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Executives

Harry Hixson - CEO

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Evan Lotus - JPMorgan

Sequenom, Inc. (SQNM) JPMorgan Global Healthcare Conference January 9, 2013 2:30 PM ET

Evan Lotus - JPMorgan

All right good morning. We are ready to go ahead and get started. My name is Evan Lotus from the Life Science Tools and Diagnostics Team here at JPMorgan. Very happy to introduce Dr. Harry Hixson who is Chairman and CEO of Sequenom. Please silence your cell phones and the breakout will be in the Sussex Room, thank you.

Harry Hixson

Thank you Evan and thanks very much to JPMorgan for inviting us to speak at this year opening kickoff meeting and conference and I’d like to remind you this is our Safe Harbor statement in respect to forward-looking statements that we will make going forward today.

I look around in the room and see a lot of old friends and welcome and I just want to talk a little but about Sequenom last year. We have basically two operating units, Molecular Diagnostics units in our Sequenom Center for Molecular Medicine. We do clinical diagnostic services there; we have a lab in San Diego and Grand Rapids, Michigan and our lab is under development in Raleigh, North Carolina. The other part of our business is the Genetic Analysis business which was the original foundation business for us, instruments, reagents and services for genetic analysis. We operate out of San Diego and we have sales offices in the U.S., in the EU and in Asia.

We had a great year last year and it surprised us and I think it surprised everybody else a lot more and it brought a lot of attention to us into this marketplace. Our revenues for the year were up 59% year-over-year. I’d like to remind you these are unaudited numbers, but we think they are quite close. So total revenues are $89 million. Our Diagnostic’s revenues were up rather remarkably $8.3 million to $46 million year-over-year. We neglected to put the percentage growth on there because it’s way too large.

We saw some softening on our GA business by about 8%. Economic conditions around the world were pretty difficult in this market, however about 4% of that softening was due to foreign exchange reasons. Totally, we did 92,000 total diagnostic samples in the year upward, rather remarkable number from the previous year.

Our GA business I’d like to speak about for a little bit. We had a very good penetration of our target markets with translation of basic research. We are making a movement here into translational medicines and into our clinical laboratory space. We have an active base of 335 instruments and this is an important source for new Molecular diagnostic leads for us and so there is great feedback from the GA business into our Molecular diagnostic business.

We have been offering new research use only at test panels and oncology and sample testing space and we will continue to do that in 2013. We had planned to file a 510-K application for our MassARRAY system in 2012. That’s slipped and we expect to do that in the second half of 2013. That’s one of the goals, few goals that we have, that we missed for the year.

Last year at this conference, as we had done the previous two years of the conference, we laid out our goals for the company for everyone to see and say, okay, here’s how you can track us we present at various conferences throughout the year. So we had another year accomplishing goals. We raised additional capital in the first half and we did $130 million convertible in the fall. We expanded our licensing partnerships around the world. Our LifeCodexx partner in the German speaking countries launched their test in August.

We have moved our 510-K approval for the MassARRAY into 2013, mid ’13. We continue to develop RUO panels for MassARRAY. We had as a goal for the company that we would have the Dennis Lo shotgun sequencing patents issued. We got a Notice of Allowance on two of them. We got an issue notification. They wondered who would be issued on Christmas day and please pay your money. And then the interference group at the patent office pulled that back as part of a broader interference analysis of shotgun sequencing technologies.

In 2012, we had rather spectacular achievement against our goals. We started out with a sales force of 20 which we had planned to increase to 50 later in year, and we did that and we did a second addition and it went to 75 in Q3. We added publication of T13 and T18 clinical studies in Q1. That had a major impact on physician’s acceptance of our test.

We had our AMD progression study, the AREDS study that was published and we are very optimistic about the future for AMD. We achieved our cost of goods reduction plan. Our plan was to reduce it to the range of 500 to 600 which we achieved for the year. Our initial internal goal was for 25,000 tests to be invoiced during the year. We increased that part of the way through the year to 40 and we billed more than 50,000 tests in the year.

We had a goal for two major national payers for reimbursement. We didn’t make that goal, however we were working with regional and local players. We have 56 million lives under reimbursement contract and that includes 6 million of the 38 Blue Cross/Blue Shield Plans.

Remarkably to us, we got our ACOG and Society of Maternal Field Medicine guidelines, which were published in December and those were fully aligned with the way we have been promoting our tests and we have completed the build-out our North Carolina laboratory facility, giving us a significant increase of capacity. We expect to bring that line this year.

So let’s talk about the MaterniT21 Plus. This is a major driver for growth for the company going forward. These are the property of the tests that we do T21, T13 and T18 and report fetal sex. We will add sex chromosome aneuploidies by the end of first quarter. The detection rate sensitivity and specificity for these test is a leader in the market.

