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Sequenom, Inc. (NASDAQ:SQNM)

Q4 2008 Earnings Call

February 11, 2009 4:30 pm ET

Executives

Jody Cain – Investor Relations, Lippert/Heilshorn & Associates

Harry Stylli – President & Chief Executive Officer

Paul Hawran – Chief Financial Officer

Analysts

Elemer Piros – Rodman & Renshaw

Bruce Crana – Leerink Swann

Anthony Butler – Barclays Capital

Pamela Basset – Cantor Fitzgerald

Ram Selvaraju – Hapoalim Securities

Kevin DeGeeter – Oppenheimer

Scott Gleason – Stephens Incorporated

Junaid Husain – Soleil Securities

Zarak Khurshid – Caris & Company

Keay Nakae – Collins Stewart

Derek DeBruin – UBS

Jonathan Aschoff – Brean Murray

Operator

Welcome to the Sequenom fourth quarter and full year 2008 financial results conference call. At this time all participants are in listen-only mode. Following management’s prepared remarks, we’ll hold a question-and-answer session. (Operator Instructions). As a reminder this conference is being recorded, February 11, 2009.

I would now like to turn the conference over to Jody Cain. Please go ahead, ma’am.

Jody Cain

This is Jody Cain with Lippert/Heilshorn & Associates. Thank you for participating in today’s call.

Joining me from Sequenom are Dr. Harry Stylli, President and Chief Executive Officer; and Paul Hawran, Chief Financial Officer. Earlier this afternoon, Sequenom released financial results for the fourth quarter and full year of 2008. If you’ve not received this news release or if you’d like to be added to the company’s distribution list, please call Lippert/Heilshorn in Los Angeles at 310-691-7100 and speak with Amy Higgins.

Before we begin, I’d like to inform you that this call will include a discussion of Sequenom’s goals, milestones, financial guidance, future plans, SEQureDx and other technology development and commercialization timelines, expectations regarding technology performance, benefits and impact and other forward-looking statements included some of the factors that are likely to influence the company’s future results. I’d like to emphasize that these statements are based on information available to Sequenom today and that the company’s actual results may differ materially from comments made during today’s conference call.

There are also a number of risks and uncertainties that may affect the company’s business and future results, including customer acceptance of and demand for new and existing products, applications and services, reliance on collaborative partners, risks and uncertainties inherent in research, product development, commercialization, regulatory compliance and approval, and particularly with respect to laboratory developed tests and diagnostics, as well as risks and uncertainties regarding intellectual property and other risks and uncertainties that are set forth in the company's SEC filings.

Furthermore, the content of this conference call contains time sensitive information that is accurate only as of the date of this live broadcast, February 11, 2009. Sequenom undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this call.

With that said, I’d like to turn the call over to Harry Stylli. Harry?

Harry Stylli

Thank you, Jody and many thanks to each of you for joining us today. Because of the annual guidance nature of today's call it's going be a little longer than usual. So, here we go. To tell you, we are reporting our 2008 fourth quarter and year-end financial results and we will provide additional color and guidance for 2009 in a few moments. I’d like to begin by recapping the many recent accomplishments in our molecular diagnostics business. We recently announced very promising results from our R&D study in assessing Down syndrome with our RNA based approach. We also unveiled our novel DNA–based approach, which further enhances our SEQureDx technology.

With these developments we are growing closer to addressing a significant unmet clinical need with SEQureDx by June 2009. The Sequenom Center for Molecular Medicine is rapidly transitioning to full commercial exploitation of a $2 billion market opportunity for Down syndrome testing alone in the U.S., a succession of peer-reviewed publications over the next few months and subsequent 18 months should unequivocally demonstrate the strong performance of SEQureDx screening test and progressively drive adoption by the OB/GYN community, the payers and the patients they serve.

We are looking forward to becoming a fully integrated commercial organization and most importantly establishing a new standard-of-care for non-invasive prenatal diagnostics. Before we go any further, I would like to begin by addressing some confusion created by topos and nomenclature errors in the presentation of our R&D data, which we subsequently addressed in last week's press release. It's important to note that these errors did not affect the underlying data of the performance of our SEQureDx. However, these mistakes are not acceptable and we have taken steps to ensure the accuracy of future data presentations. Here, and once again I apologize and the buck stops with me.

Before I begin with our comments on the recently reported R&D study, I would like to clarify some misperceptions in the analyst community regarding our upcoming June launch. Let me make this as clear as possible, we will be launching our SEQureDx tests in June period full stop, as we say in England. This test will incorporate both the RNA and DNA methods and all patients will be screened thoroughly for Trisomy 21, 13 and 18.

Please understand we are continually improving our tests, in the future you will undoubtedly hear of new tests, new improvements, and new approaches, you can expect this and you should be disappointed if you do not see continuous innovation from this management team and company. Now, let's refocus on the data we presented in January. The confusion around the data has unfortunately taken the emphasis away from what were very impressive results from the R&D study. And it is important to remember that this was a prospective blinded research and development study performed at Sequenom, which had the objective of allowing us to learn as much as possible about our SEQureDx technology while supporting completion of assay optimization for the Down syndrome screening test in a real world setting.

Fundamentally, things have not been better for SEQureDx. As we reported in January, we completed analysis on an additional 459 patient samples from the R&D study using the RNA split version of SEQureDx bringing the total number of samples studied to 858. Data from this prospective blinded study performed at Sequenom is being used to support completion of assay optimization for the Down syndrome screening test, which is now being transferred to the Sequenom Center for Molecular Medicine for validation as a laboratory developed test.

Now, I want to go over some of the terminology we used in describing the accuracy of screening test. Sensitivity of the test refers to its ability to accurately detect Trisomy 21. In the R&D study, all of the Down syndrome evaluable samples were correctly identified by the test meaning no false negative, thus a sensitivity of 100%. The positive predicted value, PPV is a term that answers the following question. If a patient is told that she is positive by the screen, what is the probability that she actually is positive? Since 29 samples were diagnosed as positive by SEQureDx, but 28 were actually positive and we had one false positive that means that 28 out of 29 women were actually positive.

That's a 96.6% positive predicted value. By comparison with current screening tests that positive predicted value is only around 2% to 4%. Meaning that if a women is told that she is at high risk today, there is only a 2% to 4% chance that she actually is positive and there is over a 96% chance that she will receive an unnecessary invasive test that will simply confirm that her pregnancy is normal. You can see this from the 752 evaluable samples in our studies from women who were all told they were at high risk based on one of the current standard screens, yet only 28 of them were in fact positive. That's about a 3.7% positive predicted value.

To be clear about what this means for women who seek screenings, the currently available screens make so many mistakes that the vast majority of women who are told that they're at high risk in fact are normal and unfortunately receive an unnecessary invasive procedure that carries a risk to the mother and baby, even though that risk is small. With SEQureDx the vast majority of women, who are told they're positive in fact will be found to be positive and very few women will receive unnecessary invasive procedures. This is one of the most important attributes of the SEQureDx test.

Coming back to terminology, the negative predictive value refers to the chance that a woman who is told that she is negative truly has a chromosomally normal pregnancy. Of the 723 women, who were told they were negative by SEQureDx, 100% of them actually were negative for Trisomy 21. Therefore, SEQureDx has demonstrated to-date a 100% negative predictive value. Specificity is slightly different as what percent of women who truly are negative for Trisomy 21 are told by the test that they are negative or normal. Because of our one false positive, we told 723 out of 724 women with non-Trisomy 21 pregnancies that they were negative, that 99.9% specificity, which is only a 0.14% false positive rate. By comparison, current screens have an advertised 95% specificity, which corresponds to a 5% false positive rate.

However, the performance of current screens is often worse in the real world because you have to get the fetal gestational age right for the formulas to work. And this dating requires ultrasound and/or knowledge of the last menstrual cycle. This is especially difficult in the first trimester, wherever the serum screens can be greater.

SEQureDx does not require ultrasound or knowledge of the last menstrual period to date the pregnancy. SEQureDx is not perfect we can expect to see more false positives and even false negatives as the number of patients tested increase, but the performance is likely to be similar to what we have already observed in the R&D study and still far better than current serum screening results.

I would like to return to the discussion of the new DNA-based method we unveiled in January. We have always worked on multiple SEQureDx technologies and had recently achieved breakthroughs with several methods including the DNA based-method and methylation that do not even reliance this making the issue of homozygocity, a problem of the past. Without rehashing all the data, we presented on the DNA based-method, which investors can review in our recent press release. I want to summarize, we ran 359 prospective patient samples through the DNA-based test and identified all 22 Trisomy 21 samples, all four Trisomy 13 samples and all four Trisomy 18 samples.

