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Sequenom Highlights Its Good News, Keeps Lid on Bad

Xconomy San Diego — 

Sequenom (NASDAQ: SQNM) sought to assure shareholders on a variety of fronts today, nearly a year after the San Diego maker of genetic diagnostic tests canceled the launch of its flagship test for Down syndrome due to “employee mishandling of R&D test data and results.” Following an internal investigation, Sequenom announced five months later that the research data supporting its test were no longer reliable. That same investigation led to the ouster of former CEO Harry Stylli, R&D chief Elizabeth Dragon, and three other employees. Two other Sequenom executives resigned.

Sequenom, however, does not subscribe to the PR doctrine of getting all the bad news out at once. After 319 days, the company has yet to publicly disclose any details about what happened during its research and development of the Down test. Instead, as Sequenom did today, the company has sought to call attention to several of its positive developments amid a wider fourth-quarter loss that revealed higher costs and lower revenue. To wit:

—Sequenom tentatively agreed in January to pay $14 million and give a 9.95 percent ownership stake to settle a class-action lawsuit that was filed in federal court by shareholders over materially false and misleading statements the company issued about its non-invasive test for Down syndrome in the 11 months before the launch was canceled. Chairman and CEO Harry Hixson told analysts and investors during a conference call today that a final approval of the settlement, set for May 3 in federal court, will clear “the major obstacle” that Sequenom faces in raising new capital. While Sequenom has $42.7 million in available cash, Hixson added, “We need to secure additional financing this year. We don’t want to let the gas tank run too low.”

—In the press release issued today, Sequenom did not provide an update on separate federal criminal and civil investigations that are focused on potential misconduct underlying the “mishandled data” during development of the Down syndrome test. Hixson only mentioned in passing during the conference call that the government investigations (and other litigation) are “ongoing.” Hixson noted, though, that Sequenom has implemented new R&D and disclosure controls, elected two new independent directors to the company’s board, and recently named two new experts to its scientific advisory board.

—Hixson says Sequenom remains committed to developing a non-invasive test for Down syndrome, which will be based on the company’s proprietary technology for detecting and analyzing fetal DNA circulating in the mother’s blood. The company says its R&D efforts are focused on using its existing and next-generation MassArray gene-sequencing equipment. Collecting clinical blood samples and retaining a third party to validate what Sequenom calls its “T21 test” (Trisomy 21) represents the single largest investment the company will make in 2010. In response to an analyst’s question, Hixson said Sequenom’s R&D is now focused on DNA analysis, and its RNA-based analysis method “is on a back burner at this time.”

—Hixson and Sequenom’s interim chief financial officer also emphasized the company has introduced three laboratory tests over the past six months. They include tests that analyze fetal DNA in the mother’s blood for Cystic Fibrosis, to determine if the fetus blood type is Rhesus D negative, and to determine fetal sex. But Sequenom’s interim CFO, Paul Maier, noted that diagnostic revenue generated by the company has been at best incremental.

Sequenom reported a net loss of $18.4 million, or 30 cents a share, on revenue of $10.8 million in the fourth quarter that ended Dec. 31. That compares with a net loss of $15.4 million, or 25 cents a share, on $12.2 million in revenue in the same quarter of 2008. The company posted a net loss of $71 million, or $1.16 per share, on revenue of $37.9 million in 2009.

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