Our no-result rate in the clinical trial was 0.9%. We have been running right around 1% and that is clearly a leadership achievement. None of our competitors are anywhere close to that. Our goal was to average seven business days for turnaround. We operate two shifts a day, six days a week. We meet that goal all the time, and are normally receiving five to six days for turnaround. So this is the leading standard of care product in the marketplace.

This is the graph of the weekly samples for the year. You can see the drops for the various holidays and this goes through the last full week of the business year. We didn’t include the Christmas week which is bouncing all over the place. One analyst pointed out that perhaps that we were going parabolic. I don’t think we’re going parabolic but I do think that we’re going everybody strong winning a growth rate going forward into ’13.

This is a summary of the American College of Obstetrics and Gynecology and the Society for Maternal Fetal Medicine, joint committee opinion which was issued in December. We are very pleased that this came as rapidly as it did. It surprised but we’re very pleased. It’s suitability for using circulating cell-free fetal DNA as a basis for noninvasive pre-natal testing or NIPT.

Indications for testing or maternal age 35 or older, fetal ultrasonic findings, a history of prior pregnancy with a trisomy or a positive blood screen test, and I’d like to point it out that on our test requisition form, in this highlighted box here, you can see that’s how we’ve been promoting our test from the beginning. If a physician doesn’t check one of these boxes, we call him back and we don’t do the test. So, we adhere to the ACOG SMFM guidelines and we feel that they have validated our positioning of this test in the marketplace basically in what we call the high risk market.

This is a latest federal data that we have. This is CDC data from 2007, this total birth 4.3 million. The high risk based on age is about little lower 600,000 and another 140,000 for other high risk. So that’s about 750,000. The lower risk market which the ACOG guidelines were specific and they did not recommend the use of NIP testing in the low risk market and we think that’s going to be a problem for anybody who tries to use this methodology and obtain a reimbursement from payers. So we look at the 750,000 potential market, our annualized run rate going out of the year was greater than 120,000 tests. So we have about a 16% market penetration in the first year in the market.

I would like to point out that the previous slide shows that there were 4.3 million births in 2007, but the most recent data is, if you think in terms of pregnancies, there are some 6 million pregnancies in the United States. So this potential market is probably somewhat greater but we don’t have really definitive data on it.

This slide sort of summarized what we have seen. This is if you take the indication of our test request form and summarize them. You can see that the most of the samples we get are from maternal age. The next would be for ultrasound and for serum biochemical screening and much smaller for personal and family history. I would like to point out that if you add these all up its greater than 100%, sometimes people check more than one box on the test requisition form.

Now, this is our clinical laboratory experience thus far, with over 60,000 patients. So 97% are negative and that points outs, make a very important points. These would have been women who have been candidates for amniocentesis or some invasive test and 97% of them would have been negative and any amnio procedure would have been unnecessary. So you can see positive 21 is about 1.9%, 18 is 0.7%, positive 13s, 0.3%. This is pretty much what we saw in our clinical trial, very close. But the important thing here is the use of our test makes amniocentesis in many ways an unnecessary procedure.

We shift to reimbursement. This is a critical factor, getting paid for this test going forward. Our initial emphasis had been on private insurers and this pie chart shows the payer mix. This is for hospital births for the woman over 35. You can see that 70% nearly are private, self-pay about 8% and Medicaid about 23%. During the year, we received positive technology assessments for NIP testing from ACOG, from Society of Maternal-Fetal medicine, Blue Cross/ Blue Shield, The California Technology Assessment Forum; these are all driving major payer discussions for us.

We also recently, NIP testing got a favorable national coverage decision from Anthem Roll Point. So at this point, we have covered lives under contract of about 56 million. That’s in December 2012, and we have a very active program going on with all of the payers, national and regional and local payers and we expect to continue to add to that during the year.

So, these are the goals that we’ve put up for you to measure us by in 2013. We have some goals for our basic business. We want to file the 510-K submission on our MassARRAY system, continue to add research use only panels and, we have some ultra-sensitive mutation detection technology that we’re going to offer on an early access program to the market.

Our goal for Sequenom CMM is to assist in a minimum of 150,000 MaterniT21 tests in ’13. We want to extend the test to include sex chromosomes aneuploidies. We will do that fairly shortly. We have a goal for national payers, our contracts of three by the end of the year and 120 million lives under contract by the end of ’13.

As you know I’ll speak to you little later, we’re on a cash counting basis, not accrual. We think in the fourth quarter that our goal is to have more than 50% of our diagnostic sales measured under accrual counting. We’re going to expand our diagnostic sales force again. We have an expansion of our cystic fibrosis test that we’re going to do in some Q2 and we will finish licensing and obtaining CAP accreditation for the North Carolina facility by Q3.