Of the remaining normal samples, there was only one false positive. The test was therefore a 100% sensitive for all three Trisomies and had a 99.7% specificity. We are very pleased with the performance of the DNA-based version of SEQureDx. The ratios generated by both the RNA and DNA-based methods can be clearly read and interpreted by professional and these tests by themselves all together do not qualify as a medical device, which have their own regulatory requirements.

SEQureDx continues on track to launch in June as a laboratory developed test or LDT from the Sequenom Center of Molecular Medicine. Some investors have expressed surprise that how the DNA-based method appear to come out of nowhere, I want to be clear that we have been working on multiple methods including DNA, RNA, methylation, shotgun sequencing, digital PCR, and other technologies for a long-time and that our goal has been to rapidly advance the best technology that was most commercially viable as efficiently as possible.

The RNA based method had an earlier advantage and was the first to make its debut last June at the ISPD Conference. The RNA method alone forms the basis of an extremely promising test for Down syndrome and we will continue to improve the performance especially around ethnic coverage. However, it was always our goal to introduce a test that would be universal and would provide information Trisomy 21, 13, 18 and soon the X and Y-chromosomes and microdeletions. These comprise the so-called chromosomal disorder panel test in our presentations. Now, we have the solution. Our goal is to develop further test that will address many more aneuploidies as well as other chromosomal abnormalities and we will.

I want to be crystal clear. Sequenom can comfortably develop both methods in parallel; meet its timelines and its profitability goal. A key simplified factor is that both methods rely on the same sample type, plasma, which we are collecting for all studies. Furthermore, we use the same MassARRAY process for both approaches. All our future studies are designed to collect at least two tubes of blood from every patient and therefore can easily validate both methods at the same time and meet our stated June launch goal. The principle investigators leading our practice changing clinical studies and their colleagues have already embraced the two approaches. The DNA method is part of our patent protected franchise including issued and pending patent rights.

For those interested in the science and clinical data, we intend to publish in a peer-reviewed journal or journals as soon as it's practicable and I respectfully request your patience. I want to show you that these are actually highly positive developments for our investors. And ultimately they are directed at providing a timely optimal solution that will accelerate adoption, maximize returns, and be universally applicable for the worldwide market for chromosomal disorders including Down syndrome. Again let me be clear, the DNA-based method is compelling, it works the same for virtually everyone on this planet, therefore is considered universal, and it helps us progress rapidly towards a global standard for testing chromosomal disorders including Down syndrome.

I reiterate that we remain unequivocally committed to current timelines for launching and developing SEQureDx in the United States. I want to take a minute to remind everyone of the place that SEQureDx will have in prenatal genetic testing, our test is meant to be a screen. As is the case with current screening tests based on serum markets, all samples that screen positive must be confirmed by an invasive diagnostic test involving amnio or CVS. No screen is perfect, but the screening test that are available now make quite a few mistakes, many positives are missed and 100s of 1000s of women with normal pregnancies go through unnecessary invasive procedures that put the mother and baby at risk.

The data from this study shows that SEQureDx technology is a screening test that will greatly reduce the number of mispositives and reduced the number of false positives dramatically. As the data we have shown today demonstrates. Because of its higher accuracy and greater convenience, we believe that SEQureDx will become the new standard-of-care for prenatal genetic screening. And with that in mind we have taken substantial steps to bring our SEQureDx Down syndrome-screening test to market. Among these we are in the process of transferring the SEQureDx technology to a CLIA-certified laboratory, The Sequenom Center for Molecular Medicine, we expect this lab to be fully operational by early March.

Sequenom is investing for success, but is also managing execution judiciously by partnering key parts of its value chain. I am pleased to say that things are coming together as expected around schedule for me in our mass terms. We have made a substantial investment in our IT infrastructure to enhance the capabilities we acquired from the SCMM in sample tracking, electronic ordering, and reporting results. And we have put in place sample collection transportation systems that can be readily scaled. We have recruited a leadership needed for our sales force and are in negotiations with a contract sales organization.

And our physician and patient marketing and education strategy has been completed and we are building relationships with potential payers that will support development of our pricing structure and reimbursement opportunities. We believe our tests will be readily accepted by payers as we present the specifications of the tests and its pharmacoeconomic advantages. While other screening tests such as the cohort screen may appear to cost less than our SEQureDx test, the errors of the serum screens carry substantial real cost for the healthcare system and the patients.

When you consider mispositive cases and all the false positive women who require counseling and unnecessary invasive procedures, the fact is that the economic and emotional cost of these inadequate screens is far greater than their retail price. Once the total real costs are accounted for, we believe we will have an overwhelming advantage of current screens, which will easily justify our expected price. Ultimately, neither we nor our pricing or reimbursement of us as expected their pricing will stand in the way of SEQureDx becoming the standard-of–care.

We expect that payers will find our pricing to be very reasonable given all the advantages offered by SEQureDx over the current screening paradigm. Regarding reimbursements. Let me be clear, our objective is for reimbursement to be available for the majority of patients from the first day we launched and for cost do not be a factor for any patient, what this means is that we do not want a physician or patient to have to decide whether or not to what a SEQureDx because they are not sure that the test will be covered by the patients insurance. We will do this by contracting with a third party billing firm that will streamline the process for patients and physicians and for us.

We are working towards having contracts in place with many healthcare payers, such as the contracts we already have in place, initially there will be certainly be payers with whom we will not yet have formal relationships, and for these payers SEQureDx will be what’s known as out of network. For example, we currently have a number of contracts in place with a number of carriers including Blue Cross Blue Shield of Michigan. We have had discussion with these carriers about the components of the test design presented in January and the CPT code stacking, which gives us confidence that we, that our reimbursement level of between $700 and $800 ranges maybe ultimately acceptable for this test. We are on track to have widespread reimbursement in place as soon as we can after launch.

It is common for people with even comprehensive insurance to sometimes get a test that is out of network. If our billing firms see that we have run a test for a patient whose insurance company considers the test out of network, they will submit the invoice to the patient's insurance company and typically we will receive reimbursement. We want to make it easy and affordable for earlier adopted patients and their physicians, who would pay reimbursement and out of pocket cost considerations of the table for patients and physicians, who will be earlier adopters. While we are finalizing reimbursement and of course for those able to do so, can access the test through direct bill.

This will allow physicians and women who want to access to the test to have access to SEQureDx in this interim period. Overtime, as we engage more payers and establish formal contracts fewer and fewer patients will fall into this out of network group and our margins will continue to improve. Building out our payer network will be a process we pursue in parallel with our clinical program and expect that both efforts will reach a considerable level of maturity by the middle of 2010. And then some of you have asked, what is it mean to launch SEQureDx as a laboratory developed test or LDT in June, before the independent clinical studies are completed. There is a difference between launching an LDT, which is say making the available physicians to what are to be half of their patients and demonstrating to more physicians that SEQureDx is the new standard-of-care.

When we launch in June, we will have data from our R&D samples. We publish data from these anticipated in peer-review journals to share with clinicians. Furthermore, our CLIA-lab SCMM will test many more clinical samples before the launch and before results from the independent studies publish. Based on the feedback we have received to-date from the community of obstetricians and maternal-fetal medicine specialists, we would not be surprised to find that there are early adopters for whom these initial data are sufficient to change their practice. We look forward to serving these early adopter physicians and their patients and again streamlining the reimbursement process for them.

We fully expect to publish and present data at regular intervals over the subsequent 18 months from our independent studies with samples from a total of 12,000 to 15,000 patients in two different independently analyzed studies the LDT led by Setrix and the RNA study led by Women's and Infants Hospital of Brown University. Each wave of data will provide the evidence that the additional physicians, want to review before they change their practice. Furthermore, each of these studies is scaled to be practice changing based on some historical precedence without syndrome positives identified.

We expect the totality of the data that we published and present by mid-2010 will be widely recognized as practice changing. While we'll continue our later focus on the development and launch of our Down syndrome technologies we continue to advance efforts in other key areas of premature diagnostics. We are especially excited by the advances we and Professor Dennis Lo have made with regards to non-invasive prenatal methods for monogenic and polygenic diseases.

