9/12/12 Sequenom (SQNM)
Announcing a $100mm 5yr senior convert notes. Px talk is 4-3/4-5-1/4% up 25-30%, NC3, 140% softcall. Assuming 3.5% borrow cost on the stock, deal looks 1.5-2.5pts rich given lack of operating visibility on SQNM and limited liquidity runway this deal will give them. Using L+1000, implies TV of 97-1/2 to 3/4 and 35 implied vol. Unless story significantly improves from current expectations, we believe company may need to come back to the market in a year for additional financing. Currently, Street expecting EBITDA breakeven in 2014 on avg. revenue growth in excess of 140%. Street also sees co. spending ~$15mm/yr on capex over the next 3 years. This should add up to total cash needs approaching $140mm over 3 years, which is likely to put liquidity below the minimum covenant threshold.
Compared to this deal, we might rather own the new AFFX deal. AFFX deal priced at L+900/21.6v back in June and since close, despite a generally OK earnings release, the stock is down 20% with bonds in line on a dollar-nuke basis to 87.6. Compared to SQNM, we see AFFX currently looks like a slightly better credit given its larger cash balance and position as free cash neutral. However, we do find AFFX’s products less compelling vs. SQNM, assuming the latter can actually build market share. On balance, we see the next year as critical for SQNM to improve its profit picture in order to execute the next capital raise (equity?). Alternatively, company could pay back its term loan to remove the minimum liquidity covenant, but that would only buy them a qtr or 2 before they run out of cash.
SQNM reported cash/ST invs of $98.6mm at 2Q12 and company also has a $10mm ABL revolver facility due May ’14 to fund operations. During 2Q, company maxed out its $20mm delayed draw 1st lien term loan facility, which comes due in May ’15. Term loan agreement requires minimum liquidity based on total amount borrowed under the facility plus 3 months of cash operating losses, which we estimate to have been about $20mm last qtr. This suggests company currently running with about $60mm of excess liquidity before deal proceeds. Given company’s current cash burn rate of ~$100mm per year, the convert should give them about 18mos of operating funds without breaching covenants.
Proceeds to be used to fund commercialization of their new product MaterniT21 Plus, a non-invasive, pre-natal test for Trisomy 21 (Down’s Syndrome). Product was introduced in October 2011 and to date, the company has sold 20,000 units (13k in 2Q). However, mgmt notes that this volume has not yet shown up in the revenue line because of reimbursement delays as insurance providers develop their guidelines around use and necessity of the test product. As a result, gross margin in the 2Q dropped to 34% from 64% a year earlier as costs of the new launch were realized ahead of revenues. Meanwhile, sales and marketing expense increased by 53% yoy on an expanded team to market MaterniT21 Plus and expand its existing diagnostic products, including tests for cystic fibrosis, Rhesus D (blood-type incompatibility b/w mother and fetus), and age-related macular degeneration. In the meantime, company outlook is clouded by pending patent litigation against Ariosa Diagnostics over a similar pre-natal diagnostic product, Harmony. In July, SQNM was denied a motion for an injunction against Ariosa to cease selling Harmony pending a trial on the matter.