Tuesday, May 12, 2009 | The sense on Wall Street is that the technology behind Sequenom Inc.’s prenatal Down syndrome test is so strong that the company will ultimately survive the data-mishandling debacle that two weeks ago caused its stock to plummet by 76 percent overnight.
The same, however, can’t be said for Sequenom’s management.
Analysts remain dumbfounded by news that employees of the San Diego-based diagnostics company mishandled data that came from in-house trials of the test, and are infuriated by the vague explanations of how it happened by Sequenom CEO Harry Stylli and other executives.
The yet-to-be-approved blood test, which can be administered to pregnant women in their first trimester, could revolutionize the prenatal screening process for Down syndrome, and perhaps other chromosomal abnormalities. And it could mean billions to Sequenom, which was the highest performing California stock in both 2007 and 2008 — going from $4.70 on the first trading day of 2007 to a high of $27.76 last September, a 491 percent increase.
Sequenom dropped the bombshell on April 29, saying in a press release and conference call that it was delaying the launch of the test, called SEQureDX, and suspending four employees who work in the company’s research and discovery department.
The company acknowledged that the suspensions were connected with the mishandling of data, but would say little else. Since, several class action lawsuits have been filed against the company on behalf of shareholders. The stock closed Tuesday at $3.42, down from $14.91 on April 29.
“‘Mishandled by employees,’ what the hell does that mean?” said John McCamant, editor of the Bay Area-based Medical Technology Stock Letter. “They are trying to make it sound like a clerical mistake — what they did was fudge the data.”
Bud Leedom, a locally based analyst who publishes the California Stock Report, also suspects foul play and is harshly critical of how Sequenom executives have handled the fallout. “They have been so vague about what exactly happened,” Leedom said. “There is far more to it, and, if you ask me, there is clearly wrongdoing involved.”
The company’s actions have also caused great concern in the medical community, the opinion of which will in the end determine whether the test — and Sequenom — is a success or failure. However, doctors and clinicians are more apt than Wall Street to withhold judgment until the results of a much larger, and independent, clinical trial are released at the end of the year.
Currently, the best test available to pregnant women who want to know their chances of having a baby with Down syndrome involves amniocentesis, a procedure in which a needle is inserted in the woman’s belly. The procedure can’t be done until the second trimester, carries a risk of miscarriage and has a false positive rate of about 5 percent.
All that is needed for Sequenom’s test is a small blood sample. It has the potential to dominate the $2-billion-a-year prenatal testing market. Last summer the company reported that in studies of 200 samples, SEQureDX identified 100 percent of Down syndrome samples with no false positives.
But that was then.
Jason Chibuk, a genetic counselor for University of California, San Diego’s Fetal Care and Genetics Center, said he has high hopes for the test, but a lot of skepticism about the company now. The UCSD center supplies patients to Sequenom for their trials, but has nothing to do with handling the data.
“It will absolutely change the way women view their risks in a pregnancy,” Chibuk said. “I see women knocking down the doors for this test if it pans out. But they may have taken this away because of the mishandling of data.”
Stylli, Sequenom’s CEO, would not comment for this story, and company spokesman Ian Clements provided no information beyond what has already been disclosed. “Clearly there is frustration all around in terms of what we can and can’t talk about,” Clements said. “My aim is not to hide behind legal mumbo jumbo, but we have disclosed as much as we can give that we don’t want to jeopardize the investigations.”
Clements said the company has more than $80 million in the bank, enough to stay afloat until the results of the independent trial are released. And though he stressed that he does not want to minimize the severity of what happened, Clements said the company is confident that the underlying science behind the test is sound.
Leedom and McCamant said they and other Wall Street analysts are also confident that the test will ultimately fulfill its promise. But they are not confident in Sequenom’s top executives, and don’t see how the company can move on without a management shakeup.
“If it was mishandled by employees, it tells me that it could be a viable product,” McCamant said. “But what does that say about the company? This is not how you run a business. We don’t have accountability and we don’t have transparency.”
Said Leedom: “I think the technology works. But are these guys the proper gatekeepers? That is questionable.”
Looking back, Leedom said there were red flags that a keen observer should have caught. The first came in December when the company put out a press release on a batch of in-house clinical trial data, but then amended the release. This showed that they had misquoted some of the data, Leedom said.
Then at an analyst meeting held in San Diego in February, company officials were saying that they were getting a number of “no calls,” meaning that the test was showing neither a positive nor a negative result, Leedom said. And once tests from women of different ethnicities were added to the sample, the no-call percentage went up to around 10 percent, he said.
Leedom described these developments as “curious things,” and said that in hindsight you could get a sense that there was some damage control done inside the company. But, he said, “there were some very good analysts covering this company, no one had any inkling that this was in the works.”