This work is protected by our 540 patent and recent PAN applications exclusively licensed to Sequenom. This group represents 1000s of disorders, the majority of which are well known, such as cystic fibrosis, the Ashkenazi Jewish Panel, β-thalassemia, disorders such as fragile x, possibly autism, which afflicts around 1 in 150 births, sudden cardiac disc syndrome and 100 more. Currently, monogenic disorders can only be diagnosed with amniocentesis, which carries a smooth, but real risk of miscarriage, limiting the utility of this procedure for these disorders. Collectively, these genetic disorders represent a future opportunity that has the potential to greatly exceed the worldwide market for Down syndrome, which is estimated at $3 billion to greater than $5 billion.

After chromosomal disorders such as T21, T13, T18 non-invasive screening for monogenic disorders and polygenic disorders is the next most important R&D effort at Sequenom. In early January, we announced the collaboration with a new tolerance institute to develop an advanced newborn screening test for Severe Combined Immunodeficiency or SCID. This is a rare but curable disease affecting new borns that can be treated effectively early in life.

The test is based on the pioneering work of Jennifer Puck, M.D. of the University of California, San Francisco. A successful feasibility study was recently completed demonstrating the adaptability of Dr. Puck’s RT-PCR screening assay for SCID diagnosis to our MassARRAY platform. We are very pleased to collaborate with the Immune Tolerance Institute the UCSF and Dr. Puck to significantly improve outcomes for newborns afflicted with devastating SCID.

We see significant potential with our molecular diagnostic strategies in not only prenatal diagnostics, but also other areas in woman's health and oncology. We have now taken a major step in expanding in these areas with our pending acquisition of SensiGen. This acquisition follows our successful partnership with SensiGen to develop advanced gene-based molecular tests, we have gained ultrasensitive and ultra specific tests for detection and monitoring of the human papillomavirus, which is the primary cause of cervical and head and neck cancers, the intellectual property we will acquire from SensiGen provides Sequenom with a unique patent protected position with freedom to operate in the competitive and highly valuable HPV market on a next-generation assay format.

In addition, we also have a test for systemic lupus erythematosus, for which approximately 92% of the sufferers are women, chronic kidney disease, and inflammatory bowel disease. All of these tests utilize our MassARRAY platform. This acquisition in fact these are enabled by our MassARRAY platform. This acquisition represents a key step towards our goal to provide a comprehensive offering of molecular diagnostics for women's health in cancer. And we will supplement our menu in the next 18 to 36 months.

Sequenom has the leading IP portfolio for the development of non-invasive prenatal diagnostics based on cell free fetal nucleic acid. We have issued patents covering all use of cell free fetal nucleic acid on a platform independent basis. The use of methylation markets, digital PCR for fetal cells and on any fluid on any platform. We licensed these assets from Cytonix and dozens of applications regarding varies by markets, methods, and technologies including the use of second gen and future gen sequencing technology.

Sequenom also has secured the rights to transrenal nucleic acids in urine for prenatal diagnostics on any platforms from genomics. One exception being, one kind of gender test. Sequenom invaded a priority to build a patent protected franchise around its women's health initiatives. However, Sequenom is not relied solely on its formidable IP estate to protect its franchise. We are aggressively executing towards the market and seeking where appropriate regulatory protection for our products. Sequenom has yet to see a competitor emerge with a credible solution. We also made an important addition to our senior management team.

Last month, we welcomed Doctor Allan Bombard to Sequenom as Chief Medical Officer. A highly respected OB/GYN, an expert in the field of prenatal diagnostics, Allan has played an instrumental role in the development of our non-invasive prenatal diagnostic portfolio as well as serving as the principle investigator in R&D screening study. We are very pleased to have Allan's expertise guiding us as we prepare to go to market. Turning to our genetic analysis business. With the exception of U.S. capital equipment sales, our business is growing strongly in reagent services in all markets and systems sales in the rest of the world.

Although, we attempt to give guidance for the genetic analysis tools business we all know how difficult that is for companies in this environment. We are extremely dollars conscious and expect the business to track towards cash flow break-even with flat to modest growth. We made an important advancement in expanding our oncology offering with the introduction of the new OncoCarta gene mutation panel. This panel in used for identify genes associated with the development of specific cancers and research applications and has the potential to be used for genetically typing tumor biopsies to help guide molecular therapy selection by physicians.

We believe the OncoCarta gene patent panel addresses this application with what we consider to be best in class technology. It also supports our longer-term interest in oncology and molecular diagnostics. With those comments, I'd like to turn the call over to Paul Hawran to review our financial results in greater detail and introduce our 2009 financial guidance. Paul?

Paul Hawran

Thanks Harry and good afternoon to everyone. We've reported total revenues for the three months ended December 31, 2008 of $12.2 million, a 9% increase from the fourth quarter of 2007. Our revenues reflect the impact of a challenging economic environment and to a lesser extent foreign exchange rates. Cost of products and services revenue is $4.9 million in the fourth quarter, compared to $5 million in 2007 fourth quarter.

Gross margin accordingly has grown to $59.5 for this year's fourth quarter as compared to $54.8 in the 2007 fourth quarter. The increase in the margin was due primarily to increased sales of higher margin consumable products and higher average selling price of our MassARRAY System. Research and development expenses increased to $9.1 million from $4.5 million in the prior year quarter. R&D expenses as you can imagine have gone primarily towards molecular diagnostic programs.

Selling, general, and administrative expenses increased $12.3 million from $9.1 million with the increase related primarily to activities to commercialize our SEQureDx based screening test as well as increased legal cost. We incurred a FAS 123R expense of $2.3 million in the fourth quarter, compared to $1.1 million in the prior year quarter. Total cost and expenses for the quarter were $26.3 million up from $18.6 million in the prior year. Our net loss for the quarter was $15.4 million or $0.25 per share. Total revenues for the full year of 2008 were $47.1 million, an increase of 15%, compared to the full year of 2007. Cost of product and service revenues was $19.6 million, compared with $18.1 million in comparable period last year.

Total cost and expenses increased to $89.8 million from $63.6 million largely the result of increased spend in the molecular diagnostic area. We reported a net loss for the year of $44.2 million or $0.83 per share, compared with a net loss of $22 million or $57 million for the full year in 2007. As of December 31, 2008, we had total cash, cash equivalents and marketable securities of approximately $100 million and accounts receivable of $10.6 million. I would like to turn right now to the 2009 guidance. We expect our genetic analysis tools business to be impacted by the general decline in capital equipment market.

Revenue is expected to be flat in the first half of 2009, compared to the first half of 2008 and we are projecting to grow approximately 15% in the second half of the year, accordingly revenues will range between $49 million to $53 million for 2009. Gross margins are expected to be approximately 60% due to higher consumable sales. Operating expenses are expected to be approximately $29 million and we expect genetic analysis business to be slightly cash flow positive in 2009.

We expect our diagnostic business' cash flow to be negative as we continue our launch of non-invasive prenatal diagnostics. As a reminder in 2009, we plan to launch four diagnostic assays to be run in our CLIA-laboratory Sequenom Center for Molecular Medicine. Our RHD assay will be launched in the second quarter 2009, our SEQureDx T21, T13, T18, assay will be launched in June of 2009. Our cystic fibrosis assay will be launched by Q3 of 2009 and our Fetal XY assay will be launched in Q3 '09.

Based on many variables, as you would imagine are associated with the launch of our diagnostic products we are not issuing guidance at this time on our molecular diagnostic programs. However, we would like to detail the company's thinking regarding reimbursement and our anticipated accounting treatment. As many of you know reimbursement discussions with carriers take on many different forms of negotiations, two primarily approaches are value-based discussions and CPT stack discussions. Value based refers to cases where diagnostic companies attempt to negotiate prices, which are higher than the prices mandated under CMS CPT codes. In these types of discussion providers are arguing based on pharmacoeconomic models that the CPT stack is not consistent with the benefits associated with a particular procedure.

As you can imagine the discussions are normally protracted and rather lengthy. Diagnostic companies engaged in these types of discussions can expect to have upwards of 90% of their revenues deferred, until payment is actually received, as there is no basis on which to provide an estimate for accounting purposes. This is not the route that we are taking, our approach involving CPT stacking is far more straightforward. CPT stack discussions are limited to the actual CMS pricing codes for various procedures. Undoubtedly, there are discussions regarding the value of the procedures, but this is not the primary focus of the discussions with the payers as it would be for our value-based discussion, companies who have short reimbursement based on CPT stacking normally defer approximately 50% of their revenues on initial launch in order to accommodate the unknowns of collecting uncontracted revenues.

