San Diego’s Sequenom Steps Back Into the Spotlight, Sort Of

3/17/10Follow @bvbigelow

San Diego-based Sequenom (NASDAQ: SQNM) is entering a critical phase in its management of the corporate crisis that erupted in its laboratories last year. It’s stepping back into the spotlight.

As a public company, Sequenom doesn’t have much choice. The maker of genetic diagnostic equipment and supplies says in its latest annual report that as of Dec. 31, it has an accumulated deficit of $597.3 million and available cash of $42.7 million. That means, as Sequenom chairman and CEO Harry Hixson told investors and analysts Monday, the company needs to secure additional financing this year.

Sequenom has been in its bunker since last April 29, after announcing a delay in the long-expected launch of its flagship test—a non-invasive genetic test for Down syndrome—due to “employee mishandling of R&D test data and results.” A subsequent internal investigation prompted a special committee formed by Sequenom’s board to fire CEO Harry Stylli, senior vice-president of R&D Elizabeth Dragon, and three other employees. The CFO and another executive resigned.

After several months of additional corporate governance cleanup, including tighter R&D controls and the appointment of two new scientific advisers and two independent directors, Hixson apparently decided Sequenom is ready to come out of the bunker and begin talking again. Hixson is scheduled to make a 30-minute presentation this morning at Roth Capital’s 22nd Annual Growth Stock Conference, which is being held at the Ritz Carlton in Dana Point, CA. Next week, he is set to make an appearance at the Barclays Capital 2010 Global Healthcare Conference in Miami, FL.

But Sequenom has yet to explain the what, why, or how certain employees mishandled its R&D data—and what consequences, if any, resulted. Remember, the mishandled R&D data were intended to support Sequenom’s Trisomy 21 test to determine if an unborn infant has Down syndrome. So what happened?

In the financial statement that Sequenom filed yesterday, the company says its independent directors concluded that “we failed to put in place adequate protocols and controls for the conduct of studies in the Trisomy 21 program at our company. Certain of our employees also failed to provide adequate supervision. In the absence of such protocols, controls and supervision, the test data and results in our Trisomy 21 program included inadequately substantiated claims, inconsistencies and errors.”

So what happened as a result?

Sequenom says only that due to “deficiencies in our disclosure controls and procedures” the inadequately substantiated claims, inconsistencies, and errors from its R&D tests “were reported to the public in our press releases and other public statements.” In other words, the only consequence that Sequenom is willing to disclose is that its misleading research data got publicly reported.

One adversary who is agitating for a fuller explanation is David Jaroslawicz, a New York lawyer who represents TrovaGene (formerly known as Xenomics) in a lawsuit filed against Sequenom almost four months ago. TrovaGene says a federal magistrate judge in New York ordered Sequenom to turn over documents sought by Jaroslawicz as part of the case.

TrovaGene is a genetic diagnostics company based in New York and San Diego that had developed rival technology to detect and analyze fetal nucleic acids from maternal urine. TrovaGene, which granted Sequenom an exclusive license to its technology, alleges that Sequenom breached their licensing agreement by providing false and misleading information about the successful development of its own Trisomy 21 test.

“What we’re trying to prove is that this was a deliberate fraud on their part to block Xenomics, to prevent us from using our own technology,” Jaroslawicz said. But Jaroslawicz told me yesterday that “Sequenom does not want to reveal what happened…If there was nothing bad there, why not put it out?”

By demanding Sequenom’s documents and access to its executives, Jaroslawicz is trying to intensify the pressure on Sequenom for his own reasons. TrovaGene’s lawsuit, which is now in a federal court in New York City, seeks at least $300 million for the damages it suffered by licensing technology to Sequenom.

“We licensed it to them for a small amount of money because there was supposed to be a substantial royalties flow,” Jaroslawicz said.

A Sequenom spokesman could not be reached after regular office hours last night for a response to Jaroslawicz’ comments. But lawyers for Sequenom contend in recent letters submitted to the court that Jaroslawicz has been making misleading statements of his own. They maintain that Jaroslawicz is not entitled to far-reaching demands for information from Sequenom under the rules of arbitration—and they recently renewed a request to move the dispute from federal court into a formal arbitration hearing.

Sequenom’s lawyers also asked the federal judge overseeing the case to halt the court proceedings—including the magistrate judge’s order to turn over documents—until a decision on moving the case to arbitration can be made. U.S. District Judge Richard M. Berman granted that request yesterday. Sequenom says written arguments on the move to arbitration must be submitted to the court by March 26.

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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