Sequenom's Brief, Wondrous Agreement

I commented last month that while Sequenom (Nasdaq: SQNM  ) was headed in the right direction with its MaterniT21 Plus Down syndrome test, after past missteps, there was still more for the biotech to show investors. I fell short of endorsing the stock because it seemed like there were a few more pieces that needed to be put into place.

After that, the test maker signed up another insurer and things were really looking up.

And then Friday happened. Shares fell 11% on word that Coventry Health Care (NYSE: CVH  ) was pulling out of its arrangement to pay for the MaterniT21 Plus test for its insured members. The deal was less than 2 weeks old.

The arrangement was set to start July 1. And it will. But Coventry said it'll stop paying for the test on Aug 31. It looks like the deal gave Coventry the right to end the agreement with a two-month notice.

Getting a drug, medical device, or diagnostic test on the market is only half the battle these days. Companies still have to get payers to agree to cover the treatments and tests, which can cause some wild moves in the stock. Dendreon (Nasdaq: DNDN  ) had to persuade Medicare to cover Provenge. And InterMune (Nasdaq: ITMN  ) has been on a roller coaster with the German price-setting group for its idiopathic pulmonary fibrosis treatment, Esbriet.

Patients covered by Coventry could pay for the test out of pocket, but I doubt many will. The blood test is safer than an amniocentesis, which presumably is still covered, but that's all relative. An amniocentesis isn't all that unsafe and it gives doctors more information than the MaterniT21 Plus, which only tells patients about chromosome 21, which causes Down syndrome, and abnormalities at chromosome 13 and 18.

What's a little troubling about Coventry's decision is that Sequenom didn't give a reason for why the insurer changed its mind. The company might not know, as Coventry was allowed to end the agreement without cause. Any way you look at it, though, Coventry's decision will make it harder to negotiate with other insurers.

As I advised last month, continue watching gross margins because they'll tell you how easy it'll be for Sequenom to get to profitability. If insurers are driving a hard bargain and keeping the price down, Sequenom will have a long road ahead even as it keeps selling more tests.

The Down syndrome test market may be large, but Fool analysts have found a bigger one. Find out what it is and how to profit from it in our free report "The Next Trillion Dollar Revolution." Get your free copy by clicking here.

Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Dendreon. Motley Fool newsletter services have recommended buying shares of Coventry Health Care. The Motley Fool has a disclosure policy.
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Read/Post Comments (9) | Recommend This Article (4)

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  • Report this Comment On May 22, 2012, at 4:04 PM, Glaze222420 wrote:

    Don't count SQNM out yet. Coventry may regret it's move. Can you imagine the lawsuit when one of it's members loses a baby following an amnio? It could happen and they will sue because it could have been avoided if Maternity21 test was covered under plan for same cost of amnio. Too me Coventry decision was very short sited.

  • Report this Comment On May 22, 2012, at 5:32 PM, hollandjoey11 wrote:

    This company has a very checkered past. They simply cannot get the business end of anything done correctly. They may have an impressive research team but they simply have zero business savvy.

    The Coventry issue is just the latest in the long line of issues they have had. In the future they also face a MAJOR issue in the patent litigation. It’s going to be a very expensive and arduous legal battle which may burn more cash than they have.

    In regards to suing... There is nothing to sue. If you want to pay for the test you are free to do so. Insurance companies are not required to cover a test, especially one as narrow in scope as this one. Its laughable that someone would try and sue since the precedent has been in place for decades on dozens and dozens of narrow scope tests.

    The stock recently fell into the low 4’s and should it fall back, or when it falls back into the 3’s its typically a short term buy there. There have been many many short term rallies from the 3’s over the last few years. Caution, be quick to take profits and keep a close eye, this is a thinly traded, heavily shorted stock.

  • Report this Comment On May 22, 2012, at 5:38 PM, rippumpers wrote:

    Great article! Glad someone had the guts to highlight the short falls of the SQNM tests! Between competition, the second best nature of it's test's results, and its high stock price, only ignorant fools will continue to invest and boast here.