Last year, we put out a range of adoption scenarios. This is not guidance this is just scenarios. We think that our test volume for next year would be somewhere in these ranges. As our goal we have 150 and then we think we may go as high as 200,000 but we’ll have to see how that proceeds. We entered the year at a running rate of greater than 120,000.

As you know, we’re on cash accrual accounting basis and this makes for some very peculiar financial statements. When we do a test and we report out the results, we have to book the cost and we cannot book any revenue for that till we actually receive the cash from the payers and so we need to get this company on accrual accounting as soon as we can and we hope that by Q4 that most of our diagnostic sales would be under accrual counting, laying the groundwork for 2014. Financial highlights for the year, revenue of $89 million, these are unaudited numbers of course, $176 million in the bank. We had a very good Q4 cash burn rate of $17 million and we look for those kind of favorable things going forward.

So, what are the market leadership advantages for MaterniT21 Plus? We are the first of our kind in the market and we took great advantage of the first mover advantage. We built a big sales force and we drilled the product in the marketplace. Our lab has run more clinical samples than anyone else, greater than 60,000 commercial tests. We have a strong balance sheet, our sales force is the largest in the NIPT field.

Our instrument capacity currently in San Diageo is 200,000. We have easy ability to increase that when we get North Carolina online. We have very rich content now and when we have the sex chromosome aneuploidies, we will have the best in the marketplace. We are the only ones who reports on twins for instance.

Now, we have focused on service to the physician audience. We try to keep a short turnaround time, less than 7 business days. We do better than that almost all the time. Our published studies are the largest. Our no-call rate or no-result rate is far less than anyone competing in the marketplace. Our market penetration in the maternal fetal specialist is greater than 35% and increasing. We have built a robust infrastructure, customer service, medical affairs, R&D so that we can support this test. We have industrialized it and we have established a very high level of customer service and response times.

Well, we had a great year and on Sunday morning I thought we had a really nice conference. And I’m waiting for the car to come and I’m sitting at the piano playing and I play very badly but I do that too to pass the time and I get a call from Jay Flatley and he tells me that he is going to call Verinata. And so anyway my mind starts thinking about all the ramifications of that. We met for a two, 2.5 days now with analysts, investors and everyone asked us the question, what do you think this means? And then they follow it up with, we don’t understand it and I would say that this time that Sequenom is puzzled.

I would like to recent quotes from Jay’s Press Release, they will continue to supply instruments and reagents to all the NIPT payers. We have a contract, supply agreement contract with Illumina that runs until the middle of 2016. And he also says we’re working very hard to reinforce our relationships with our existing customers in this field. I might add I’m waiting for the call; the second call.

So I’d like to point out that we’re one of Illumina’s best customers. In terms of reagent consumer consumption we may be the best, but we wanted the best and we’re going to continue to do what we’ve been doing, which is drive this product into the marketplace. It’s the premium product in the marketplace. It’s the standard of care, it’s the brand recognition that physicians have come to be comfortable with and we’re going to make it even more known throughout the OB/GYN and Maternal-Fetal medicines specialists’ community.

Now I think I should make one comment about some of the things that were in the Illumina Press Release about foundation or technology and intellectual property. Sequenom has a fundamental patent on circulating cell-free fetal nucleic acids as an analytic, those circulating cell-free fetal nucleic acid in the Maternal serum and that’s the basis for everyone test. We have an exclusive license to the IP on that. Our competitors have taken us to court. We tried to get a preliminary injunction against them. Preliminary injunctions are hard to achieve. We had a fairly short hearing in the District Court, that didn’t go our way. We appealed to the Court of Appeals for the Federal Circuit and today the oral arguments on that patent are being heard. If we prevail there and get a preliminary injunction, I think everyone knows what that means to competitors.

There are a host of patents on other on the technology associated with sequencing and we have rights to patents from Dennis Lo and those are the patents that we’re going to get issued but got pulled into interference. We think all of these, it’s likely that all of these shotgun sequencing related patterns are going to get called into interference. Those proceedings are underway.

We expect that since we pushed to get an interference declared and we think that Verinata not also did so we think it’s highly likely that the interference will go forward, it will take about three or four months for the patent office to decide which patents are involved and then from that point on it would be about 18 to 24 months before the interference reaches its conclusion. So, I just want to point that the IP here is still up in the air, we have a very strong position.

In the shotgun sequencing technology Dr. Lo filed his patent 14 months ahead of Stephen Quake at Stanford and those are the patents that Verinata depends upon. So, we will continue to pursue our intellectual property possession and we will consider and we will continue to push this product into the marketplace with our large sells force, with the premium superior product and I’d like to point out that we have been competing against Verinata since March or April last year and we competed very effectively against them. They have been a distant third in the marketplace and that we had a number of head to head competitions with them and we believe we won every one of them. So, we think we have the premium product and we think it’s a big market and we’re going to continue to attack it and develop it.

And thank you very much for your attention today.

Question-and-Answer Session

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