OB/GYNs Give a Thumbs-Up to Sequenom

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It sure has been a good month for genetics company Sequenom (Nasdaq: SQNM  ) . Fresh off the heels of strong sales  of its MaterniT21 PLUS prenatal test, the company happily issued the results  of a study indicating the accuracy of its RetnaGene AMD test. The stock's done quite well; for the past month, it's up nearly 24%. Forget the past, however, because another batch of good news came out for Sequenom on Wednesday to the delight of Wall Street, sending shares up 15%. Can this surging stock continue to push higher?

A timely recommendation
The American College of Obstetricians and Gynecologists (ACOG) recently recommended  expecting mothers to receive prenatal testing for fetal aneuploidy, which comprises several genetic disorders caused by an abnormal number of chromosomes. Most notable  among these disorders is Down syndrome, which afflicts one in every 800 births or so.

"That's great," some of you are saying. "What does that have to do with Sequenom?"

The ACOG report specifically highlighted a DNA-reading technology, known as massively parallel genomic sequencing, that accurately detects three  of these genetic disorders, known as trisomy 13, trisomy 18, and trisomy 21. Conveniently, Sequenom's MaterniT21 test, which analyzes chromosome material, can detect these same three disorders based on the same sequencing technology. It seems we've found a healthy match of our own here.

In short, ACOG -- which represents more than 90%  of U.S. board-certified OB/GYNs and stylizes itself as "the leading authority on women's health" -- has given an endorsement to Sequenom's test for picking up some rather serious fetal disorders. The MaterniT21 test has already been a smashing hit for the company in just its first full year on the market; Sequenom believes sales will greatly surpass internal expectations. MaterniT21 tests are selling now at an annualized volume  of 90,000 -- with 37,000 test samples conducted in the third quarter alone.

ACOG's recommendation should kick those sales into a higher gear. The group has a membership of more than 50,000  doctors, and with an estimated 750,000 high-risk pregnancies occurring in the U.S. each year, there's plenty of untapped market awaiting Sequenom. As doctors and groups gain experience with the MaterniT21 test over time, expect that familiarity to also foster increased sales. Getting insurance payers to cover the MaterniT21 test will additionally help; earlier this year, MultiPlan began to cover the test in a first step in the right direction. ACOG's recommendation could provide a push for insurers to step up.

To capitalize on this, however, Sequenom needs to get its financial house in order. Currently, it's not in good shape.

A shaky foundation
Let's start with the good news for Sequenom's business first. The company has posted some impressive growth out of its Diagnostics Services  division, fueled heavily by MaterniT21. In the third quarter, that branch posted revenues exceeding Q3 2011's division revenues by more than 400%, from just over $2 million to more than $12 million. That jump helped push Sequenom's total revenues up by more than 68%.

On the downside, not only is this company not profitable, but it's also accelerating its net losses with each quarter. Sequenom is mowing through cash like a weed whacker with a burn rate of around $28 million per quarter. The company still has plenty of cash on hand -- at its current rate, it wouldn't run out for around another seven quarters -- but with its negative operating cash flow easily keeping pace with revenue growth, investors need to question whether Sequenom can manage to actually hang on to some cash.

One far-flung but possible outcome could be a buyout by Roche Holdings (NASDAQOTH: RHHBY  ) . Roche has been looking for an acquisition target in the gene sequencing industry for a while  after its failed attempt to launch a takeover of Illumina (Nasdaq: ILMN  ) . Illumina has also played the "failed acquisition" game by striking out in its rejected bid  to buy Complete Genomics (Nasdaq: GNOM  ) . Sequenom's more than four times larger by market cap than Complete Genomics, but it's not unreasonable to see another large company like Roche keeping its eyes open for a buy.

With the acquisition bug in the air around this industry, it could be Sequenom that makes out handsomely if the MaterniT21 test continues to pick up sales growth.

One step in the right direction
Sequenom still has plenty of flaws, but ACOG's recommendation gives the company a push in the right direction. The MaterniT21 test looks promising with its sales blowing past expectations, and this latest announcement should only help that trend. It's too early to declare Sequenom a complete success story, and the company is still fighting for its future, but investors for now can feel a little more comfortable about this company's direction.

Sequenom's stock surge shows just how volatile, and lucrative, the biotech industry can be. While you can certainly make huge gains in biotech and pharmaceuticals, the best investing approach is to choose great companies and stick with them for the long term. In our free report "3 Stocks That Will Help You Retire Rich," we name stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

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