Sequenom's CEO Presents at Lazard Capital Markets 9th Annual Healthcare Conference (Transcript)

| About: Sequenom, Inc. (SQNM)

Sequenom, Inc. (NASDAQ:SQNM)

Lazard Capital Markets 9th Annual Healthcare Conference Call

November 13, 2012 9:30 am ET


Harry Hixson – Chairman and Chief Executive Officer

Paul Maier – Chief Financial Officer


Karen C. Koski – Lazard Capital Markets LLC

Karen C. Koski – Lazard Capital Markets LLC

I think we can get started.

Harry Hixson

Okay. Thank you Karen and thank you very much to Lazard for inviting us and give us the opportunity to speak today. I’d like to start off with some forward–looking statements and ask you to read this for the standard of course.

So, at Sequenom, it has two operating segments, the original business generic analysis which we – the results are under Sequenom Incorporated, instruments reagents and services for generic analysis. We do this in San Diego and then we have sales offices in US, Europe and in Asia that was since the fundamental original part of our business.

More recently, we are into molecular diagnostics and we do this in our wholly-owned subsidiary, the Sequenom Center for Molecular Medicine and we offer clinical diagnostic services. We are operational in the San Diego. We have laboratories in San Diego and in Grand Rapids, Michigan. And we are in build out and validation for another facility in Raleigh, North Carolina.

2011 we had pretty a nice year. Revenues were up 18% year-over-year. The first nine months of this year however, our total revenues are up 39% year-over-year to $56 million. You can see that we’ve done in nine months what we did in full year last year. So for the first nine months of this year, we did a total of 59,000 total sample tests all of our LDTs and of that, $36 million were MaterniT21 PLUS samples that we had received.

Just a little bit on the GA business, very good penetration into our target markets which are translational and basic research. A little bit in the agriculture genomics and now into pharmaceutical and biotech. You can see from this line of revenues and the gross margin percentage, we had some growth for 2009 through 2011.

We are fairly flat this year. The gross margins are holding up quite nicely. We see some softness around the world. But in the third quarter, still softness in Asia and in Europe, but the US is starting to show some signs of recovery. Instrument basis over 330 and what we see is a use here is we brought out a number of panels of markers for research only panels and LungCarta and OncoCarta, three panels for cancer markers. Those have – we sell a fair number of those and they are very good at flowing through the instrument and consumable sales.

Also our GA business sales force worldwide, there are source for new molecular diagnostic opportunities that they are being developed in various laboratories around the world. At the beginning of every year, there is a large healthcare meeting in the second week of January. I think you all know what that is. We’ve put up our – three years in a row we’ve put up our goals for the year and like to just give you a status – during the year, we just keep everybody posted on how we are growing and achieving those goals.

So for Sequenom, the corporation raised additional capital. We did that in the first half and then more recently in the September we closed a $130 million convertible debenture. We wanted to expand our European licensing partnerships. We have done that. Our licensee in the German speaking countries LifeCodexx, they launched their version of our tests using our technology in August of this year.

We have client build arrangements with for samples to come from the following countries into our laboratories, Hong Kong, Japan, The Netherlands, Czechoslovakia, Czech Republic, Slovakia and Israel and we expect that many more coming in the next few months.

Our 510(k) submission for the MassARRAY system is one goal probably and that couldn’t meet this year, it slipped probably about five to six months. We’ve introduced a number of RUO panels for the MassARRAY business. Brand new news and very pleasant to us is, we had as a goal, major goal, that the massively parallel sequencing patent by Professor Lo which we have an exclusive license.

We hope to have that issued in the 2012 earlier this month. We received a notice of allowance. For the first of those we won a one patent. We paid the fee. And then another version of the same patent in of the 119 we received a notice of allowance last week and we paid the fee for that. So, we believe that our original basis that we would have the dominant position in massively parallel sequencing see some bearing fruit.

