How does an organization get out of a slump? That's a question that investors in Sequenom (NASDAQ: SQNM) hope the company answers soon. Shares have fallen nearly 43% since May and are down almost 20% since just three weeks ago. Can Sequenom rebound? I think it can -- if it addresses the following must-do items.
1. MassARRAY maintenance
"Major on the majors" is a piece of advice that works. For Sequenom, the major revenue-generator continues to be its MassARRAY system. For the first half of 2012, genetic analysis product sales and services accounted for 61% of total revenue. MassARRAY, a system for genetic analysis, contributes a large chunk of the genetic analysis dollars.
Sequenom faces declining sales for MassARRAY, however. Revenue for the system fell nearly 14% in the first six months of 2012 compared to last year.
The company really doesn't have to grow sales of MassARRAY tremendously to succeed. However, it must maintain sales levels at least in the range of previous years. Sequenom faces competition from several players, including Abbott Labs (ABT +1.40%) and Illumina (ILMN +1.34%).
2. MaterniT21 momentum
Future growth for Sequenom hinges on its MaterniT21 PLUS laboratory-developed test for Down syndrome. The good news on this front is that growth so far has been strong. Diagnostic services revenue, made up largely of MaterniT21 test sales, soared 295% in the first half of 2012 compared to last year.
The company estimates the potential U.S. market at around 750,000 tests each year. Currently, Sequenom's annualized run rate for MaterniT21 tests stands at 70,000 per year.
Capturing that market won't come easy. Credit Suisse recently downgraded Sequenom because of concerns that lower-priced alternatives from competitors such as Ariosa Diagnostics could be more successful.
Sequenom, though, claims several advantages that the company thinks give it a leg up on the competition. One advantage cited by management is that the company has a larger sales force than rivals. Sequenom also points to its shorter turn-around time of seven business days. For now, at least, these factors help the company maintain high market penetration levels.
The other challenge is getting major insurers like UnitedHealth (UNH +2.60%) and WellPoint (WLP +2.29%) to foot the bill for MaterniT21. Sequenom's data shows that 69% of births to women over age 35 (who are more likely to have high-risk pregnancies needing prenatal Down syndrome testing) are covered by private payers.
3. Cost control
Revenue represents only one side of the equation in actually making a profit. Sequenom's third must-do item is to control the other side: costs. The trend hasn't exactly been a friend lately, though.
Cost of goods sold increased 129% in the first half of 2012 compared to 2011, and shot up 179% in the second quarter of 2012 versus last year. Total operating expenses were up 26% in the first half of the year.
Timing explains part of the cost increases. Expenses for the MaterniT21 tests are incurred prior to receipt of payments for the tests. Increased selling and marketing associated with the ramp-up for the tests play an even larger role.
Sequenom has placed a high priority for 2012 and 2013 on reducing cost of goods sold, in particular. Specific approaches for cutting these costs include increasing sample throughput and implementing process automation.
Slump-stopping 101
These must-do items really reflect basic business fundamentals. Keep cash from established products coming in to help finance newer products. Execute well on building the market for those new products. Keep costs down.
It's too early to know how well Sequenom can and will handle each of these. My recommendation is to watch the financial results for next quarter. If the MassARRAY sales decline levels off, MaterniT21 growth continues strongly, and the rate of cost increases slow down somewhat, then the company is on the right track. If not, the stock's current slump isn't likely to reverse for a while.
