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As Investors Retreat, Sequenom Loses Options. Will Firm Be Acquired Soon?

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When Sequenom releases its second-quarter earnings Thursday morning, investors, customers, and collaborators will be looking to see whether the company can arrest a six-month slide in its stock price.

Though quarterly revenues have grown since the second period last year, receipts for the first three months of 2004 have fallen by $2.3 million year over year because of a challenging market for high-throughput genotyping systems.

Sequenom has meanwhile struggled to sell its newly released desktop genotyping platform, and its nascent pharmaceuticals business is still too young to make an impact on top-line growth. The firm has also had to say good-bye over the past six months to its top two business development people, its director of US sales, and a commercial operations executive.

In turn, investors appear to be losing confidence in Sequenom’s ability to regain its market superiority in the genotyping instrument space or to ramp up the pharmaceuticals business quickly enough, and have caused shares in the company to plummet nearly 70 percent since early February.

These events have led some industry insiders to speculate that CEO Toni Schuh has come under increasing pressure from his board of directors and from investors to divest either the systems or pharmaceuticals business — or to even sell the company outright. In fact, Sequenom this spring was in talks to be acquired by Samsung, the Korean conglomerate, with whom it has a vendor relationship, people close to Sequenom have said.

Schuh “is under a huge amount of pressure, for sure,” said a person close to the company.

“This should be pretty obvious to the public,” added Sean McKenna, who covers Sequenom for Merriman Curhan Ford & Co.

Reaction from the public — or at least among investors — appears obvious. Shares in Sequenom were trading down at $1.06 on the Nasdaq exchange late on Wednesday, 6 cents above the stock’s 52-week low of $1, reached earlier this month. The 52-week high for the shares was $4.50, reached in January (see table, this page).

Interviews with insiders and people close to the company agree that Schuh’s options are limited: sell more MassArray instruments — especially its newly launched desktop system — hasten product development in the pharmaceuticals business, or sell the company.

A person close to the company told Pharmacogenomics Reporter recently he believes Sequenom still “has some opportunities” to turn itself around. This person, who spoke on the condition that his name not be used, said investors have been fleeing the stock because the company “hasn’t been delivering on the systems side.” Indeed, CFO Steve Zaniboni, writing in a company statement announcing first-quarter earnings in April, said MassArray system placements during the first three months of 2003 “were below our expectations,” and that “the number of new account opportunities for high-throughput genotyping [is] reaching saturation.

“In addition, the sales cycle for our new MassArray gene-expression application and MassArray compact system are longer than planned,” Zaniboni said [see 5/6/04 PGx Reporter].

Revenue from the systems business during the first quarter fell to $4.8 million from $6.5 million year over year.

The pharma side, on the other hand, is still too young to affect Sequenom’s top line. “You really have to be in phase II clinical trials for people to ascribe value” to this kind of business, said the anonymous source. Sequenom plans to file an IND next year, he added.

Receipts from the pharmaceutical business segment during the first quarter fell to $300,000 from $900,000, and contributed to $5.8 million in operating losses, Sequenom said in April.

Divide and Conquer?

Last year, Sequenom began telling investors it intends to divide the company into two components — systems and pharmaceuticals. The move may also lead to two separate tracking stocks, according to a person familiar with the decision. This announcement, made to investors during financial conferences rather than through news releases, led some to speculate that Sequenom was inviting larger companies to buy one or the other business. Logistically, it’s easier to acquire a stand-alone business unit, especially one with its own stock, than it is to buy and cobble together components of a unified company.

“I think there is a significant amount of value in the pharma side … and the systems business as a stand-alone has value,” said this person. “The problem is that when you try to break [the business] up in today’s market, what does that do? Maybe it enables someone to pick [one or the other unit] up at a very cheap price.

“I think the company is put at an even tougher position now,” he said. “They may be wheeling and dealing, and saying, ‘Hey, help us out of this hole we’re in.’”

In fact, as early as February, when Sequenom shares were trading above $3, the company was in talks to become acquired by Samsung, according to this source. He said Samsung and Sequenom have discussed terms of an acquisition on three separate occasions, but that each time the deal failed to gel. He said “at a couple of points” the negotiations were “intense.”

Samsung and Sequenom have had a vendor relationship since at least June 2002, when Samsung bought $7 million worth of MassArray units to help it design diagnostics products. Under the terms of that deal, Sequenom stands to receive 50 percent of the rights to any products that are developed, as well as 5-percent royalties from any diagnostics that are developed.

More interestingly, the Samsung Advanced Institute of Technology, to which Sequenom sold its MassArrays, has a newly formed Biochip Project Team that “conduct(s) research in three areas: biochip-platform developments, SNP identification, and validation for several human diseases,” according to the division’s web site.

Samsung also provides the nanodispensors and consumable chips for Sequenom’s MassArray units, according to a form Sequenom filed with the US Securities and Exchange Commission in May.

“I know [Shuh] is feeling the pressure,” said another person familiar with the company, also on the condition of anonymity. Asked whether employees may have sensed in recent months that the company may be close to being acquired, or at least was seeking to become acquired, this person, who maintains close ties to a number of officials at Sequenom, said, “speculation was always there. It wouldn’t have surprised anyone had [an acquisition] happened.

“If I saw [news of Sequenom being acquired in the media], it wouldn’t surprise me in the least,” this person added.

Officials from Sequenom declined to comment for this article because they are in a quiet period leading to the company’s second-quarter earnings release.

Brighter Times Ahead?

CFO Zaniboni, speaking with Pharmacogenomics Reporter in April following the company’s first-quarter earnings, said sales of the bench-top MassArray “will drive a significant portion” of top-line growth during the remainder of 2004. Sequenom “remain[s] encouraged by the level of new leads being generated for these products in the clinical market. We continue to develop our market for clinical genetics and molecular medicine ...,“ he said.

In April, Zaniboni reiterated that Sequenom is “in the middle” of a transition from large government-funded research programs — the traditional MassArray customer base — to what he called “applied genetic analysis for the clinical genetics market and the molecular health-care market.” These new markets are collectively worth $1 billion, he said.

By comparison, the high-throughput genotyping space is worth around $250 million. He said Sequenom “had the potential to access” 20 percent of this smaller marketplace.

Zaniboni said one area in which Sequenom seeks to become a bigger player is prenatal diagnostics. “We see activity in the customer base of the analysis of fetal DNA for genetic detection in maternal blood, and that’s pretty exciting,” he said in April. He added that this is a “leading edge” project for Sequenom.

—KL

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