For Sequenom CMM, the clinical laboratory subsidiary, we had a number of goals. First we want to increase our field sales force on the launch size of 20 to 50 where we did that in the first quarter. Things were going so well. We decided to add another 25 which is that in the third quarter. We launched our products with claim for our T21 only. We had data from the original Women & Infants study for T13, T18 that was published in the first quarter. A remarkable change in the attitude of the physician community once those 13 and 18 data were published. And we saw a very, very nice increase in the acceptance with this product as a result.

We have another product, age-related macular degeneration LDT. We were looking at age-related disease study, large sample bank, got the bill in our age and we completed that study and the results of that were given in a paper yesterday in Chicago. Very pleased with that, the results of that study. We’ve continued to work to reduce our cost of goods sold for the test and we’ll talk a little bit about that later.

Our original internal goal, not guidance, was that we would invoice or bill 25,000 tests during the year, while part of the way through the spring, we thought, well, we’re doing so well. We’ll just increase that to 40,000. We – in the summer, we increased it to 50,000. We are getting pretty close to the end of the year, we probably won’t increase the – we definitely will be in excess of 50,000 test bills for the year. I doubt that we’ll make 60s but, we maybe in the high 50s.

We saw as a remaining goal, reimbursement agreements with two of the major payers for the MaterniT21 PLUS LDT and our other LDTs. We still believe that that’s an achievable goal. Our North Carolina facility is coming along very nicely. We’ve completed the build out. We are now in the staffing and validation stage of that. Well, this is the key driver. And I have to show you this slide and I think this slide speaks for itself.

This is the weekly test run rate on the X axis and the Y axis in the months on the X axis and you can see this Y data point here is slightly in excess of 1800 and that was right around 1st of November. We’re continuing to see growth as a matter of fact; we are seeing some acceleration in the growth at this point.

So, what is MaterniT21 PLUS? Non-invasions laboratories do all the tests to identify pregnancies with increased risk for fetal trisomy T13, T21, T18 and T13 reported the performance criteria are outstanding. This data is from our clinical study independently monitored and conducted by Women & Infants Hospital at Brown University.

Our new call rate in the study was 0.9% and we are staying pretty much around 1% rate for new call. The accuracy rate for fetal sex determination of the Y chromosome, which we added in the more recently, is 99.4%.

The test is good from the tenth week of gestation onwards. We draw two ten and odd samples. The analyzer circulating cell through the DNA. Our turnaround in the beginning was we had a target of eight business days, now we moved it down to seven business days we are doing significantly better than that on a very good basis now.

So what are our real advantages here, we are the first in market. We are the innovators. We launched in October last year. We’ve done 37,000 tests actually quite a bit more than that now. We now have a very strong balance sheet of $193 million at the end of the third quarter. A very large sales force, large in the prenatal space.

Our recruitment capacity, test capacity is approximately 200,000 tests per year a 12 plus with the new North Carolina facility. We will be able to add rather substantially to that. Our test has the richest content that we think, our operating 13, 18, 21 and Y chromosomes. Our no call rate and our turnaround time are clearly are the major factors with our physician and patients really appreciate. Competitors are nowhere near that, competitors are two to three weeks in turnaround time and the new call rates are in the five, six and sometimes higher percentages.

We have a solid IP position and we’ll talk a little bit more about that later. We have rather fantastic market penetration, as we said, the Journal of Fetal Medicine Specialists who are the primary drivers in this marketplace, more than 30% of them have used our tests thus far. And we can see this is that requires very high level of customer service and response we’ve invested and built a robust infrastructure in customer service, and in research and development.

So this is the pie chart of some data from the CEC for 2007 this is latest data that we have showing 4.3 million births of which 610,000 are high risk as scripted by the age criteria, group in 35, there are other factors that contribute another 140,000, those factors be at (inaudible) previous sample history or positive serum screened.

