SQNM (Sell Recommendation)

1. SQNM (Sell Recommendation) (NIPD: Non-Invasive Prenatal Diagnostics) February, 2009

2. SQNM: non-invasive prenatal diagnostic test for Down’s Syndrome (T21) • T21 lab test is not ready for launch • Mgmt team is not ready for launch • Data to support marketing is not mature • Reimbursement • Competition • Royalty rates • Top holders under pressure • IP • ACOG/Physician adoption

3. SEQureDx for T21 is not ready for launch • SQNM has not announced if the T21 test will be based on mRNA and DNA or mRNA alone • Not commercially viable: 6-18% of samples are “no calls” • Because of legal climate, OBs and MFM specialists follow ACOG guidelines, which is years away from incorporating SQNM T21 test • OB/MFMs require tests to be published in peer-reviewed journals prior to widespread adoption. Current tests had 40,000 pt samples in published trials • The small amount of available data for SQNM T21 test was produced in-house • Independent trials will report 4Q09-1Q10, after the launch

4. Quantitative versus Qualitative • Qualitative: presence or absence of a dz. RhD +/-, sex determination, and x-linked dz. • Aneuploidy (T21, 18, 13): how many copies of Chr. 21 are present?

5. Not yet innovative • Without a SQNM test for T18, T13, and NT defects, the T21 test is additive to the prenatal work-up (ACOG guidelines), not a replacement. The current tests still need to be done (PAPP-A, beta-hCG, AFP, uE3, and inhibin A) • Goal is to replace invasive CVS/Amniocentesis with SQNM blood test; invasive tests have less fetal loss than SQNM says

6. Reimbursement • SQNM declined to give T21 revenue guidance and said it will likely defer 50% of 09 NIPD revenue because most payors will not have contracts at launch. This will lead to a large cash burn with no assurance of reimbursement • No sign that Blues will reimburse a test without large trials and ACOG backing, and a high “no call” rate

7. Competition 1. Lenetix – claims a DNA-based test using methylation-sensitive amplification of fetal nucleic acid markers2. Genzyme – nothing known about their test, but they confirmed an internal program and recently licensed EXAS IP3. PerkinElmer – implied they are working on it, but would not confirm4. Xenomics – working on a urine-based test5. Living Microsystems – working on a test to detect fetal cells in maternal blood6. BioCept – fetal cells, unknown source of cells7. Ikonisys – fetal cells, unknown source of cells8. Fluidigm – Digital PCR-based test9. Artemis – Digital PCR

8. IP • SQNM recently made a hostile bid for EXAS, likely to gain IP • EXAS licensed the relevant IP to GENZ and SQNM cancelled the tender offer • Many of the companies on the competition slide believe they have freedom to operate • Hard to protect a lab test when you do not yet know what it is (DNA, RNA, or both) • SQNM’s IP is untested in court

9. Royalties • SQNM must pay royalties of 2-4% each to 4 different parties. • This means 8-16% royalties

10. Trouble at the top of the holders list • Ridgeback and RA Capital are under considerable pressure based on over-exposure to SQNM. • RA: SQNM is > 40% of the fund. Cost basis $7/share. • Ridgeback has only 4 positions, including >15% of SQNM common stock

11. Physician adoption slow ahead of large trial data and ACOG support • Due to the litigious nature of OB/MFM, widespread adoption of prenatal testing requires incorporation into ACOG guidelines and large clinical trials published in peer-reviewed medical journals • These events are 2-3 years away, if they happen at all.

12. Current tests supported by large clinical trials • 2003 SURRUS: 47,000 pts • 2005 FASTER: 38,000 pts

13. Calendar June 2009: launch SEQureDx RNA T21 and DNAT21,T18, and T13 tests. Little data on the DNA tests. 3Q09: Publication of 1000 pt R&D study (T21 only). 4Q09: Publication of second trimester data from the RNA study in 10,000 pregnant women in high-prevalence pregnancies. (Brown University) 1Q10: Presentation of LDT validation study of 3,000-5,000 samples at SMFM 2010. Publication in a peer-reviewed journal in 2Q10 2Q10: Peer-reviewed publication of first trimester data from the RNA study and LDT study presented at SMFM.

14. Practical hurdles • Heterozygosity requirement at PLAC4 gene (mRNA). Add more mRNA targets? • Low “call rate” in some minority populations: African-Americans (85%) and Asians (65%) • Hemolyzed samples: blood must be drawn and stored on ice until it arrives at lab. This requirement has lead to many hemolyzed samples in the trial data

15. Mind the Gap: no SQNM test for T13, T18, or NT defects • The T21 testing is elegant, but SQNM has not presented data for T13, T18, or NT defects, meaning those tests still need to be done the old way (PAPP-A, beta-hCG, AFP, uE3, and inhibin A) • Until SQNM can offer a comprehensive solution (T21, T18, T13, and NT defect testing), significant market penetration for the SQNM T21 test alone is unlikely

16. Market Model • Total US mkt: 2.8M cases x $150 reimbursement = $420MM/year • After data publication and ACOG guidelines, SQNM will start to take a share of the current US market (PAPP-A, beta-hCG, AFP, uE3, and inhibin A) used to evaluate high-risk pts • Unlikely to gain premium pricing, per conversations with Blues (CA and MI)

17. Consensus Ests. for T21

18. Valuation • Diagnostic and genetic analysis peer group trades at EV/Sales ratio of 3x. • For SQNM, consensus 2009 sales $80MM, meaning EV $240MM versus SQNM current EV of $714MM • 60M shares out and EV of $240MM: $4/share • Take-out: 9x fwd sales (HOLX/Third Wave) would be $720MM ($12/share)

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