, Isis Innovation Ltd., and the Chinese University of Hong Kong in 2005^[16]. The licensing agreement gives Sequenom the exclusive right to use this technology on any platform, and cost Sequenom $500,000 up front plus milestone and royalty payments^[17]. Sequenom plans to obtain revenue from this technology through the out-licensing and commercialization of diagnostic kits^[18].

Trends and Forces

MassARRAY is Expanding into the Emerging and High Potential Clinical Research Market

The customers of MassARRAY largely lie in the research market, which is focused on making initial genetic discoveries. However, the clinical analysis market, which is concerned with establishing the use of genetic information for the benefit of the general population, has potential to be significantly larger, is less price competitive, and allows lower throughput but demands high accuracy and consistency. Sequenom believes that the relatively high sensitivity, specificity, and reproducibility of MassARRAY provides an opportunity to be competitive in the clinical analysis segment^[19]. However, clinical genetic research is still an emerging market. The ability of Sequenom to penetrate into the clinical research market will be critical for it to grab market share from its competitors, which include Illumina, Applied Biosystems, and Affymetrix.

The Success of Sequenom's Entrance into Prenatal Diagnostics

Sequenom has little prior experience in diagnostics, but has secured exclusive rights for testing fetal genetic material from maternal blood^[20]. Furthermore, in June 2008, Sequenom announced clinical results for its SEQureDx^TM-based test for Down syndrome showed 100% sensitivity and specificity for detecting the genetic abnormality in prenatal screening^[21]. In the United States, where there are over 6 million pregnancies per year, the market for prenatal screening tests like Sequenom's is upward of $2 billion^[22].

Despite the promise of this market opportunity for Sequenom, there are many hurdles that must be crossed before such revenues are realized. First, in order to market prenatal screening tests in the United States, Sequenom is required to validate the effectiveness of the screen through the Food and Drug Administration (FDA). While Sequenom may sell the reagents involved in the test to CLIA-certified labs without FDA approval, in order to directly market its diagnostic kit to physicians as a screening tool, the FDA must approve it, either through a 510K process or premarket approval (PMA) application. The 510K validation process can take three to six months, while building a full PMA can take over a year^[23]. Sequenom's relative inexperience in FDA regulation means that it will be important to keep an eye on these diagnostics as they are developed and validated by the FDA.

The Rise of Personalized Medicine in Health Care

Pharmacogenomics is the study of how genetic codes, or markers, in the DNA of a patient correspond to the efficacy and toxicity of potential therapeutics. Personalized medicine is the use of pharmacogenomics to guide prescription, and even development of such therapeutics. Analysts predict that personalized medicine will become a part of mainstream practice in medical care within 10 years ^[24].

As personalized medicine becomes a standard practice in the medical community, physicians will need genetic analyzers, such as those that Sequenom develops, to make prescribing decisions. In addition, the development of new drugs for the personalized medicine era that are targeted at patients with specific genetic profiles will require companion tests powered by technologies such as Sequenom's iPlex system (see Herceptin and the companion HercepTest as an example).

The Threat of Competition from Home Brew Diagnostic Tests

Many genetic tests now fall into the "home brew" category of tests that are developed within medical labs in which they are used. Home brew tests are not regulated by the FDA, so as long as the lab has scientists skilled enough to create the tests, there is a relatively low barrier to entry for these tests to compete with Sequenom's prenatal screening tests^[25].

However, malpractice suits arising from parents of children born with genetic abnormalities are common in cases where the parents can show that the genetic test was inappropriately used or interpreted. This malpractice liability provides an incentive to adopt a standard of care practice that is both effective and well regulated^[26]. Sequenom's tests are required to be strongly validated and regulated in order to attain FDA approval, which will ease some of the burden of malpractice liability on physicians using the test.

