We 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.