If we look at it another way and say okay, those 750,000, this is the potential available market and use that procedures or invasive procedures that are estimated to be some 200,000 this is data from couple of years ago. Our annualized run rate now is 90,000 but we think that a large segment of the 750,000 is a real market that we should be going after. I would think the market size here is got to be at least a half a million. So we are perhaps maybe a 20% to the way end of this market. There is lot more room for growth.

This is a slide that shows our test requisition form and also our test report form to the physician. The highlighted orange box shows the four factors of the determined high risk pregnancies. We ask that the physician check the box when he sends in the test and if no box is checked we go back and ask them to tell us why they didn’t. We will not run a test unless we know that one of these boxes have been checked.

So a cumulative degree for the somewhat more than 37,000 patients that we run so far, you can see the large preponderance of the samples have come because of the turn will aid some 68%. The next high is just probably 2% that’s a positive serum biochemical screening.

Ultrasound findings have contributed another 20% and personal family history is 5%. If you add these up, I think it comes to a 115%. I think what happens is, some doctors check more than one box.

So this is pretty much what we would expect it going in and what the CDC data from 2007 would have indicated. This is a very simple looking slide that has a lot of information on it. First, this is a result of all our testing through October of this year. There are some 37,000 plus patients. You can see that about 2.5% of the patients are test positively, 1.8% are T21s, the other ones 18 and 13 and 0.5% and 0.2%.

I think the most important thing here is that, prior to the introduction of our test; all of these would have been candidates for some kind of invasive procedure. And 97.5 % of them were the negative and were unnecessary. So, this is pretty much what we saw in our clinical data and so we have not seen any significant change in this distribution.

So we think we are making a major contribution to women’s health with the introduction of this test. So with our intellectual property, as you can imagine, if you have anything that people think as or the people will think that they should be a part of it. So we’ve continue to be very aggressive with the enforcement of our intellectual property.

We have the 540 patent in the US which is issued, this is the use of circulating cell-free fetal nucleic acid as a light and we try to get a preliminary injunction in the district court. If we were not successful the barrier for preliminary injunction is quite high and so we’ve gone to the appeals through Federal Circuit to which is the core repository with patent expertise in US legal system.

So we are pursuing that very aggressively. As I said earlier, MPS or massively parallel shotgun sequencing patent has been allowed. We have paid the fee and there is another various one I think that has been allowed and paid that fee as well. So we’ll wait until those patents are actually issued and our intent is we estimate the four to six weeks.

So I am now going to turn to this over to Paul Maier.

Paul Maier

Thank you, Harry. This slide depicts the process that we follow for the MaterniT21 PLUS LDT and as you can see there are quite a few steps. It’s a very complex process and in August, we launched a newer version of the test and we had several objectives in mind. Our first and foremost was to improve the quality of the test and we did that through automating a portion of the sample preparation. We also implemented the newer version of the aluminum reagents and flow cells and it allowed us to move from four flux to a 12 flux.

So that step allowed us to take our existing machine capacity and approximately doubled the throughput without buying anymore sequencing machines and now we have in place capacity for approximately 200,000 tests a year. In addition, we were able to reduce across the goods through the efficiency improvements that we implemented with this.

And as you can see, we have quality control steps at each stage of this process. The cost of goods sold is an area of interest both internally and the company and externally of course and with the improvements that we’ve implemented and we show a list of them on this slide, which were all related to improving efficiency and reducing costs.

I am pleased to say that we are tracking toward our goal which was to have a unit cost of goods in the $500 to $600 range by the end of this year. And one of the efficiencies we achieved by having higher volumes and increasing the volume of our throughput is we are able to spread the overhead over more tests.

And so it’s behaving the cost structure is behaving exactly the way we expected it would. In each quarter, we are seeing improvements as our volume increases. So in terms of an operational update, for the first nine months, we accessioned more than 30,000 tests of MaterniT21 PLUS and we also are very pleased with the acceptance in the maternal fetal medicine specialist community.

