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With Its Share Price Sliding, Sequenom Pins Hope on Clinical, Pharma Markets


Sequenom’s share price began to crawl back from the brink Wednesday afternoon, one week after diving 27 percent in a single day as lackluster sales of its MassArray genotyping platform hurt first-quarter revenue and caused net losses to jump by $1.3 million.

In its first-quarter earnings report April 29, Sequenom said sales of its flagship MassArray platform “were below expectations,” and warned investors that the high-throughput system may be reaching saturation.” The firm also said the sales cycle for its newly launched gene-expression application and the new bench-top MassArray system “are longer than planned.”

After closing at a 52-week low of $1.98 the day of the report, and falling to a nadir of $1.77 earlier this week, shares of the San Diego pharmacogenomics company inched up to $1.96 on the Nasdaq exchange late Wednesday. It was still a far cry from the $2.70 closing price the day before the first-quarter earnings were announced.

“Last week was tough,” Steve Zaniboni, Sequenom’s CFO, told Pharmacogenomics Reporter this week.

Revenue from product sales during the period ended March 31 fell to $4.8 million from $6.6 million one year ago, while receipts from Sequenom’s nascent pharmaceutical business decreased to $192,000 from $265,000 year over year.

First-quarter losses for the systems business, meantime, widened to $9.9 million, or $.25 per share, from $8.5 million, or $.22 per share, in the year-ago period, the company said.

“MassArray system placements in the first quarter were below our expectations,” Zaniboni said in a statement April 29. “We see the number of new account opportunities for high-throughput genotyping reaching saturation.

“In addition, the sales cycle for our new MassArray gene-expression application and MassArray compact system are longer than planned,” he continued. Zaniboni said that product sales in the first-quarter of 2004, like sales in 2003 — which fell below expectations — caught Sequenom off guard. “I think that’s partially true,” he told Pharmacogenomics Reporter.

However, he said sales of the bench-top system “will drive a significant portion” of top-line growth during the remainder of 2004. In the statement, Zaniboni stressed that 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 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.” (He stressed that “the [genotyping] markets are not polarized” to the point that the bench-top system can only be used for clinical genetics and the large unit exclusively for high-throughout customers.)

Zaniboni said these new markets are collectively worth $1 billion. By comparison, the high-throughput genotyping space is worth around $250 million. He said Sequenom “had the potential to access” 20 percent of the smaller space.

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. He added that this is a “leading edge” project for Sequenom.”

Zaniboni had earlier said this redirection downstream will help Sequenom continue the 25-percent annual revenue growth it enjoyed when the high-throughput genotyping segment was white-hot. The last time it recorded this growth was between 2002 and 2003. But this portion of the transition will be challenging. “The sales cycle so far has not shortened for the clinical genetics market,” Zaniboni said. “We think it will.” He said it will take “a group of thought leaders” to begin using Sequenom’s technologies to begin developing home-brew applications.

Though R&D spending inched up in the first quarter, to $6 million from $5.9 million year over year, Zaniboni said this will not be a trend. “The R&D expenses will not be growing significantly in 2004.” However, he said, there will be “some very important shifts” in that spend. For instance, in the clinical genetics component of the systems business, R&D dollars will focus on improving “system robustness, analytical yields, quality of results,” all with an eye toward the diagnostic market. In the past, he said, these funds would have gone to throughput and multiplexing.

This R&D spending is mirrored in the pharmaceutical division, where Sequenom has recently completed a gene-discovery program in which researchers identified more than 60 “high-confidence” genes in 10 diseases. “That investment is decreasing while the investment to focus on a very small, select group of programs for internal drug development … is increasing,” he said.

Asked why investors continue to drive share price lower, Zaniboni said: “To some degree, I can even understand such a reaction. We took a straight and honest approach [during the company’s conference call last week] in trying to communicate where we are. …” He said investors were unhappy that the company was unwilling to revise its earnings outlook for the remainder of 2004, saying instead that it would “view our progress over the next quarter, and see if we can then get some substantive information regarding sales cycles and applications and ramp-up time to better provide this in the second quarter.

“We did that well-knowing that this is an area of risk that investors would like as clear guidance from the company as they can,” he said. “At that point in time, we couldn’t provide it. By the end of Q2, we’ll have some more to say.”

The news comes several weeks after Sequenom missed by $4 million its 2003 revenue projection and blamed the shortfall on poor sales of the bench-top MassArray [see 10/9/2003 Pharmacogenomics Reporter>].

In February, Sequenom reported $30.3 million in total revenues, $28.3 million of which was from product sales. And though this was more than the company generated in fiscal 2002 — Sequenom posted $30.9 in total revenues, $24.9 million from products sales — the amount fell far short of the $34 million in total receipts Zaniboni had projected in August [see 8/7/2003 Pharmacogenomics Reporter]. The CFO said $32 million of that would be from the systems business.

There were some bright spots in the quarter: The company established five MassArray gene-expression reference sites, including ones in the Wellcome Trust Centre for Human Genetics, in Oxford UK; the Karolinska Institute, in Stockholm, Sweden; the Agricultural University of Norway in Oslo, Norway; the Institute for Genomic Research, in Baltimore; and the University of Michigan Medical Center.

Additionally, the NIH used the MassArray platform to identify a gene linked to diabetes risk — a disease that is a linchpin of Sequenom’s clinical goals.



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