However, much of these uncontracted revenues still end up being collected. We are expecting to receive the majority of 2009 deferred revenue in 2010. Our approach to reimbursement has been and will continue to be primarily based on CPT stack, and expect that our discussions will be straightforward and hopefully short and direct. Accordingly, we are anticipating that we will be likely deferring approximately 50% of our revenues upon the launch of the our various tests until we enter into definitive agreements with the various carriers, which could be expected to be completed sometime or substantially completed in 2010. At that time we hope to recognize the revenue, receive the cash and reverse the deferrals of those revenues received in 2009.

Please keep in mind that revenue recognition will be dependent on the specific facts and circumstances of the individual revenue items at that time, at the time that they arise, but what I have described represents what Sequenom considers a reasonable set of assumptions. Moving on to corporate G&A. 2009 will be approximately $16 million reflecting additional administrative cost due to the launch of our diagnostic business and continued ramp of a newly acquired lab facility in Michigan, as well as increased legal cost. Stock-based compensation is expected to be $6 million to $8 million in 2009.

So, in summary we expect our genetic analysis revenues to be approximately $49 million to $53 million, and our total operating expenses excluding diagnostics to be approximately $53 million. We will give guidance on our expected revenues and operating expenses for the diagnostic business later in the year, as we get closer to the launch. However, let me reiterate our guidance regarding cash. We have sufficient capital based on current operating plan to bring us the profitability. That said, in the event we require increased working capital to support higher accounts receivable, we would expect to obtain secured working capital lines of credit securitized by current assets including accounts receivable and inventory. To be clear our current business plan does not call for any additional dilutive financing.

I would now like to turn the call back over to Harry. Thanks you.

Harry Stylli

Thanks Paul. Before opening the call to questions, I would like to share some of our upcoming milestones. In our genetic analysis tools business, we continue the development of our closed tube assay, which is an application, intended to amplify and simplify the workflow of our MassARRAY. This application will enable Sequenom to enter new segments of the genomic analysis market and we now enable the MassARRAY platform to be more competitive in molecular diagnostics. We expect to introduce this assay early in 2010. Launching new technology for the oncology and other markets for customers with lower throughput requirements is a key goal. This technology is also designed with diagnostics in mind.

In June 2009, which I fully elaborate on what this new technology is closer to the launch date. On the molecular diagnostic side, the next several months will be key months for Sequenom. We remain on-track for our June launch of the RNA-based Down test with the parallel launch of the DNA-based method. Based from the promising early results from the DNA-method test, we are aggressively pursuing its development and looking forward to publishing and presenting this data in the coming months in peer-reviewed journals.

Also in 2009, we are on track to launch tests for Rhesus D incompatibility, Cystic Fibrosis, and Fetal XY, all of which will broaden and strengthen our presence in the prenatal diagnostics arena. These launches are our substantial intellectual property of stay and the significant data flow we expect from our completed and ongoing research and clinical studies clearly for Sequenom in a position of strength as we look at the prenatal marketplace and competitive landscape.

Now, I want to reiterate some major 2009 molecular diagnostics milestones as they relate to the Sequenom Center for Molecular Medicine. As Paul mentioned earlier, we intend to launch Rhesus D in Q2 as an LDT. We are intending to publish the RNA–SNP method and clinical data by Q2. We intend to publish a DNA-based method in a science journal and the clinical data from that method by the end of Q2. But we intend to meet clear analytical requirements for SEQureDx to submit in New York and California in Q2.

We intend to launch SEQureDx by June 2009. We intend to launch cystic fibrosis carrier screening in Q3. We intend to submit the obstetrics led LDT trial data, which is the independent study, which treated by 5000 patients. We intend to submit the Abstract for consideration by SMSA in early July or August. We intend to launch Fetal XY in Q3. We expect California and New York approvals by Q3 and Q4 of 2009, and we expect the publication of the second trimester on the RNA study, which is the large independent study that's being led out of Brown University in a peer-reviewed journal by year-end 2009.

This is a very exciting time at Sequenom, we are actively moving forward on many programs and we look forward to keeping you apprised of our developments. The birth of any molecular diagnostic is a challenge, but we anticipate rapidly building our business to emerge as the provider of a standard-of-care for non-invasive prenatal solutions that will be transformative for clinicians and most importantly for the patients.

There is much speculation about the ramp of our tests; all our data suggests the likelihood of an unprecedented uptick. We are just a few short months away from initializing full commercialization of SEQureDx. We ask everyone to be patient, we are confident of delivering to you all our stated milestones on time. So, with that overview of our plans and at this time I’d like to open the call to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions).

Harry Stylli

While we are waiting for the first question I want to inform you that we are thinking about holding a commercial day event in the April timeframe, if there is sufficient interest from the investor community. The focus of this event would be on the commercialization of our Down syndrome screening test, and will include aspects of our strategy, supply chain, reimbursement and other nuts and bolt activities involved in bringing this test to market as we know by that point. Okay, operator, we are ready for the first question.

Operator

Our first question is from the line of Elemer Piros with Rodman & Renshaw. One moment please.

Elemer Piros – Rodman & Renshaw

Can you hear me Harry?

Harry Stylli

Hi there, Ele.

Elemer Piros – Rodman & Renshaw

First of all I would like to turn to Paul just to better understand your 2009 guidance please. I'm looking at the fourth quarter numbers, and let's just pick R&D, you jumped from $7 million to $9 million in this current quarter. How should we think about R&D and let's factor out for a moment anything related to diagnostics, where should that number trend to?

Paul Hawran

Essentially, flat to maybe perhaps slightly up, the research and development in the genetic analysis area is I wouldn’t say, we have a sufficient amount of a base if you will that we can continue improving and continue building that division with resources that are currently in that group.

Elemer Piros – Rodman & Renshaw

On a quarterly basis if you assume say $9 million that will total $36 for the year, am I correct?

Paul Hawran

If I total $9 million for the total?

Elemer Piros – Rodman & Renshaw

No, $9 million times four that's $36 million.

Paul Hawran

Yeah, but keep in mind also that $9 million also includes some numbers associated with the diagnostic piece. When I was referring to the guidance that I had given it was specifically around the genetic analysis tool business and excluded diagnostics.

Elemer Piros – Rodman & Renshaw

Okay. I have the same slide confusion with the G&A line as well currently it is at 6 on a quarterly basis times four that would be 24 rather than the 16 you mentioned. So, I think the 16 what you referred to is purely for shall I call it the legacy business?

Paul Hawran

That's correct, and also keep in mind that that excluded the FAS 123 charge as well. So, that is a separate line item that I’m adding.

Elemer Piros – Rodman & Renshaw

Okay. Thank you for that. And what I’d like to also ask you, again coming back for the maybe for the last for the legacy business, we see consumables to be broader stable, on an increasing installed base. How do you explain that, I understand the capital CapEx softness in the U.S. market, but it doesn't seem to be that they are turning their product on that installed base?

Paul Hawran

Keep in mind that consumables are up year-on-year, and that number will continue to grow as we increase the number of panels that we're putting in, new software if you as well. So, we are expecting that consumables will continue to grow even throughout 2009.

Elemer Piros – Rodman & Renshaw

Okay. And Harry or Paul, the question is related to the launch of the SEQureDx platform in June. What I would like to understand is that in the initial months, July, August, call it September, what sort of tools your sales person would have at their disposal in terms of data. Would they be able to refer to the research study findings, would their performance characteristics of this study be published might then, what's sort of material will you…

Harry Stylli

We would expect that, this is Harry. We would expect they would definitely have a published material of both the DNA and the RNA-based studies to present including a supportive clinical data to science data, we would expect that they would have educational materials to present to obstetrician/gynecologist that also be supported by a regional KOLs holding ACOG regional meetings educating doctors and so forth with the virtues and the benefits of our test. So, that would be quite an expensive set of tools that they would have at their disposal.

Elemer Piros – Rodman & Renshaw

Okay. And let suppose we have those pioneers out there, and a person in Arizona starts prescribing a whole bunch of these tests and sending samples to Michigan. What would be the reimbursement mechanics there would be the existing CPT stack that you referred to be utilized, and what if the person wouldn't get reimbursed would you pick up the expenses there?

