Are These Sequenom Insiders Telling You to Buy?

Famed money manager Peter Lynch told us executives can sell their stock for any reason, but typically buy only for one: They think the price is going to go up!

Today I'm highlighting biotech Sequenom (Nasdaq: SQNM  ) , which saw four executives including the CEO and CFO buy an aggregate of more than $500,000 worth of company stock. These aren't option grants, but rather people who are putting their own money on the line, buying shares at market prices just like you and me.

Although following the lead of insiders can be profitable, I still recommend you do further due diligence to determine whether this stock would make a good addition to your own portfolio. So this isn't a call to buy, but just the inside track on a company you might want to check out further.

Putting your money where your mouth is
I particularly like it when a CFO buys stock in his company. If there's anyone in the business that understands how well it's running -- arguably even more so than the CEO -- it's the top finance guy. When I see him buying shares, I'm reminded of CNS, the maker of Breathe Right nasal strips, which saw its CFO begin buying company stock after it was beaten down and then continue doing so over a period of months. When that quarter's results came out, profits had tripled and the stock jumped 12% in one day. It wasn't long before GlaxoSmithKline (NYSE: GSK  ) bought out CNS.

Not every CFO purchase will lead to such silly gains, but it's certainly a sign I watch for at companies.

With Sequenom, while its CFO did pick up 10,000 shares, his wasn't the largest purchase made by an insider; in fact, it was the smallest, so I'd wait to see if he continues buying. But perhaps the chief accounting officer also plunking down money for 10,000 shares of the company is a sign. Adding to the 50,000 shares bought by the CEO and the 100,000 shares bought by the biotech's R&D director, certainly some important top names are seeing opportunity.

A network of connections
Sequenom is a beaten-down stock, off nearly 50% from its 52-week high and 15% lower just this past month. Losses widened in the latest quarter for this maker of a non-invasive blood test for Down syndrome, and it failed to win an injunction against a rival it has accused of infringing on its patents. The upstart has signed up Laboratory Corporation of America to distribute its tests throughout its 1,000 centers, suggesting it could give it leverage in stealing market share from Sequenom.

Moreover, because its MaterniT21 test runs on sequencing machines operated by Illumina (Nasdaq: ILMN  ) , it fell in sympathy with the medical equipment maker when its quarterly results showed flagging revenues and raised the specter of clients turning to rival Life Technologies' (Nasdaq: LIFE  ) machines.

I've said that the market read Sequenom's results wrong and unfairly punished the biotech. It reported that more than 13,000 tests were accessioned, equaling a run rate of 65,000, far more than the 4,900 tests accessioned in the first quarter that gave it an annual rate of 30,000. Furthermore, although Sequenom's losses were larger in the second quarter, revenues tend to lag expenses, so revenues for the services it provided this quarter will show up later. Even analysts admit that because all of this is so new to the biotech, it's difficult getting a handle on what's happening. Yet with the swift uptake being recorded in the MaterniT21 tests, it seems as though the market is providing investors with a discount here.

And investors (and insiders) might be realizing that, as the stock has jumped 25% off its lows.

Still a risky bet
Yet risks do abound. The multiyear delay in getting the MaterniT21 test to market has given time for rivals to develop their own tests, as the lawsuit against Ariosa Diagnostics indicates. Sequenom's own attempt to sign up a distributor resulted in an embarrassing PR mess when Coventry Health (NYSE: CVH  ) agreed to take the MaterniT21 test, then inexplicably cancelled just two weeks later. And just recently, German outfit LifeCodexx got a seemingly similar type of blood test approved for use in Switzerland as well as in Germany, Austria, and Liechtenstein.

 While Sequenom is not yet profitable, I think we'll see that turn around despite the rise of competition. Doctors and hospitals are obviously becoming enamored with the test that is safer for both mother and child as the rising run rate indicates. It's just one of the reasons I'm maintaining my outperform rating on Sequenom on Motley Fool CAPS, but you can tell me in the comments box below whether you think it will be able to outmaneuver its rivals and whether the insiders moving en masse to buy stock indicates there's a reason for optimism.

On the inside track
Investors looking for other biotech opportunities will definitely be interested in a new premium report on Arena Pharmaceuticals. The company just received FDA approval for a potential blockbuster anti-obesity drug, and our top biotech analyst details everything you need to know about the company. Claim your copy, which comes with a full year of updates, by clicking here now.

Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. Motley Fool newsletter services have recommended buying shares of Coventry Health Care, Illumina, and Laboratory of America Holdings. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 09, 2012, at 2:27 PM, jjspring73 wrote:

    LifeCodexx licenses the test from Sequenom.... This is not a negative as implied in the article.

  • Report this Comment On August 09, 2012, at 5:28 PM, earthunit wrote:

    "And just recently, German outfit LifeCodexx got a seemingly similar type of blood test approved for use in Switzerland as well as in Germany, Austria, and Liechtenstein."

    HEY, guess what? The LifeCodexx test IS Sequenom's test! LifeCodexx licensed it from them!

  • Report this Comment On August 30, 2012, at 7:25 AM, techperson wrote:

    "It reported that more than 13,000 tests were accessioned, equaling a run rate of 65,000, far more than the 4,900 tests accessioned in the first quarter that gave it an annual rate of 30,000."

    13,000 x 4 = 52,000

    4,900 x 4 = 19,600

    I think you are unclear on the concept of "run rate" - or your calculator is out of warranty.

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