    It is no wonder short interest is high. The shortfalls are real and obvious.

    Anyone who thinks the company doesn't know why the coverage was dropped deserves the losses that they will receive here!

  • Report this Comment On May 22, 2012, at 8:03 PM, bringthepain wrote:

    CVS,Amnio statistical analysis(April,2012)

    1 miscarriage for every 14 Down, Edwards or Patau syndrome diagnoses

    http://www.birminghamgenetics2012.org/pdfs/spoken/monday/2.1...

    For every 100,000 high risk pregnant women :

    old method(CVS,Amnio) - cost of $100 million and 500 procedure-related losses

    new method(MaterniT21 Plus) - cost of $3.9 million and 20 losses

    page 918

    "To asess utility, a saimple model compares current daignostic protocols for Down syndrome with one that inserts mpSS beween idenfitication of high/risk pregnancy and invasive diagnosis.

    Asume 100,000 women at high risk for Down syndrome, with one aftected prgnancy for every 32 normal prgnancies, diagnostic testing costs of $1,000 per patient , and a procedure-related fetal loss rate of 1 in 200.

    Complete uptake of invasive testing by high-risk women would detect 3,000 cases at a cost of $100 million and 500 procedure-related losses.

    Complete uptake of MPSS testing by all high-risk women, followed by invasive testing in those with positive MPSS results (along with those who failed testing), would detect 2,958 cases (42 missed) at a cost of $3.9 million and 20 losses.

    The difference in financial costs for the two protocols could help offset MPSS testing costs. Assigning a dollar value to the 480 potentially avoidable procedure-related losses is difficult, but they are an equally important consideration.

    If the procedure-related loss rate were lower than 1 in 200, the absolute number of losses would decrease, but the proportional reduction would remain the same.".

    psge 919

    "A major goal in the field of prenatal screening has been to reduce the need for invasive procedures. MPSS testing cannot yet be considered diagnostic.

    However, offering MPSS testing to women already at high risk for Down syndrome can reduce procedure-related losses by up to 96%(!!!), while maintaining high

    detection. Confirmation by invasive testing is still needed."

    http://www.ipmms.org/PUBS/DNA%20Sequencing,%20Genet%20Med.pd...

  • Report this Comment On May 23, 2012, at 1:27 AM, InvestDonkey wrote:

    The author clearly missed the mark with this article.

    Firstly, Both Analysts from Landenberg Thalman and Oppenenheimer issued statements following the Coventry PR stating that this was a non-event. They spoke with Coventry and confirmed that the signed agreement was made with the CA based office, and that Coventry as a national organization decided not to honor that agreement (ie, they wanted a better deal). Furthermore, the Coventry network is SO small that if they never signed with SQNM it would not matter. SQNM absolutely did the right thing by not giving them a 'sweetheart' deal. The fact that this author uses this 'Coventry situation' as the basis for writing an article, and then misses these key points, is evidence that he is just looking for a reason to talk about how this company will fail.

    The reality is, SQNM's test is set to replace the need for 99% of the amniocentesis procedures done in the near future. The simplicity of the test is a significant draw for women going through a pregnancy, especially a women over 35. The last thing a 35 year old women looks for is ANOTHER risk factor to be introduced into pregnancy. With the risk of 1 in 200 that the amnio causes a miscarriage, it is certainly NOT a risk free procedure as noted in the article. The author is clearly a guy who has never had a long needle stuck inside his whom while he is pregnant.

    The company just launched this test about 6 months ago. They have already completed 10,000 tests this year, and their run rate is increasing exponentially every month. They started with a run rate of 100 tests per week in January and are now running over 1000 tests per week. They are on track to complete conservatively 50,000 tests this year, which is more likely to be closer to 80,000 tests with the rate the growth occurring..