Harry Stylli

Yeah. Let me answer that Elemer the CPT stack that's mended around CMS are actually adjusted by region, we've actually, our region would be in Michigan. So, normally what would happen is that our CPT stack would actually be applied, would be applied to patients in Arizona. However, that's not to say that we may negotiate a different rate if you will with different Arizona carriers. Okay, but just on the face of it, you could expect that we would be receiving the CPT stack that's mandated for the Michigan region.

Elemer Piros – Rodman & Renshaw

So, and this would be applicable to the early phase as well?

Harry Stylli

Yeah. It would be applicable to the early phase as well, we're going to have a third party billing operation that would manage this for us, and for the patient, and for the doctors and interface with the payers there will be a help line for patients to call out, if they needed guidance or doctors to call out if they needed guidance through this system, if the patient is out of network, then in the initial phases of launch, we would take into consideration the any extra co-pay by the patient may have. We want to make this a seamless and a straightforward for the patient and the doctor as we possibly can with the launch of a new test early on in its evolution. And we are taking those steps from the outset from now. Okay, and building industry's capabilities.

Elemer Piros – Rodman & Renshaw

Can you say that Harry that if somebody was pioneering enough to not to do the biomarker test whether it's a triple test or the quad test and they end up with a $600 or $700 bill that you would find also to raise to assist them to get?

Harry Stylli

We would work on the patient’s behalf and the doctor’s behalf to ensure that they get the best treatment possible.

Elemer Piros – Rodman & Renshaw

Okay. Thank you so much for taking my questions.

Harry Stylli

Thank you.

Operator

Our next question is from the line of Bruce Crana with Leerink Swann. Please go ahead with your question.

Bruce Crana – Leerink Swann

Good afternoon guys.

Harry Stylli

Hi there, Bruce.

Bruce Crana – Leerink Swann

Couple of things, can you guys give us, an equipment number for the quarter that you placed?

Paul Hawran

Actually, right now it looks like it’s around 12 units during the quarter.

Bruce Crana – Leerink Swann

Okay. And Paul, little bit on the, I guess the guidance if you will. Second half of '09 you're talking about I guess the MassARRAY business recovering from a level as first half, why do we hang our hats on there I mean why would that business suddenly turn around to be up 15% in the back half of the year, what are you planning on there?

Paul Hawran

I think if you take a look at the entire year what we're actually looking at is essentially growth of 7.5% throughout the year, keeping a slight number in a first six months and then up 15% in the second half. So, that number may move a bit, but you can take a look at it as being roughly around 7.5% to 10% growth, which I don't think is actually exaggerated, if you will to coming of a fact that we've had 20% growth in previous years 15% growth this year.

Bruce Crana – Leerink Swann

So, you're not contemplating a bit of a recovery in the second half?

Paul Hawran

Well we're cautious about it, we'd like to think that there will be a recovery, but we just don't want to come out with exaggerated numbers. So, we would rather be conservative and follow through on a usual policy and that is to under promise and over deliver.

Bruce Crana – Leerink Swann

Okay. And I know you talked a little bit about the deferring revenue at the time when you start performing security access and I guess I'm curious understand you, let's say for the sake of argument you differ 50% or so, that revenue, but at the time the test was performed, are you still taking the expense?

Paul Hawran

Oh yeah, we would still be taking in the expense Bruce. But keep in mind also that, when I gave you our thoughts and our assumptions on reimbursement and what the deferred revenue policy might or accruals, just based on my discussions with various analysts out on the street, I got the sense that it was sort of a little bit all over the place. And what I am suggesting is that, those companies that were up at the 90% level actually have a different business paradigm than we do. And after really taking a look at a lot of companies or at least a number of companies that have gone and launched a new product more closely associated with the CPT stack it seem to be close to around 50%. Now that doesn’t mean that every dollar that we receive automatically defer 50% of it. Frankly, if I take a look at the contract, if we have a hardcore contract in place then obviously I am just going to take a 100% and move on. But for those that might be out of network where we judge that there might be some risk of actually receiving the collection, we would take a deferral of that.

Bruce Crana – Leerink Swann

I understand that I guess the tried and true method, but we should be thinking about an impact on gross margins at that time?

Paul Hawran

Absolutely, yes. I would agree with you on that. And as I said on an average what I am expecting again based on current information that the revenues that we will record will really be, I would imagine on average about 50% of it would be deferred until 2010. Then frankly in 2010 hopefully, as we pick up additional carriers that number becomes less and less deferred.

Bruce Crana – Leerink Swann

Okay, I got it. And then last from me Harry, can you give us some sense when you are obviously at going different payers here in an agreement with various contracting activities, how are you choosing those payers or I guess you are going at first, and can you share with us perhaps any sense of goal you might have, let's say mid ’09 or by year end ’09 in terms of covered lives?

Harry Stylli

In terms of covered lives, we already made in roads with good progress with Blue Cross and Blue Shield, they cover a lot of life, okay. So, I feel as soon as we are able to write policies, we will be able to enter the whole Blue Cross, Blue Shield network fairly quickly. I believe they cover and don’t call me if I’m wrong here a 30% or so percent of lives in the U.S. in our kind of business. That alone should give us a very strong boost. So, again we will begin to systemically approach all the payers, we are going to see a percentage hopefully in the 20% to 30% by the end of this year, which we bill on in 2010.

Bruce Crana – Leerink Swann

All right. Thank you.

Operator

Our next question is from line of Tony Butler with Barclays. Please go ahead with your question.

Anthony Butler – Barclays Capital

Thanks very much. Harry as you are having discussions with contract sales organizations can you describe what those discussions are with respect to, the approximate size of sales reps you need, and are they paid a detail fee, are they actually paid a percentage of what they might sell, that's question one. And then second, could you describe maybe your thoughts on, how you roll out Europe? Thanks very much.

Harry Stylli

How would we roll out Europe or the U.S.?

Paul Hawran

U.S.

Anthony Butler – Barclays Capital

No, Paul outside the U.S. into non-U.S. areas?

Harry Stylli

So, do you want me to answer the contract sales question first for the U.S. because that's where it's most relevant?

Anthony Butler – Barclays Capital

Yeah, exactly the contract sales…

Harry Stylli

We will have, so the general consensus is that in due course we will have somewhere between a 150 to 175 sales reps, that headcount level would give us U.S. national coverage for the obstetrician/gynecology community. Obviously, we're going to grow into that, and in order to achieve this, we're going to be working with the contract sales organizations and there would be a detail fee. So, effectively the CSO is working in a classic manner where they are recruiting the sales reps that we identify and specify, there is a selection procedure, training procedure, we then carry the overhead if you like of that sales person once we've recruited them and once they have come through our training procedures. And we expect to have a lot of flexibility in how we ramp our headcount. We have chosen this route frankly because the ramp could be quite significant, and we'd want to bring on a lot of people potentially we may want to bring in a lot of people fairly quickly. So, that's really the strategy there and I can go into this in more details with you Tony another time. Now in Europe, we're in the process of I'd say we're in the process of making a short list of a number of potential partners in the European market, and I don't want to say anything more than that at this stage other than we are making a short list, and we're working through that list, we're getting various proposals back from these European perspective partners, and we're assessing them in order to identify not just the best partner, but the best way to go in the various European countries and regions.

Anthony Butler – Barclays Capital

Would you say Harry last question that those discussions are in the eleventh hour or let's say ninth inning or eighth inning or how would you characterize it?

Harry Stylli

I'd say the fifth inning.

Anthony Butler – Barclays Capital

Thank you.

Operator

Our next question is from the line of Pamela Bassett with Cantor Fitzgerald. Please go ahead with your question.

Pamela Bassett – Cantor Fitzgerald

Hi, thanks for taking my call. Can you hear me okay?

Harry Stylli

Hi there, Pamela that’s fine.

Pamela Bassett – Cantor Fitzgerald

Hi. Hopefully, a quick follow-up on pricing and revenue recognition, CPT code based filling would be for work done, and the value based pricing really could include a lot more. So, when you talk about recognizing 50% you are talking about recognizing 50% of what you might be getting in the value based pricing or CPT code base?

Paul Hawran

No, it would be keeping the line there, we are looking at it strictly from an accounting perspective, Pamela. So, just as a example on value based pricing, what you might have is for instance a diagnostic company has a generic stack for instance that amounts to $900, but instead they would like to charge say $3000 for the test itself. What they will do is, they will actually go into an insurance carrier and argue the fact that, although we are only priced at $900 on the CPT stack it’s actually worth $3000 based on the pharmacoeconomic models, if you will.

