Why Sequenom Inc. Shares Plunged

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Sequenom (NASDAQ: SQNM  ) , a global life sciences company focused on developing genetic analysis devices, tumbled as much as 31% after disclosing in an SEC filing after the bell yesterday that it had received an unfavorable ruling in its ongoing patent litigation case with privately held Ariosa Diagnostics.

So what: According to the filing, the company received an order and opinion from the U.S. District Court for the Northern District of California yesterday regarding U.S. patent 6,258,540, a key patent used in prenatal genetic testing, which Sequenom's release refers to as "540." The court ruled that 540 is ineligible for patenting under the current patent code since it's based on a "natural phenomenon." As such, the court denied a summary judgment against Ariosa because of what it considers to be an invalid patent. Sequenom plans to appeal the decision to the Federal Circuit Court of Appeals.

Now what: Clearly having a key patent invalidated by a U.S. District court is never a good thing as it could expose the company to competition down the road by removing exclusivity. We saw a similar situation earlier this year when Myriad Genetics (NASDAQ: MYGN  ) saw some of its patents on naturally occurring genomes in the body get thrown out as invalid which opened its BRACAnalysis BRCA 1 & 2 gene test to almost instant competition. In the case of Sequenom, I feel we're looking at a bit of an overreaction. There are already a number of prenatal genetic tests on the market, so this ruling isn't too big of a concern. I believe investors are just more disappointed in the outcome because they were looking for the expected cash judgment from Ariosa to bolster its cash on hand. I would certainly encourage more risk-willing investors to give Sequenom a look at these levels as I do consider its technology to be attractive enough to lure in a potential buyer.

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  • Report this Comment On October 31, 2013, at 6:01 PM, russkr wrote:

    To be precise, the Court's order not only denied Sequenom's Motion for Summary Judgment but also granted Ariosa's Motion for Summary Judgment. The former would have been a minor setback, but the latter ends the case in Ariosa's favor (subject to appeal, though).

    I have been long SQNM for a long time but the company has not caught any breaks. This appeal will eat up significantly more amounts of cash. With their cash burn over the last 4-6 quarters and no trustworthy signs that profitability is near, it's hard to be optimistic about the stock.

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