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Strong Buy
Re: Sequenom Inc : William Blair raises to outperform from market perform rating EOMWe are upgrading shares of Sequenom from Market Perform to Outperform for the following reasons: 1) we conducted a survey of over 100 ob-gyns and women’s health professionals that indicates a high likelihood of non-invasive prenatal testing (NIPT) moving quickly into the $1 billion-plus average-risk pregnancy market; 2) the multifaceted agreement with Quest Diagnostics (DGX $59.08; Market Perform) from last week provides added market coverage, provides a distribution channel into the averagerisk space, and dampens the near-term prospects for a competitor; 3) the recent addition of another national payer contract helps secure what we believe is favorable pricing and a move to accrual accounting; 4) a more secure cash situation has resulted from the sale of the genetic analysis business earlier this month; and 5) favorable progress has been made on the IP front. Though we suspect this is a stock that many investors have negatively skewed preconceived notions about, we encourage a fresh look at the company now that the dust has started to clear on a number of fronts. Stock Thoughts and Valuation If we look merely at the high-risk pregnancy market in the United States (which is the segment of the market and geography where the company is generating most of its test volume from today), we would expect Sequenom to be able to accession at least 200,000 tests in 2017 (roughly a 30% share, which is down a little bit from market share at present). Using a blended $1,000 average reimbursement rate per test (what we believe national contracts are averaging) would yield revenues from this segment alone of $200 million, and even at a 25% lower reimbursement rate (not unreasonable when thinking about the mix of payers beyond the national contracts), this segment should add north of $150 million on a consistent basis. On top of that, we expect 1) Quest-related fees for tests run by Sequenom but sent in from Quest, 2) licensing royalties from Quest should it develop its own test, 3) further expansion into international markets (today around 10%-15% of revenues, we estimate), and 4) the strong possibility for average-risk revenues to begin to emerge in the next couple of years. All told, we do not believe that a revenue number of $250 million in 2017 is a major leap of faith and see this as potentially quite conservative. Using a revenue multiple of 3 times that total (in line with peer group average), we get to a valuation of around $750 million (versus $500 million today). Thus, based on several recent positive developments, a path to much higher revenues, and a newly promoted management team that seems very committed to building and maintaining investor credibility, we are upgrading Sequenom from Market Perform to Outperform.
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