Pamela Bassett – Cantor Fitzgerald

Right.

Paul Hawran

Our CPT stack right now based on CMS is roughly between $700 and $800 and frankly we're actually quite pleased to have that as a starting point if you will with the carriers. So, when I speak about our 50% deferral, what I'm thinking about is in terms of as and we get tests in and I receive let's say two tests in, one has a contract and one doesn't, what that means is that one will not be recognized while the other one is recognized. And that amounts to about a 50% deferral.

Pamela Bassett – Cantor Fitzgerald

I guess, the other piece of component of this question is, there is an implication that this test will ultimately be priced much higher if its value based pricing because it could incorporate the economic factors that, I don't know, maybe you're collecting data, please tell me during the RNA study?

Paul Hawran

Yeah, no. Actually, Pamela, you are quite correct. I think that the idea that we are only a CPT stack and that’s that we are going to be discussing or negotiating with the carriers is absolutely not complete, the fact that the matter is that we will be also approaching the carriers with value as well, but the fact that the matter is that we don’t have a hurdle like in my previous example where I have a $900 stack and I am trying to get $3,000. That becomes a much harder conversation then for me to go in there and say, well listen I have got a $700 stack and I am trying to convince you those worth a $1000.

Pamela Basset – Cantor Fitzgerald

Okay, all right that’s helpful. So, you will be collecting economic data during the RNA studies as part of the design?

Paul Hawran

We are actually developing pharmacoeconomic models as we speak.

Pamela Basset – Cantor Fitzgerald

Okay, great. And any word you can tell us about the oncology panel that might be launched into or might be used develop the diagnostics?

Harry Stylli

Actually Pam there is three potential tests in the oncology area that we’re going to be moving along. The first is the, a version of the OncoCarta test that we've commercialized as a research tool currently. And we are working to develop that to help basically oncologist make ultimately treatment decisions based on genotyping biopsies from patients that have tumors. And this could be commercialized as early as towards the end of 2010. The other two approaches that we are looking out to develop in the cancer arena is a HBB head and neck, which could be commercialized as soon as mid-2010 and finally HPV for cervical cancer. This would be, what we are looking to develop here is not just a genotyping test, but a quantification test and one that also matches potentially the integration of the virus into the genome, which is indicator of cancer risk. That's going to take a lot longer and I wouldn’t expect that to be a product until 2011.

Pamela Basset – Cantor Fitzgerald

Great. Thanks very much.

Harry Stylli

Thanks you.

Operator

Our next question is from the line of Ram Selvaraju with Hapoalim Securities. Please go ahead with your question.

Ram Selvaraju – Hapoalim Securities

Thanks so much, can you hear me?

Harry Stylli

Yeah.

Ram Selvaraju – Hapoalim Securities

Okay. First, Paul a couple of quick housekeeping items could you give me the shares outstanding as of the end of the fourth quarter?

Paul Hawran

Its approximately $61 million shares.

Ram Selvaraju – Hapoalim Securities

Okay. Also Paul, are you able to give an approximate price per MassARRAY machine?

Paul Hawran

At this point in time the average selling price is north of $300 it’s about $350.

Ram Selvaraju – Hapoalim Securities

$350. Okay, and then with respect to the timing of the commercial launch, earlier there was a question asked as to what kind of data the sales reps might have at their disposal come to time when the tests are being brought online, would you expect them to have an hand even partial data from the LDT study or would that of a necessity be something that would only be available after the actual launch of the tests?

Harry Stylli

We will have data generated by the Sequenom Centre for Molecular Medicine, its not necessary LDT data because the LDT data is really going to be conserved for presentation to the Maternal-Fetal Society. So, there will be additional data that the Sequenom Center for Molecular Medicine generates to meet CLIA requirements and this will be clinical data and often laboratories take this information as promotional material, as they retail to their various customers.

Ram Selvaraju – Hapoalim Securities

Okay. With respect to the overall commercial plan and, the number of reps and how quickly you would be able to hire those, would those all be details that you would be able to discuss with granularity at this proposed commercial day in April?

Harry Stylli

Yes, like I said, if there was sufficient demand for that day then that’s the kind of information we will able to reveal.

Ram Selvaraju – Hapoalim Securities

Okay. And could you just go over the timing of the filing for approval of the tests as LDT's with the respective departments of health, and what the timelines are for those departments to respond to you?

Harry Stylli

Okay. So, really I believe this is just three states; New York, California and Rhode Island that have a requirement for data package submission, we expect that they would take anywhere between three and six months, so they take a little bit longer it depends on the state, but in that kind of period, we would expect them to give us the nod.

Ram Selvaraju – Hapoalim Securities

Okay. And in the other states essentially, you wouldn't need anything you can just go ahead?

Harry Stylli

Yes, for the rest of the country, if it's the data is generated by CLIA accredited laboratories and if they go to almost immediately take patients from all the other states barring those three.

Ram Selvaraju – Hapoalim Securities

Okay. And then one another regulatory thing, which is with respect to your discussions with the FDA regarding the PMA route for eventual formal agency approval of the Down syndrome test. At this point it's quite clear that not that the FDA does not plan to issue any kind of regulatory guidance regarding the LDTs themselves and that is not part of your exciting FDA discussions.

Harry Stylli

Actually, we won't be talking to the FDA about our laboratory-developed tests. But the way we’re positioning our product in the Center for Molecular Medicine in Grand Rapids is that it is under CLIA's jurisdiction and not under FDA's jurisdiction.

Ram Selvaraju – Hapoalim Securities

Okay. Thank you. Those were all my questions.

Operator

Our next question is from the line of Kevin DeGeeter with Oppenheimer. Please go ahead with your question.

Kevin DeGeeter – Oppenheimer

Good evening guys. Thank you for the comprehensive call here. Couple of things, two house keeping items, For CF versus the Fetal XY, can you give us your current thinking with regard to deferred revenue treatment at the launch of each of those products, kind of we know less about each of them. But, I mean is that going to be 100 cents on the $1.00,, $0.50, $0.20.

Paul Hawran

Right now, Kevin based on the, as I said the research that we have done and taking a look at other companies that have launched products, each of those maybe a slightly easier if you will than T21, but I don’t want to make it sound like that, it's I would still suggest that it would still be around the 50% mark.

Kevin DeGeeter – Oppenheimer

All right. Terrific. And just one housekeeping item on the quarter, other expense lines seem to be about a $1 million interest expense there. Can you just repeat on what corresponds to that?

Paul Hawran

As far as other expenses I mean just general, there is nothing that is of any particular, as I can say, particular large item.

Kevin DeGeeter – Oppenheimer

Okay and…

Paul Hawran

And by the way are you speaking about interest income and other net?

Kevin DeGeeter – Oppenheimer

Yes, I am.

Paul Hawran

Oh, I'm sorry. On that particular case, what we did do is, as you know, we’ve got some auction rate securities about $5 million and so, most of that about $600,000 relates to write-off or reduction if you will and a value of a couple of those auction rate securities in the fourth quarter.

Kevin DeGeeter – Oppenheimer

Great. That’s helpful. And then just lastly Harry, I think there may still be a little bit of confusion. For the launch in June, you affirm your commitment to launch, which is terrific and you spoke of launching an RNA test and a DNA test. Can we just be clear to understand, are we thinking about launching with RNA and reflexing the DNA, will the doc have a choice to choose an RNA test or DNA test, just so there is no confusion on this.

Harry Stylli

We are launching both test in parallel and they could be used initially either in reflex mode or in singular mode.

Kevin DeGeeter – Oppenheimer

Okay. And both to be priced identically?

Harry Stylli

We expect that the DNA based-test may actually have higher, at least the same if not better pricing than the RNA-SNP test.

Kevin DeGeeter – Oppenheimer

Okay. And how just from a sales and marketing standpoint, do we think about the RNA versus the DNA I mean is a sales person going out. I guess this is the question which I think a lot of investors are just trying to get their eyes on?

Harry Stylli

As far as the doctors are concerned the majority of doctors are only interested in the fact that we have a non-invasive prenatal diagnostic for chromosomal disorders and they will focus on the brand SEQureDx. Okay.

Kevin DeGeeter – Oppenheimer

All right. Then may be just lastly a followup on that I mean, so help us on, you want to take a full forward here to help you walk through it, I think it is important, help us understand why a physician would choose the RNA test given what you have described as the profile of the DNA test.

