How Not to Gain 75% of Your Company's Value Overnight

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This is a follow-up to my article titled "How to Lose 75% of Your Company's Value Overnight," written after Sequenom (Nasdaq: SQNM  ) crashed following employee mishandling of data. Two and a half years later, the company finally announced the launch of its Down syndrome test, MaterniT21 LDT.

The accuracy of the test, which uses maternal blood rather than the more-dangerous amniocentesis, actually looks pretty good. In a peer reviewed article published in Genetics in Medicine, independent researchers peg the accuracy of the non-invasive test at 99.1%. Seems there was no need for the Dragon lady to allegedly fudge data.

But the shares aren't even close to where they were before the initial uncertainty of the drug. Shares were nearly $15 the day before the bad news, and they're sitting at about a third of that price today.

Part of the problem is that Sequenom had to raise money -- unfortunately at depressed prices -- to stay alive long enough to get the study completed; the share count has ballooned more than 60% in the past two and a half years. That's just the cost of doing business for biotechs, especially when things don't go as planned, as Dendreon's (Nasdaq: DNDN  ) and Human Genome Sciences' (Nasdaq: HGSI  ) investors can attest.

But the increased share count doesn't account for all of the share-price change; Sequenom's market cap is still almost half of what it was two and a half years ago. The rest of the decreased value can be ascribed to a combination of overzealous investors in 2009 -- the fudged data was good, but it wasn't that good -- and cautious investors in 2011. Like other companies that haven't lived up to expectations -- Boston Scientific (NYSE: BSX  ) , for instance -- Sequenom remains a "show-me" company.

At a market cap of $500 million, Sequenom is clearly undervalued if the company can capture many of the 750,000 high-risk pregnancies each year. The company currently has the capacity to run 100,000 samples on an annual basis, with plans to open a second next year. Even assuming just 100,000 tests at $1,900 each, that works out to $190 million in sales, which would value the company at close to $1 billion assuming a reasonable price-to-sales ratio of 5. And that doesn't include Sequenom's other products.

A 75% increase in price certainly seems possible -- albeit not overnight -- but not until investors are convinced that Sequenom can execute on its sales plan the way it has on its clinical plan.

Keep up with Sequenom by adding it to My Watchlist, the Fool's free watchlist service. Don't have My Watchlist account? Sign up for free.

Fool contributor Brian Orelli holds no position in any company mentioned. Check out his holdings and a short bio. The Motley Fool owns shares of Dendreon. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (7)

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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 October 18, 2011, at 5:03 PM, unkownuser wrote:

    Sequenom should double overnight

  • Report this Comment On October 18, 2011, at 5:05 PM, unkownuser wrote:

    Based on the T21 test alone, we should see a double from here in short order

  • Report this Comment On October 19, 2011, at 12:31 PM, gerogejungle wrote:

    Are you serious? First of all Dr. Dragon, though clearly unqualified to be dircting development of a clinical diagnostic, was likely just a pawn of an equally unqualified scientific and corporate management. Secondly the test that is now ostensibly giving good results uses a completely different technology platform than the one that failed two years ago. They had to go out and buy off the shelf sequencing technology from a different company because their own mass spec based nucleic acid analysis wasn't up to the task. The bits of the investigation that have been publicly disclosed made it clear that the data wasn't mishandled so much as bad - with no predictive value whatsoever. So in addition to the calumny you imply, you are completely mistaken in stating "there was no need for the 'dragon lady' to alledgedly fudge the data." Since that method evidently did not work the need was absolute for Sequenom management to misrepresent the results if they wanted people to believe it did work. I shake my head almost every time I read one of your commentaries. Never has an organization borne the mantle of "fool" so appropriately.

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