The Continuance of Government Interest in Genetic Analysis

The relationship of government interest to Sequenom's success is twofold. First, Sequenom's MassARRAY system has been used for livestock DNA testing since 1999, which is a market created by government mandate to track and verify the age and origin of livestock commodities. Second, Sequenom systems are directly involved in or benefit from government sponsored initiatives such as Cancer Genome Atlas (TCGA) and the HapMap initiative. Currently the TCGA is backed by over $100 million in funds from the National Cancer Institute (NCI) and the National Human Genome Research Institute (NHGRI), and will advance the use of genetic diagnostics. The HapMap project is an international project to characterize the genomes of populations across the world, and uses the MassARRAY for its studies. Government funding of projects such as these are connected with Sequenom's success.

Competition

SNP Genotyping Market

MassARRAY competes in the SNP Genotyping market, which in 2007 had total sales of $625 million. With revenues of $41 million, Sequenom sales represent almost 7% of this market^[27].

SQNM market share in the Genotyping Market^[28]

Genetic Diagnostics

Sequenom's entry into the multi-billion dollar molecular diagnostics market is specific to prenatal screening tests in which the major competition is with in-house labs at hospitals that make their own home brew tests. The other main sources of competition in this realm come from alternative prenatal screening techniques such as DNA extracted from maternal urine or cervical swab samples rather than serum^[29].

References

1. ↑ Sequenom (SQNM) Form 10-K, Fiscal year 1999, p. 41
2. ↑ Kalorama Information. SNP Genotyping and Analysis Markets. June 2008, p. 166
3. ↑ Sequenom (SQNM) Form 10-K, Fiscal year 2007, p. 32
4. ↑ Secures Rights to Key Non-Invasive Prenatal Diagnostic Intellectual Property, 2005
5. ↑ Sequenom (SQNM) Form 10-K, Fiscal year 2007, p. 19
6. ↑ Sequenom (SQNM) Form 10-K, Fiscal year 1999, p. 27
7. ↑ Sequenom Announces New York State Approval of a Noninvasive Prenatal Test, 2007.
8. ↑ Sequenom (SQNM) Form 10-K, Fiscal year 2007, p. 32
9. ↑ Sequenom (SQNM) Form 10-K, Fiscal year 2007, p. 32
10. ↑ Sequenom (SQNM) Form 10-K, Fiscal year 2007, p. 32
11. ↑ Sequenom (SQNM) Form 10-K, Fiscal year 2007, p. 41
12. ↑ Sequenom (SQNM) Form 10-K, Fiscal year 2007, p. 32
13. ↑ Sequenom Genetic Analysis Applications.
14. ↑ Sequenom (SQNM) Form 10-K, Fiscal year 2007, p. 32
15. ↑ Sequenom Noninvasive Prenatal Diagnostics.
16. ↑ Secures Rights to Key Non-Invasive Prenatal Diagnostic Intellectual Property, 2005
17. ↑ Sequenom (SQNM) Form 10-K, Fiscal year 2006, p. 20
18. ↑ Sequenom (SQNM) Form 10-K, Fiscal year 2007, p. 33
19. ↑ Sequenom (SQNM) Form 10-K, Fiscal year 2007, p. 33
20. ↑ Sequenom (SQNM) Form 10-K, Fiscal year 2007, p. 13
21. ↑ Sequenom Announces Additional, Positive Results for Down Syndrome Test at Analyst Briefing, 2008.
22. ↑ Marcial: Sequenom's Down Syndrome Test, Business Week, August 2008.
23. ↑ Sequenom (SQNM) Form 10-K, Fiscal year 2007, p. 19
24. ↑ [www.personalizedmedicinecoalition.org/objects/pdfs/PMC_Incentives_for_PM_2008_January.pdf Personalized Medicine: The Emerging Pharmacogenomics Revolution. PriceWaterhouseCoopers. Feb 2005.]
25. ↑ Genetic Testing, Genome.gov
26. ↑ Reproductive Genetic Testing: Issues and Options for Regulators. Genetics and Public Policy Center, 2004.
27. ↑ Kalorama Information. SNP Genotyping and Analysis Markets. June 2008, p. 166
28. ↑ Kalorama Information. SNP Genotyping and Analysis Markets. June 2008, p. 166
29. ↑ Sequenom (SQNM) Form 10-K, Fiscal year 2007, p. 8