Harry Stylli

We would offer the result to the doctors, but you may find as we have more data for the DNA-based method that the DNA-based method could actually be the dominant test that we offer.

Kevin DeGeeter – Oppenheimer

All right. Thanks for the query guys.

Harry Stylli

Okay.

Operator

Our next question is from the line of Scott Gleason with Stephens Incorporated. Please go ahead with your question.

Scott Gleason – Stephens Incorporated

Harry, Paul thanks for taking my questions. First, just for modelling purposes looking forward to 2009 is there any way you could break down the fourth quarter in terms of operating expenses associated with the genetic analysis business and operating expenses associated with the diagnostic business on a percentage basis?

Paul Hawran

Yeah, I could certainly do that, Scott, but if you don't mind, I wouldn't mind taking that off-line with you. Okay, in order to break that individually, there is a lot of bits and pieces in that.

Scott Gleason – Stephens Incorporated

Great. And then Harry just go and switch over to reimbursement, you said you were close in discussions with Blue Cross Blue Shield, have you guys already determined a firm contract rate with Blue Cross Blue Shield?

Harry Stylli

No, we have not determined a firm contract rate, we do have a contract with Blue Cross Blue Shield, we have them agreeing to CPT code stack. The next stage would be to either show the manuscripts or publish data.

Scott Gleason – Stephens Incorporated

Okay. Is there any peers you guys have agreed to have firm contract right yet with.

Harry Stylli

No.

Scott Gleason – Stephens Incorporated

Okay. And then Harry can we talk a little bit about the cystic fibrosis market looking later in the year. I mean, right now that's mainly a carrier screening market can you talk a little bit about your strategy to kind of switch that over to non-invasive prenatal market?

Harry Stylli

So, initially we're entering the market with a carrier-screening test for cystic fibrosis that will have a greater number of markers in currently available tests that will enable you to a genotype and quantify the amount of markers present and that’s unique in the marketplace. Our intent though is as we make progress with our monogenic product is to combine that offering with a non-invasive test for cystic fibrosis that obviously assesses cystic fibrosis and the foetus and combine the offering. So, look at this as a one-two punch. The first punch is cystic fibrosis carrier screening launched this year in Q3 and its going to be differentiated and competitive that our sales force can begin to distribute to the obstetrician/gynecology market and then in due course, we will supplement that with a non-invasive prenatal test for cystic fibrosis that would give the information as it relates to the foetus. Then I think we have an absolutely unique value proposition, for combining carrier screening from mom and dad with non-invasive testing for the foetus. Now, we are going to do this, take this approach for whole range of monogenic disorders, where there is carrier typing available and where there is the need to do non-invasive prenatal testing for the foetus.

Scott Gleason – Stephens Incorporated

And then just one last question, a real quick for Paul. Paul you guys have talked about not having to tap the financial markets again for liquidity issues could that potentially change if there is any kind of legal contingency in the next 12, 24 months where you guys have to depend your intellectual property in core?

Paul Hawran

Yeah, I mean clearly we have got some reserves or some numbers in our forecast for that in the current operating plan, but, as far as the current operating plan as I said we are fine with the amount of capital that we have. So, and even if we have to defend our IP.

Scott Gleason – Stephens Incorporated

Okay. Great. Thank you guys.

Operator

Our next question is from the line Junaid Husain with Soleil Securities. Please go ahead with your question.

Junaid Husain – Soleil Securities

Good afternoon guys.

Harry Stylli

Hi, Junaid. How are you?

Junaid Husain – Soleil Securities

Not too bad. Harry, a quick question for you. I apologize if I missed this from your analyst meeting, but the one false positive that you did identify in the R&D study. Did you identify the same false positive using the RNA and DNA based approach or were there two different false positives?

Harry Stylli

There were two difference false positives.

Junaid Husain – Soleil Securities

Gotcha, gotcha. And then Harry, if you could, we have been hearing a lot of noise with regards to competing technologies for prenatal diagnostics whether from Fluidigm or Linatex, could you perhaps give us a year take on these alternatives how they stack up to SEQureDx, I know there is, it's early going, there is not a lot of data on these alternative tests, but I am about to get your opinion on how these alternative sack up?

Harry Stylli

Absolutely, so I would answer the question in a number of ways, but first I haven't really seen any data that would qualify like anything close to reduction of practice from many of these potential alternative players. Secondly, we are very confident that our intellectual property, the full portfolio if you like, is dominating in both of those approaches. Whether its the Fluidigm platform, which is in our view dominated by the Cytonix intellectual property as well as the 540 and various other patents we have, or whether is Linatex approach, which is the least permanent tool, which is again dominated by the 540 patent and the 280 patent that that are both issued patents, all the patents referenced are issued patents, the 280 patent specifically deals with methylation and its utility in non-invasive prenatal diagnostics.

Paul Hawran

By the way one of the thing that I would like to add to what Harry mentioned, as he said there is really no competitor that we see that's on a horizon right now. Keep in mind, a key issue for us is the fact that if we are first to market and we have what appears to be at least a three year advantage, frankly that's significant for anyone to try and follow through on that, that is the significant hurdle for anyone to get through.

Junaid Husain – Soleil Securities

Good enough thanks. That’s helpful. And last question for you. Guys I know you have an active medical conference schedule. Could you tell us what medical meetings we should paying attention to over the next six months or so is it Pittcon, is it ACOG and then what should we expect to see from a data perspective at these meetings?

Harry Stylli

I think we are going to be present at several conferences this year, but really in terms of revealing what I would call significant data, you should really be focused in 2010. Okay, we are looking to present at the Maternal-Fetal Society at ACOG and at various generic counseling conferences and so on and so forth. We will have a presenter in all those conferences this year, but we are not looking to reveal a lot of data at these conferences.

Junaid Husain – Soleil Securities

Great. That’s helpful. Thanks so much guys.

Harry Stylli

Mostly, through peer-reviewed publications this year.

Operator

Our next question is from the line Zarak Khurshid with Caris & Company. Please go ahead with your question.

Zarak Khurshid – Caris & Company

My questions. I was just curious about what is the criteria to drop the RNA based-test all together and go forward with the DNA-based version and then as a quick followup what are the advantages currently with the RNA version versus the DNA-based test?

Harry Stylli

So, number one we are not dropping the RNA-based method. I don't know how that came in, you have not heard it from the company. So, want to make it explicitly clear. We are developing both approaches in parallel. Okay, and its full speed ahead for both methods. The advantages of the two different methods are frankly the performance of the RNA-SNP method is extraordinary and that in itself is sufficient to evolve it further forward. If you look at the, it has some clearly the homozygo question is one that we could address and close down by incorporating additional significance to the method, and so and so forth. However, all this is sort of a moot point, if you look at the DNA-based method, which also looks extremely promising. It has very many attributes that complement the RNA-based method, including fast [SuperCD] RNA based method in future. And these attributes include the fact that it's based on a universal marker, you're able to deliver multiple chromosomal trisomies and that the market is extremely stable relatively speaking. And these combined could be very powerful, but also as we deliver more data in the DNA based test, you could see that test beginning to dominate the marketplace. But we’re developing both methods full speed ahead and will both be ready for launch in June.

Zarak Khurshid – Caris & Company

Great. Thanks for the clarity there. And then Paul could you talk a little bit about the actual cash burn you're anticipating for ’09?

Paul Hawran

Now, if I gave you that and I would get probably what the burn is for, you get back into the revenues of the diagnostic side that’s why, it was a bit circumstance and I apologize for that Zarak, but as I mentioned we've got enough capital that will last us right into through profitability, which is expected in the 2010, 2011 timeframe. To give you assurance, and I think later on in a year, probably we will close down the entire guidance and gave you exactly what the guidance might be for the rest of the year, but right now, we want to try and get some of the variables out of the way and then move forward with giving some reliable guidance rather than something that's off the cuff.

Zarak Khurshid – Caris & Company

It sounds good. Thank you.

Operator

Our next question is from the line of Keay Nakae with Collins Stewart. Please go ahead with your question.

Keay Nakae – Collins Stewart

Hey Harry.

Harry Stylli

Hi Nakae.

Keay Nakae – Collins Stewart

Question for you guys regarding the cost of diagnostic test you talked about differing the revenue, but you will be incurring the cost, so can you give us any better clarity of cost per test?

