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Sequenom, Inc. WellPoint Coverage Decision a Nice Positive

This morning, WellPoint (WLP $59.97) indicated that it deemed cell-free fetal DNA-based prenatal screening for various chromosomal abnormalities to be medically necessary in the high-risk population.

The indication from WellPoint, one of the largest insurance companies in the world, that cell-free fetal DNA-based screening for fetal aneuploidy is deemed to be medically necessary in the high-risk population is an incremental positive for Sequenom. The key points from today’s news are that the decision relates to coverage and not reimbursement and that it follows a recommendation in November by the American College of Obstetricians and Gynecologists Committee on Genetics (ACOG) that this class of tests be covered specifically in the high-risk population.

The specifics of the decision are important to Sequenom, as the company has been actively targeting the MateriT21 Test to the high-risk population, while its competitors are less focused on the high-risk population and have been looking for more broad approval. In addition, this is a coverage decision and not a reimbursement decision, so each company will have to separately negotiate reimbursement, and we believe Sequenom has been making progress in its conversations with WellPoint and other insurance companies and is well down the path to reimbursement.

We point out that notice of the coverage decision has come through several WellPoint affiliates, and there has not yet been confirmation by Sequenom that this is a national decision.

Stock Thoughts
Based on significant survey work and interviews of many potential users of the test (maternal-fetal medicine specialists and ob-gyns), our thesis has been that uptake of the
MaterniT21 test would be much faster than what we believe investors were looking for and
that this uptake would result in stock price appreciation. However, despite the very strong momentum the company has seen, the marketing noise from other test providers, lack of clarity on the reimbursement front, and growing list of litigation proceedings have all weighed on the stock, and as a result, the stock has been volatile. Despite this pattern, we believe it is becoming increasingly clear that Sequenom is establishing a meaningful first- mover advantage in what has become one of the fastest growing markets in all of diagnostics (and one that we believe will be able to support multiple players long term) and that management has been true to its word in hitting milestones and building credibility. Interestingly, while the strong initial uptake may not have led to the appreciation in the stock that we had expected, we suspect it provided the impetus for quick review of the technology not only from professional organizations but also from payers. We view today’s news as another important step toward reimbursement and adoption of the MateriT21 test; we reiterate our Outperform rating and remain confident in management’s ability to exceed test volume expectations and expect that coverage decisions are another sign that formal reimbursement codes could be issued in the near future.

Sequenom is a diagnostic testing and genetic analysis provider focused on translating the results of genomic science into diagnostic tests in noninvasive women’s health and prenatal diagnostics, age- related macular degeneration, oncology, and infectious diseases.

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