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Crazy Question: What If Sequenom's Down Syndrome Test Doesn't Exist?

What if Sequenom (SQNM)'s Down Syndrome test doesn't exist in any meaningful form? That is the question raised by a lawsuit filed against the company by Xenomics, which licensed a patent for the test to Sequenom and now wants its property -- and a bunch of money -- back. Back story: In September 2009, Sequenom revealed the data for its non-invasive Down Syndrome test was "inadequately substantiated." 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. Sequenom has since started from scratch. The company told investors on its Q3 2009 conference call that it had just begun the process: "we are currently collecting samples, which will only be ultimately used when we have an assay that is ready for such studies."

Xenomics' suit strongly hints that it believes Sequenom now cannot possibly develop such a test, and may never have been able to in the first place. The complaint claims that "Defendant maintained the charade that it had valid testing procedures," calls Sequenom's representations about the test "fraudulent," and uses the term "non-existence" to describe it:

... the defendant has no real non-invasive testing for Down Syndrome ... and certainly will not have the funds necessary to continue testing ...
Xenomics also put out a press release alleging that "Sequenom's Down Syndrome data were deliberately doctored in order to create an extremely robust data set."

A recent legal settlement signed by Sequenom which describes an internal reorganization the company had to perform also suggests that, at best, Sequenom is a long way from producing a functioning test.

So, does the SEQureDx Trisomy 21 test actually exist?

The answer to that question is contained inside the report by law firm Sheppard, Mullin, Richter & Hampton, which conducted an internal probe at Sequenom to figure out what went wrong. Dozens were interrogated and 300,000 documents were reviewed, according to Xenomics' suit. Sequenom has, pointedly, not released the report on that investigation; nor has it offered any further explanation of what went wrong inside the company. The fact that the probe was done by a law firm suggests that management may claim attorney-client privilege in order not to release it.

Sequenom did insist to Xenomics prior to the suit that "Sequenom remains fully capable of performing all of its contractual obligations," and that the company does not owe Xenomics another milestone payment until 2011. It calls Xenomics' allegations "utterly absurd" (see page 74 of the complaint.)

A spokesperson for Sequenom told BNET:

The company is continuing its R&D efforts with respect to T21 internally. For 2010, investment in T21, its development, clinical sample acquisition, and the running of clinical trials, will be one of Sequenom's largest investments for the year. When there are material developments the company will communicate them to the public.
One last thought: The patent Xenomics licensed to Sequenom was described as "Methods for detection of nucleic acid sequences in urine" (see pages 12 and 33 of the complaint). But Sequenom's press releases repeatedly described the test as one that used blood as a sample medium. That couldn't possibly be significant ... could it? Sequenom said:
T21 is a blood-based test, outside of that the company is not going to comment further.