Paul Hawran

Well keep in mind that we're still looking at having a roughly a gross margin around any of the SEQureDx test running around 75% to 80%. So, the cost of the test relative to the actual deferred revenue. I wouldn't say it's a minor piece, but clearly this is a good business. So, it isn't going to be a huge amount if you will.

Keay Nakae – Collins Stewart

Okay. And second question for you Harry, with respect to the RNA study, initially when that was laid out for us back at September you talked about using three independent labs to do the analysis and now you've decide to pull that in house. So, can you give us first of all your thoughts surrounding that decision and then specifically in anyway do you feel like doing it that way would restrict the number of peer–reviewed journal publications that may consider reviewing this data?

Harry Stylli

Okay. These are all good questions, but let me clarify. So, number one the Sequenom Center for Molecular Medicine really needs to be the lab that's tested here because it is going to be only lab that offers the test to doctors in this country. So, the principle investigators reached that conclusion and that's the way they wanted it. The way you manage in this situation is that the lab itself is basically just a tool. Okay, which see randomized blinded samples. Okay and it reports back data that it generates, the principle investigators, both the LDT trial and the RNA study that is called, are the only ones that consolidate the information and the only ones that have access to the amniocentesis and CVS information. Now, over sighting them is a quality control board. Okay, so we are extremely confident that this structure, which is world tested in other places it confirms and assures the independence of the study. Okay. And all journal doors are open to us…

Keay Nakae – Collins Stewart

Okay, thanks.

Operator

(Operator Instructions). Our next question is from the line of Derek DeBruin with UBS. Please go ahead with your question.

Derek DeBruin – UBS

Great. Thank you. Good afternoon.

Harry Stylli

Hi there, Derek.

Derek DeBruin – UBS

So, talking about the DNA test, I know from looking at some of the low papers that some of the issues surrounding the concentration of Fetal DNA in maternal plasmid have been addressed, but I guess, could you give us a little color on how the issue of maybe lingering fetal cells, maternal blood from early pregnancies, mean does the DNA method get around some of the concerns of that?

Harry Stylli

Well the DNA, remember we are looking with cell-free DNA based technology. And there are numerous studies in the literature that demonstrate that within several hours of the baby's born you will not find any cell-free fetal DNA in the mothers blood. So, essentially it sources the foetus and assumes that a baby is born, you take off the supply and it's very rapidly excreted and cleared. So, there is no risk of whatsoever that you will have any lingering cell-free fetal DNA period.

Derek DeBruin – UBS

Great. That's kind of what I thought, but I just wanted to make sure on that.

Harry Stylli

Yeah, absolutely good question. Thank you.

Derek DeBruin – UBS

And I guess the, when you start talking about the CPT codes and the stacking there, can you give us an idea of, how many codes you're trying to stack and what steps there are in the process and just a little bit clarity on…

Harry Stylli

Yeah. So, for example, if you take the current version of the RNA-SNP test, there are 15 markers involved in that test. 12 of which are directed towards authenticity and 3 of which are directed against quantification of RNA. Each one of those has a CPT code. So, each one corresponds to PCR. So, you could multiple the number of PCRs by 15 and you get a number there. Okay, there are other components of the tests and remember this is all published standard CPT codes that we're using to do this, and the reason why we are taking advantage of this is that we believe we can deliver our gross margin requirements using CPT code strategy. The other factor is that we believe our market could support higher prices. Okay, but this one meets our margin needs and could help drive penetration development of the market more rapidly. So, there are other constituents that go into the test in the case. So, for example, sample prep has a CPT code. Enzymes that we use have CPT codes. So, when you take that if you like ingredient, their menu, that recipe if you like a CPT codes, you end up with a stack and that drives the price that most payers are willing to work with. Okay.

Derek DeBruin – UBS

Yeah. That’s very helpful. Thank you. Just a quick question for Paul. Paul could you give us with the, I wasn't quite sure of the net income, interest income line. So, could you just give me a breakout on the interest income and interest expense on that?

Paul Hawran

We actually take a look at on the interest income line, if you back out $650,000 for the additional ARS and another $250,000 for interest expense associated with capitalized lease obligations, everything else is just kind of pulled together from there.

Derek DeBruin – UBS

Okay. I was missing the other 250. Thanks. And if I guess, just one another quick question, Harry, we were without the DNA sequencing meeting last week, and just kind of sparked me to think that you guys had talked about having your optical nanopore technology potentially having some concepts upon that. Are we going to see that, some time in the near future?

Harry Stylli

I think we're making good progress, finally. Okay, we had a meeting with various folks involved and I am actually for the first time in quite a while encouraged by the experiments on scientific progress that’s being made. So, I'm optimistic that we will be informing you shortly. In fact, there is a meeting of all these advanced sequencing types real shortly [Nick Miller], who is if you like the inventor of the technology that we are using, we will be presenting at that particular meeting and he will show some data, that I hope will be well received by the community.

Derek DeBruin – UBS

Great. And just one final question so, are there going to be any lingering carryover revenues from either CMM or SensiGen in the 2009 numbers?

Paul Hawran

Not really, Derek it might be a couple of pennies, but nothing that’s significant or anything that you would really focus on.

Derek DeBruin – UBS

Great. Thank you very much.

Harry Stylli

Thank you, Derek.

Operator

And our next question is from the line of Jonathan Aschoff with Brean Murray. Please go ahead with your question.

Jonathan Aschoff – Brean Murray

Hi, thank you very much. I was wondering you earlier clarified the ethnic breakdown of those 459 samples. Could you just do this in for this 399 both ethnic and the balance of new calls within those enthinicities?

Paul Hawran

I'm not sure about the 399. Are you referring to the September data?

Jonathan Aschoff – Brean Murray

Yes, the earlier one before you added the 459 for total of 858, the original 399.

Paul Hawran

Yeah, if you would like to e-mail us, I would be happy to give that to you. But I don’t have that information at hand right now.

Jonathan Aschoff – Brean Murray

Okay. All right. Thank you.

Operator

Our next question is a followup from the line of Kevin DeGeeter with Oppenheimer. Please go ahead with your question.

Kevin DeGeeter – Oppenheimer

Yeah. Just one clarification on the modeling side, Paul, do you have to, on the cost of goods piece, there is both, a royalty there paid to third parties and just kind of cash cost of goods, when you defer revenue, do you have to recognize just the cash cost of goods or do you have to recognize the full potential royalty payment, even though the revenue is not certain?

Paul Hawran

No, the royalties, you have a good point there, Kevin. The royalties themselves would not need to be expensed at that point in time, only at the time that we are actually making the payment or receipt of the payment if you will.

Kevin DeGeeter – Oppenheimer

So, on tests which you would defer the revenue, you're going to have a functionally much lower perhaps, 50% lower cost of goods if you like it?

Paul Hawran

That’s correct.

Kevin DeGeeter – Oppenheimer

Okay, That’s helpful. Thank you, that’s all.

Paul Hawran

Thanks for the question.

Operator

And our next question is from the line of Elemer Piros with Rodman & Renshaw. Please go ahead with your question.

Elemer Piros – Rodman & Renshaw

One last follow-up, can you here me?

Paul Hawran

Yeah.

Harry Stylli

Yeah, go ahead.

Elemer Piros – Rodman & Renshaw

So, we are talking about the CPT stack, and there is potentially 15 PCR reactions, 15 markers do you see in precedence out there that this CPT stack is used for say more than a handful of PCR reactions to screen for one condition or another?

Paul Hawran

Elimer, it's a consistent stacking for all genetic markers.

Elemer Piros – Rodman & Renshaw

So, there are usually a dozen or even more markers that people look at to call…

Harry Stylli

Elemer for instance if you take the cystic fibrosis panel, ACOG recommended its 23 markers.

Elemer Piros – Rodman & Renshaw

Okay.

Harry Stylli

Some of the commercial products to be in the 80s, maybe even a 100 now, I have lost count. So, yes, there is a precedence for this all over the place.

Elemer Piros – Rodman & Renshaw

Okay, That’s all. Thank you.

Operator

And that is all the time we have today, Mr. Stylli, do you have any closing remarks.

Harry Stylli

Absolutely, in closing thank you for joining us on today’s call and for your interest in Sequenom. We are excited about our substantial progress in bringing our SEQureDx Down syndrome test to market. The significant prospects for our molecular diagnostics and advancements in our genetic analysis business. We look forward to keeping your appraised of our progress. Good day and thank you for your interest.

Operator

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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Source: Sequenom, Inc. Q4 2008 Earnings Call Transcript
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