Sequenom's Brief, Wondrous Agreement

I commented last month that while Sequenom (NAS: SQNM) was headed in the right direction with its MaterniT21 Plus Down syndrome test, after past missteps, there was still more for the biotech to show investors. I fell short of endorsing the stock because it seemed like there were a few more pieces that needed to be put into place.

After that, the test maker signed up another insurer and things were really looking up.

And then Friday happened. Shares fell 11% on word that Coventry Health Care (NYS: CVH) was pulling out of its arrangement to pay for the MaterniT21 Plus test for its insured members. The deal was less than 2 weeks old.

The arrangement was set to start July 1. And it will. But Coventry said it'll stop paying for the test on Aug 31. It looks like the deal gave Coventry the right to end the agreement with a two-month notice.

Getting a drug, medical device, or diagnostic test on the market is only half the battle these days. Companies still have to get payers to agree to cover the treatments and tests, which can cause some wild moves in the stock. Dendreon (NAS: DNDN) had to persuade Medicare to cover Provenge. And InterMune (NAS: ITMN) has been on a roller coaster with the German price-setting group for its idiopathic pulmonary fibrosis treatment, Esbriet.

Patients covered by Coventry could pay for the test out of pocket, but I doubt many will. The blood test is safer than an amniocentesis, which presumably is still covered, but that's all relative. An amniocentesis isn't all that unsafe and it gives doctors more information than the MaterniT21 Plus, which only tells patients about chromosome 21, which causes Down syndrome, and abnormalities at chromosome 13 and 18.

What's a little troubling about Coventry's decision is that Sequenom didn't give a reason for why the insurer changed its mind. The company might not know, as Coventry was allowed to end the agreement without cause. Any way you look at it, though, Coventry's decision will make it harder to negotiate with other insurers.

As I advised last month, continue watching gross margins because they'll tell you how easy it'll be for Sequenom to get to profitability. If insurers are driving a hard bargain and keeping the price down, Sequenom will have a long road ahead even as it keeps selling more tests.

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At the time this article was published Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Dendreon. Motley Fool newsletter services have recommended buying shares of Coventry Health Care. The Motley Fool has a disclosure policy.
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