We have market penetration there in excess of 30% and our turnaround time as Harry mentioned, we think is standard in the industry and right now, it’s less than seven business days. And we’ve invested in the infrastructure to continue to do that, that’s a very important commercial advantage that we have.

Our sales force was increased twice this year. We now have 75 in the field including the regional managers and we have coverage of about two-thirds of the market with that sales force. It’s the largest one in the prenatal space. Our run rate, as Harry mentioned, you saw the slide earlier, the annualized run rate is in excess of 90,000 tests annually and we are continuing to see that grow since the end of the third quarter.

The reimbursement profile is continuing to improve with the out-of-network timeline improving as well as the in-network, we announced in our earnings call last week that we now have over 46 million lives covered and so we are making good progress with our contracting effort. And, we also have the broadest test capacity and content which Harry mentioned and our international testing service is starting to expand and we do anticipate adding additional partners throughout the world.

The method that we use for revenue recognition is cash-based and so, that provides a bit of an anomaly. We have to recognize the cost when we run the test. So we see that upfront the revenue lags from the time we perform the test. So the collection cycle can be 90 to 120 to 180 days even and so there is a significant lag and what it does is artificially depresses the gross margin and the revenue that might be attached to that test can lag over several quarters and even fall into the next year.

And so we have significant contracts in place and we have experienced with payment cycles. We will wait to convert over to accrual accounting. Once the large contracts are in place that we expect at some point that thereafter we will have enough experience when we can do that. In the mean time, we are seeing our cash receipts grow as our test volume that’s growing, and we expect to see that trend continuing.

The reimbursement environment, our actual experience is very similar to what the payer mix is for high risk births or over 35 age and about 70% of those have a insurance of some sort about 23% are Medicaid and then there is a small portion of self-pay patients and so our experience is very similar to that.

The additional contracts have been put in place during the year. We expect that that will continue, we have a good infrastructure of contract specialists who are calling on the payers and with the guidelines that have been announced recently, we expect that will help motivate more to enter into contracts with us. The high volume is also another motivator for those payers to sit down with us.

The final side, the financial highlights, you can see our revenue through nine months equal to the revenue that we had for the full year last year. But the important growth is in the revenue for the diagnostic segment and by the end of the year it will be our larges segment and it’s been growing nicely over the last couple of years.

The cash that we have in place approximately $193 million at the end of the third quarter. We believe that that will be sufficient as a result of our financing to get us bring the company to cash flow breakeven. So we maintain a strong balance sheet and while our cash burn rate is up a little bit this year, as soon as we accelerate the payments from our insurance payers. We expect that to improve in the future.

That’s the end of the presentation. I think we are out of time. So…

Question-and-Answer Session

Unidentified Analyst


Paul Maier


Unidentified Analyst


Harry Hixson

Well. they are client bills. We have a fixed price that we charge and then there is a volume discounted price. The foreign entities pay for the shipping. So, and the nice thing is that they pay by the way. So there is not much cash flow problem. So it’s very attractive for us.

Unidentified Analyst


Harry Hixson

Well, we have a number of agreements that are under discussion. And we rather announced that when they are done rather than that they are under way. But so far, we have Hong Kong, Japan. We have the licensee in the German speaking countries as LifeCodexx, the Czech Republic, Slovakia, Israel.

Unidentified Analyst


Harry Hixson

Well, we should have the patent issued if there aren’t any interference proceedings, that’s where we should have this by the end of the year. We look very closely at the claims and the intellectual property environment at that point and then we’ll make a decision. But…

Unidentified Analyst


Harry Hixson

There are always possibilities that you get a patent issued like that and have interference proceeding pops up. It’s something – it’s quite rare once you have paid your fee for your patent. Eventually, all of the shotgun sequencing stuff is going to get resolved either in a interference proceedings in the court – in the patent office in the court. We’ll just wait to find out this Dr. Lo’s patents were filed 14 months before Dr. Craig’s work. And then certainly been another patch.

Unidentified Analyst


Harry Hixson

Thank you very much to Lazard.

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