    Contrary to the article, management stated during their last call they ARE being reimbursed for the test at rates expected. On the high end, insurance companies are paying upwards of $2000/test (same cost as Amnio). With some companies not yet covering, or covering at a lower rate, their average revenue/ test is likely closer to $1200. With a cost of goods per test of currently $500+ (estimated) that is expected to shrink down by 40% this time 2013, the company has a blockbuster, high margin test on its hands.

    Furthermore, a comparison to Dendreon's problems is completely misguided. Dendreon's situation is unique in that it requires doctors to front immense amounts of cash to buy their product up front (i beleive $20,000 per treatment?) Sequenom's test is actually easier and more safe to administer than amnio (most doctors HATE doing amnio). It carries no risk of miscarriage, and costs the doctor nothing. It also MORE accurate than Amnio. The doctors LOVE this test. The exponential rate SQNM is Iicreasing their run rate shows the DNDN comparison is nothing more than unintelligent.

    This author is clearly short sided and Ill-informed of the facts. Its fortunate we have the chance to posts the facts and set things straight.

  • Report this Comment On May 23, 2012, at 1:42 AM, InvestDonkey wrote:

    Correction. Dendreon's Provenge cost is $93,000 per treatment. That is the upfront cost to the doctor, which is why Dendreon is struggling. The analogy between Dendreon and Sequenom makes no sense at all.

  • Report this Comment On May 23, 2012, at 8:47 PM, unkownuser wrote:

    "An amniocentesis isn't all that unsafe..."

    Hey Brian, I don't think you understand or relate to the issues facing those in the high-risk pregnancy category.

    My wife and I had our children late, she was 38 and I was 46 when we STARTED! We did not have the luxury of time ahead of us if we wanted to have a family.

    Because of the risk of Down Syndrome with advanced maternal age, we needed to decide if we wanted to have an amniocentesis or just throw the dice (MaterniT21 was not available back then).

    It was a painful decision... on the one hand we wanted to know if the child had Down's, on the other hand we did not want to take any risk of losing a healthy pregnancy to amnio.

    A 1:200 or even 1:400 risk is not inconsequential when you have to go through fertility treatments to get pregnant, and are then faced with the decision of amniocentesis and possible miscarriage to rule out Down's.

    If MaterniT21 had been available, it would have been a no-brainer for us; even at full cost out of pocket.

    There is much more emotion here than you realize, and it can easily overpower montary concerns. Also, I work in a hospital and speak with patients and families every day... and my wife and I are not a tiny minority within the high-risk category. This is part of the reason why I know Sequenom will fly.

  • Report this Comment On May 24, 2012, at 10:15 AM, russkr wrote:

    Although it is true that Sequenom did not release anything that explained the reason why the agreement was terminated, they DID release a statement on the issue. The most important excerpt:

    "Coventry advised Sequenom CMM that this decision was not a judgment on Sequenom, Inc., Sequenom CMM or its products. "

    It appears Sequenom may not know the actual reason, either...but were at least advised that it wasn't a problem on Sequenom's end.

    http://sequenom.investorroom.com/2012-05-17-Sequenom-Provide...

  • Report this Comment On June 07, 2012, at 3:34 AM, nikdeerf wrote:

    I agree with the comment above. The difference between an amnio and a non-invasive (risk-free) blood test is such a huge one! An amniocentesis is done around 20 weeks when the pregnancy is very public, mom already feels the baby kicking, and termination is not an option at this step for many people.

    The Sequenome test can be done at 10 weeks.

    I am a 32 year old who had a baby with Trisomy 13, and am now pregnant with my second. I did not want to risk the amniocentesis, but would have killed to get my hands on the Sequenome test (I live in Europe, it is not available here). Many friends I have spoken to who are pregnant feel the same.

    I totally agree with the commenter above, given the increase in the number of women above 35 who are getting pregnant, and the number of women who do not want to take the risk with an amniocentesis, I think the Sequenome test has a real chance of sucess, if people would just give it time! Right now, very few doctors in the US even know about it.

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