What: Shares of Sequenom (NASDAQ: SQNM), a life sciences company that develops and manufactures molecular diagnostic tests, were spliced and diced in June. According to data from S&P Capital IQ, shares of the device maker fell 9% after receiving an unfavorable ruling in a U.S. appeals court.
So what: On June 12, Sequenom announced that the U.S. Court of Appeals for the Federal Circuit upheld the patent eligibility criteria established in the Mayo Collaborative Services v. Prometheus Laboratories decision, and deemed that Sequenom's U.S. patent, 6.258,540 (known by shorthand as its 540 patent) is not eligible for patenting. The Court's reasoning involved prior legislation that companies cannot patent naturally occurring phenomena. The intellectual property in question covers Sequenom's prenatal DNA blood tests.
According to Sequenom,
"The Company believes that the ruling has little business impact, as it has been operating under the District Court's invalidity ruling since October 2013, and due to the pooling arrangement of NIPT intellectual property entered into with Illumina in December 2014."
Source: Centers for Disease Control and Prevention via Facebook.
Now what: The $64,000 question investors have to ask themselves is whether or not June's swoon in Sequenom shares is a reason to consider buying, or a warning to keep your distance.
On one hand, Sequenom has a unique set of prenatal products that could become a standard-of-care test. Additionally, with the company's 540 patent request invalidated previously, it's not as if the ruling of the Federal Appellate Court is in any way surprising. For what it's worth, Sequenom's legal overhang should be subsiding.
However, the bigger challenge for Sequenom will be in gaining insurer coverage for its tests and increasing awareness among consumers and primary care physicians. Additionally, competition in the diagnostic device space is increasing at a rapid pace. There's the danger that over the long-run these genetic analysis tools could become somewhat commoditized, further eroding margins.
Personally, I believe Sequenom has the tools to succeed, but it could still be years from now before we see those results reflected in its bottom-line. For investors, it means little need to feel rushed into buying Sequenom stock. I'd consider adding it to your watchlist, but would suggest investors wait for substantial top-line growth before dipping their toes in the water.
