Monday, August 25, 2008

Sequenom (SQNM) Flying off Positive Investor's Business Daily Mention

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I assume Sequenom (SQNM) is up nearly 8% as I write this on Friday's Investor's Business Daily mention. The story highlighted the company along with Myriad Genetics (MYGN) which I also have looked at closely and strikes my fancy. Valuation is steep though, and I didn't like the "drug" business part of their company - which they might end up splitting off.
  • A decade after dazzling Wall Street with big promises and slender earnings, biotech firms specializing in genetic research have returned with a vengeance -- and even more big promises and slender earnings.
  • Rising powers such as San Diego-based Sequenom (NasdaqGM:SQNM - News) have scored triple-digit gains this year. The Medical-Genetics group owns the No. 1 spot among the 197 industries tracked by IBD for six-month price performance
  • One of the biggest catalysts for stock price growth in the industry has been rampant merger and acquisition talk, says William Ho, senior research analyst at Banc of America Securities.
  • "You have two types of companies getting acquired," said Ho, whose coverage includes traditional biotechs as well as genetics stocks such as Myriad Genetics (NasdaqGS:MYGN - News). "You've got the early-stage platform companies, which offer more attractive valuations for Big Pharma companies. Then you've got late-stage companies, those that have already marketed their products or have passed stage three clinical trials and are about to go to market."
  • "There's a basic tenet in biology: DNA produces RNA, which translates into proteins," Ho said. "Underexpression or overexpression of a protein causes disease. The thought was that genetics could identify changes or mutant factors that lead to disease. Unfortunately the body is more complex than that. Diseases are often multifactorial."
  • Myriad Genetics has experienced plenty of ups and downs. Its stock peaked at 138 in November 2000, fell below 9 in March 2003, and has since trended upward, hitting a seven-year high of 68.59 earlier this month. The firm has banked big growth through a test called BRCAAnalysis. It screens for hereditary risks of breast and ovarian cancer.
  • Ho estimates that about 7.8 million U.S. women are candidates for testing, with only 200,000 tested by the end of 2007. With various patents secured through 2016, 2018 and 2023, and a growing knowledge base gleaned from performing tests, Myriad has a strong competitive edge with its BRCAAnalysis.
  • The test helped drive company-wide revenue growth of 40% or more in each of the past five quarters. BRCAAnalysis is also a highly profitable test, generating operating margins of 47%, Ho says.
  • Despite those high margins, Myriad, like other genetics companies, has had a hard time producing black ink. Research and development costs are usually so prohibitive that it can take years for a company to turn its first profit. Marketing products as a solo venture is often so difficult that genetics companies will sell out to a big drug maker before those profits ever arrive.
  • Ironically, the June failure of a stage three trial for another Myriad product, Alzheimer's drug Flurizan, might pave the way to profitability for the firm in the near future. Last year, Myriad spent $116.5 million on research and development, with $63 million going to Flurizan. With Flurizan's progress now derailed, the company figures to devote more attention to its profitable diagnostics business.
  • There's also talk of splitting the company into two parts: diagnostics on one side and the cost-intensive therapeutics business on the other.
  • Sequenom began doing fine mapping, a technique that studies hundreds of thousands of genetic samples, looking for connections to disease. It expects to clear about $50 million to $55 million in revenue from fine mapping this year, says analyst Sean Lavin of Lazard Capital Partners.
  • But Sequenom is on the cusp of marketing a new product with the potential to generate $1 billion in revenue within the next five years: a test that can detect a number of different hereditary conditions, including Tay-Sachs, cystic fibrosis and others. For now, Sequenom's focus is on a test to detect Down syndrome in unborn babies. The test uses fetal RNA found in the blood of expectant mothers.
  • When the product does go to market, one challenge will be convincing doctors to adopt it. Some 4 million pregnancies occur in the U.S. every year, Lavin says, creating a potential market of $2.5 billion. (that won't be a challenge as it's NON invasive)
  • Sequenom aims to secure its own code for its test. If it's successful, the firm could go from making about $600 per patient to two-and-a-half times that. If OB-GYNs latch onto Sequenom's product and offer it as a less intrusive way to test for Down syndrome, there's potential for an even bigger premium. (Bingo)
As I've been saying with these small caps, you can have all the potential in the world but until the mainstream catches up to the story they can sit in purgatory for a long time. And then go on epic runs, but sometimes it takes years for people to figure it out. I think we're seeing that with some of the Chinese small caps now.

[Aug 13: Beginning Stake in Sequenom]

Long Sequenom in fund and personal account



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