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Better Buy: Exact Sciences or Sequenom?

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It's a battle of the diagnostic test makers: newcomer Exact Sciences (Nasdaq: EXAS  ) versus Sequenom (Nasdaq: SQNM  ) , which is more-established but has a tarnished image.

Which one gets the nod? Let's see where the science leads us.

A more pleasant colorectal cancer test
Colorectal cancer is detected through colonoscopy, but some 40% of patients don't get one because they don't like the idea of having an instrument shoved up their rear. Enter Exact Sciences' Cologuard, which looks for altered DNA from cancer cells that shed into a patient's stool.

Initial results looked pretty good, but they were done on frozen samples from well-characterized patients. The true test will come from a clinical trial with real live patients, not poo pops.

Damaged goods?
Sequenom is farther along in that it has products to sell. The company sells mass spectrometry systems, but the market for such products is fairly limited. Sequenom shipped just 11 instruments last quarter. It's hard to get rich off $11.7 million in revenue every quarter. The future of Sequenom is its diagnostic tests.

So far, that hasn't gone all that well, though. The company has launched two tests: one for determining the RHD status of a fetus and another that looks for mutations that cause cystic fibrosis. It's still early in the launch, but neither has amounted to much, with combined sales of well under $1 million last quarter.

The big payoff could come from a test for Down syndrome. A maternal blood test for Down syndrome avoids an invasive amniocentesis, which can put the baby at risk.

Sequenom had a test that seemed to be working with near 100% accuracy, but former researchers are accused of knowing the answers, which helped them make the right calls on the test. Sequenom plans to start a clinical trial of the test this quarter.

The Down syndrome test uses the same technology as the already-marketed RHD status test. The tests look at minute amounts of fetal DNA in a blood sample from the mother. That should give investors a little hope that the Down syndrome test will also work.

But only a little. The RHD test looks for the presence or absence of a gene, while the Down syndrome test needs to determine if there are three copies of chromosome 21 rather than the normal two. Determining the difference two and three copies is likely to prove more difficult than the difference between zero and one.

The endgame
For both companies, the endgame is likely an acquisition. Pharma's appetite for diagnostics is too great and the synergies too plentiful to not expect them to be acquired long before they become a powerhouse.

The venture capital arms of Johnson & Johnson (NYSE: JNJ  ) and Google invested in 23andMe, which has a direct-to-consumer genetic test. Google was an investor in earlier rounds; 23andMe's CEO, Anne Wojcicki, is the wife of Google co-founder Sergey Brin. But the Johnson & Johnson investment is new. I'm not sure if it's a straight investment with the venture arm simply looking for returns, or if Johnson & Johnson is testing the waters before an outright purchase.

Eli Lilly (NYSE: LLY  ) recently purchased privately held Avid Radiopharmaceuticals for florbetapir, which detects plaques in the brains of patients with Alzheimer's disease. Abbott Labs (NYSE: ABT  ) and Roche both have diagnostic test divisions as well.

About the only pharma headed in the other direction is GlaxoSmithKline (NYSE: GSK  ) , which shed some of its holdings of Quest Diagnostics (NYSE: DGX  ) last year. Glaxo still owns 18% of the company.

Of course, Exact Sciences and Sequenom will only be acquired if their diagnostic tests turn up positive.

Stop stalling, pick one
Both companies are fairly risky, so buying both to mitigate a potential drop might not be a bad idea, but of the two, I like Exact Sciences better. Sequenom might turn out just fine, but I think it's prudent to wait until after there's some non-tainted data supporting the Down syndrome test before jumping in. You'll miss a big run-up if the test turns out to work, but avoid a downdraft if developing the test proves difficult.

Which one do you like? Sound off in the comments box below.

Quest Diagnostics and Google are Motley Fool Inside Value recommendations. Google is a Motley Fool Rule Breakers selection. The Fool owns shares of and has written covered calls on GlaxoSmithKline, which is a Motley Fool Global Gains pick. Motley Fool Options has recommended a diagonal call position on Johnson & Johnson, which is a Motley Fool Income Investor choice. The Fool owns shares of Google and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. The Fool has a disclosure policy.

Read/Post Comments (4) | Recommend This Article (10)

Comments from our Foolish Readers

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 December 01, 2010, at 10:18 PM, Disaster1 wrote:

    Suggest you could have also compared these to GPRO/Gen-Probe, which technically built a long base and has just moved above long term resistance at 50, next stop 57 to 60; over 6% of shares short, with recent breakout should have lots of short covering; has significant penetration in numerous clinical arenas . new tests coming along, for prostate Cancer, on top of older strength in areas of STDs,hepatitis and influenza, and trichomonas. Procleix, PANTHER, TIGRIS systems are well established. Not a one-test wonder, this company is the real thing. I am long GPRO.

  • Report this Comment On December 02, 2010, at 1:40 PM, Troy2008 wrote:

    I agree, EXAS has recently been validated by the Mayo Clinic, enough said. This virtually makes the FDA trial a no brainer as the FIT component will be added to the test for better late stage results.

    Also noteworthy is the fact you mentioned the frozen samples at Mayo being used, the fact of the matter is the test Cologuard was designed to be used on fresh samples, not frozen and will work better in a "live" clinical trial next year.

    Exact also has the opportunity to market in Europe starting in 2011, only a small amount of revenue will put the company in positive revenue, and with 100 million in the bank and zero debt it's a winner.

  • Report this Comment On December 03, 2010, at 7:32 AM, chazzerg57 wrote:

    50:50 is a better bet but on balance I'd say Sequenom as it's much further along in the development cycle with (what would be) a neater product. Yes EXAS has upped its game generally and the management is slick - but I remain sceptical about the product. We need some proper study results.

    Mayo is not objective; it gets boatloads of cash for carrying out research and from licences of patents to EXAS.

    Re saying the test "will work better" on fresh samples - sounds similar to one of their lines! The test is still being developed and the PR machine just blinked.

    Europe uses the terrible, but dirt-cheap FOBT/FIT for screening and won't switch that quickly - see Epigenomics battling to introduce their blood test - their final results are not at the EXAS interim result levels but they're marketable and there's no stool involved.

  • Report this Comment On August 27, 2013, at 2:28 PM, Troy2008 wrote:

    I believe I won that one. EXAS is now @ 900mm and sqnm is well, failing.

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