Sequenom Settlement Offers Clues to What Went Wrong Last Year

(MoneyWatch)  Sequenom (SQNM) will pay $14 million and issue a bunch of new stock to settle a dozen class-action cases in which the company was accused of ripping off investors through the "mishandling" of research and development data on its Down Syndrome test. While coverage of the settlement focuses on the (relatively small) amount of cash being paid out, it is the changes in corporate governance required in the settlement that offer clues as to what went wrong at Sequenom last year.

In late April 2009, Sequenom announced an internal investigation into the data it was using in its development of a test for Down Syndrome. In September, it revealed that data was "inadequately substantiated" and that work would begin again. The CEO and six other execs were kicked out. The company is currently under investigation by the SEC and the FBI. One of the departing execs was sued for alleged insider trading prior to the release of bad news. Sequenom was No. 2 among BNET's Worst Drug Companies of 2009.

That's pretty much all we know about Sequenom's problems. The company has not offered a detailed account of the findings of its internal investigations. But last week's settlement contains several specific provisions that appear to be aimed at fixing pieces of Sequenom that must have been broken until now.

The changes can be broken into three types: Those related to internal transparency and accountability; those related to R&D; and those affecting director-level corporate governance.

The transparency/accountability changes:

1. Sequenom's reporting structure has been reformed, "reducing the number of direct reports to the Company's Chief Executive Officer."
2. The company's "Open Door Committee" will now take all complaints by employees, not just financial ones.
3. A new "Disclosure Committee" will be "responsible for testing the reliability of information to be disclosed to the public."

Taken together, these changes suggest that prior to Sequenom's implosion there were so many management layers that it took way too long for bad news to reach the CEO and then the board. They also suggest that the board should not rely solely on the CEO to report information about the company -- hence the two committees have been given new reporting duties in addition to those of the CEO.

The R&D changes:

1. A new "Scientific Review Committee" will oversee Sequenom's R&D.
2. A full-time biostatistician and an external consultant clinical biostatistician have been hired.
3. A new set of standard operating procedures regarding study design planning and review, has been introduced, "including clear identification of whether a study is blinded or unblinded, raw data storage at multiple locations, independent third-party review of blinded clinical data, and a redundancy review of clinical study design by the Oversight Committee and of blinded clinical data by the Scientific Review Committee, the clinical group and the Company's biostatistician."
4. And, "The Company has revamped its policy concerning the storage of clinical samples, including requiring that samples be stored in third-party storage facilities, bar-coding samples for electronic tracking and auditing, creating formal procedures for obtaining a sample, and limiting access to the Company's sample storage freezer."

These changes are scary, because they suggest that none of these things were properly in place before the scandal. R&D chief Elizabeth Dragon was one of the execs fired by the board -- can she have been the only biostats expert in the firm? The latter two changes strongly imply that prior to April Sequenom was not only failing to perform its basic science adequately, but that its study samples were also screwed up. In others words, whatever "mishandling" occurred was systematic and extensive, occurring on both the data analysis side and the sample storage side.

The corporate governance changes:

1. A majority of the board of directors must be "independent."
2. Independent directors may serve on no more than four other company boards.
3. 50 percent of independent directors' fees shall be delivered in stock.
4. All directors must actually attend the annual general meeting

Taken together, the impression is not that these class action suits have squeezed Sequenom for money. Rather, they seem to have introduced adult supervision at a company in dire need of it.

• Related:
• The 5 Worst Drug Companies of 2009
• Sequenom Stock Now the Plaything of Rumors
• Sequenom Insider Accused of $366K Stock Sale Before Data Corruption Revealed
• Did Sequenom Insiders Sell Stock Before Data Corruption Was Revealed?
• Madness at Sequenom: Interim CEO Gets a Pay Rise; Stock Rises 18%
• Madness at Sequenom: CEO, 6 Others Ousted for Bogus Data in Down Sydrome Test