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William Blair Downgrades Sequenom to Market Perform

NEW YORK (GenomeWeb) – Investment bank William Blair today downgraded Sequenom's stock to a Market Perform rating from Outperform following a series of events culminating in Sequenom's analyst day presentation yesterday.

In its report, analyst Brian Weinstein wrote that the company faces "deterioration and uncertainty" in the high-risk noninvasive prenatal testing market that Sequenom is unlikely to overcome in the near term with new products and revenues from its patent pool agreement with Illumina.

Last week, Sequenom announced that President and CEO Bill Welch had resigned. Dirk van den Boom, who had been the company's chief scientific and strategy officer, replaced Welch as interim president and CEO, and several days later, the company lowered its projected 2015 revenues to a range of $127 million to $131 million from a previous estimate of $150 million to $170 million. 

"Most troubling about last week's announcement of a guidance reduction was that management cited increased competition and price compression in the noninvasive prenatal testing (NIPT) market as the reason for the reduction in expectations, as these are factors that we do not believe are likely to abate any time soon," Weinstein wrote.

As a result, William Blair lowered its 2015 revenue estimate for Sequenom to $129 million from an earlier estimate of $142 million. It also lowered its 2016 revenue estimate to $135 million from $167 million.  

During its analyst day presentation, Sequenom highlighted two new recently launched NIPT products — MaterniT Genome, which analyzes every chromosome for deletions and duplications larger than 7 megabases, and VisibiliT, which screens for just trisomy 21 and 18 and is geared toward the average-risk market.

Weinstein wrote that although these products, along with its MaterniT 21 Plus test, give the company flexibility, "we simply remain perplexed as to how all of the offerings will be used by clinicians when working with their patients, what the price point will be for each product, what the cost of goods are on the different products, and how reimbursement will play out for each one."

Following Sequenom's analyst day presentation, investment bank PiperJaffray was also "cautious," about whether Sequenom could "bridge the gap" from its lowered 2015 revenue guidance to the over-$500 million in revenues that Sequenom said it expects by 2020.

Senior research analyst William Quirk wrote in a note that Sequenom's three NIPTs should "appease multiple physician groups," but added that he anticipates the adoption of VisibiliT to be limited on his belief that most physicians would prefer a test that included the DiGeorge microdeletion.

With regards to MaterniT Genome, he said that the firm would have to demonstrate clinical validity and utility before the test is widely adopted, in order to justify a higher price.  Sequenom is currently in the midst of a blinded clinical validation study in 1,000 women, although it did not present initial data during its analyst day, Quirk wrote.

In its analyst day presentation slides, which Sequenom made available on its website, the firm noted that 11 payors are currently reimbursing for NIPT in the average-risk market, and that it is increasing its focus in that market segment. Currently, there are around 80 million births worldwide in regions offering NIPT, only 1.5 million of which are considered high-risk, so expanding into average-risk pregnancies would open up the market to a total of over $3 billion, Sequenom estimated.

The company noted that it currently has over 200 million lives covered under commercial contracts and 44 million covered by Medicaid or Medicare in the US.

With regards to its patent pool with Illumina, Sequenom said that currently it receives between $6 million and $10 million in annual revenue from license fees, but there is the potential for that to grow to over $50 million.

During the analyst day presentation, Sequenom also discussed its previously announced plans to develop a liquid biopsy oncology assay. The firm is working on a 134-gene next-generation sequencing-based assay, OncoPlasma, being designed for late-stage solid tumor cancers.

It estimates the market opportunity for liquid biopsy is $20 billion to $30 billion. Currently, the firm is working with the University of California, San Diego and the Scripps Research Institute on development of the assay, which it will launch initially as a research-use only product in 2016.

The initial opportunity will be in cancer profiling, which Sequenom estimates to grow to about a $2 billion market by 2020. The ultimate opportunity will be in cancer detection, a $14 billion market by 2020, it estimated.

Regarding Sequenom's OncoPlasma product, Weinstein wrote that revenue contribution from that product is not yet "expected to be meaningful" and "there are still questions on commercialization and eventual reimbursement for the product." In addition, he said that while early cancer detection will likely eventually be very important for some cancers, "there is no data yet that we have seen that gives us confidence in the accuracy of these products."

In afternoon trading today, Sequenom's shares dropped 14 percent to $1.65 on the Nasdaq.