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Executives

Marcy Graham – Senior Director, IR

Harry Hixson – Chairman and CEO

Paul Maier – CFO

Bill Welch – President and COO

Ron Lindsay – EVP, Strategic Planning

Bill Bowen – SVP and General Counsel

Analysts

Jon Wood – Jefferies

David Ferreiro – Oppenheimer

Vamil Divan – Credit Suisse

Brian Weinstein – William Blair

Dave Clair – Piper Jaffray

Zarak Khurshid – Wedbush

Bryan Brokmeier – Maxim Group

Sequenom, Inc. (SQNM) Q4 2012 Earnings Call March 7, 2013 5:00 PM ET

Operator

Good afternoon, everyone, and welcome to the Sequenom Fourth Quarter and Full Year Earnings Conference Call. All participants will be in a listen-only mode.

(Operator Instructions) After today’s presentation, there will be an opportunity for you to ask questions.

(Operator Instructions) Please also note that today’s event is being recorded.

At this time, I’d like to turn the conference call over to your moderator, Ms. Marcy Graham, Senior Director of Investor Relations. Please go ahead.

Marcy Graham

Thank you, and welcome to the Sequenom conference call today to discuss operating results for the fourth quarter and full year 2012. Joining me today is Dr. Harry Hixson, Chairman and CEO; Paul Maier, CFO; Bill Welch, President and Chief Operating Officer; Dr. Ron Lindsay, Executive Vice President of Strategic Planning; and Dr. Dirk Van Den Boom,, Executive Vice President of Research & Development will join us later for the Q&A portion of our call.

This is also being broadcast live over the Web, and will be available for replay through Thursday, March 15, 2013 on the Investors section of our website at www.sequenom.com. Before we begin, please note that this call will include a discussion of Sequenom and Sequenom CMM’s current plans and intentions regarding product development and commercialization and other matters, as well as expectations regarding Sequenom’s financial resources, our future financial performance, statements that are not historical facts but are forward-looking statements.

Forward-looking statements are not guarantees of performance. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by any forward-looking statement. For information about the risks and uncertainties that Sequenom faces, please refer to the risk factors set forth in our recent filings with the Securities and Exchange Commission. Sequenom assumes no obligation and expressly disclaims any duty to update any forward-looking statements to reflect events or circumstances after today’s call, or to reflect the occurrence of unanticipated events.

With that, I would now like to turn the call over to Harry Hixson. Harry?

Harry Hixson

Thank you, Marcy. Good afternoon, and thanks to everyone online for joining us on today’s call to discuss Sequenom’s fourth quarter and full year results for 2012. We’re pleased to share with you this afternoon a review of a very successful year for Sequenom. The performance results reported today reflect the first full calendar year of the Sequenom Center for Molecular Medicines or SCMMs commercial operations for the MaterniT21 PLUS laboratory developed test or LDT, the noninvasive prenatal test for fetal aneuploidies. The results for both test unit volume and revenues for 2012 surpassed even our own optimistic expectations and the internal goals that we announced at the beginning of the year.

We began 2012 in a solid position with SCMM as the first laboratory in the United States to enter the noninvasive prenatal testing or NIPT market. We continue to improve on our market position during the year as we experienced rapid acceptance and increased sample test numbers. We expanded the clinical utility of MaterniT21 LDT to include reporting of trisomies 18, 13 and fetal Y.

The SCMMs sales force was expanded twice during the year, growing from 20 to 75 field representatives. We hired a team of Medical Affairs Professionals to provide educational and genetic counseling support to doctors and a billing and reimbursement team to assist with contracting and payment. To provide access to physicians and their patients outside the United States, we executed additional international distribution agreements around the world.

In 2012, SCMM accessioned 92,000 total test samples, including more than 61,000 MaterniT21 PLUS tests. At the close of 2012, the annualized run rate from MaterniT21 PLUS test was more than 120,000 test samples, which equates to an average of more than 2,300 samples every week.

We continue to see a significant sample volume growth so far this year. As a result of this, we have increased the capacity of SCMM San Diego location and accelerated efforts to validate and initiate commercial operation at the SCMM North Carolina location.

Our internal goal for 2013 for MaterniT21 PLUS tests performed is over 150,000, and we are confident that we will achieve this internal goal. We will continue to update our annualized run rate when we report results following the close of each quarter as a measure of our progress in penetrating the high-risk NIPT market.

During the fourth quarter, Sequenom recorded a significant increase in total revenues due to the timing of cash collections and the increase in the number of total MaterniT21 PLUS test samples accessioned in the high-risk pregnancy market. The diagnostic testing services business experienced increased revenue in each quarter in 2012. And for the first time in the company’s history, revenues from our diagnostic services business exceeded revenues from our genetic analysis business.

The clinical utility of noninvasive prenatal testing technology has gained rapid recognition and acceptance throughout the U.S. obstetrics medical community. The most important recognition was a positive joint-committee opinion on the use of NIPT technology in pregnant women at high risk of carrying a fetus with a fetal aneuploidy that was issued by the American College of Obstetricians and Gynecologists Committee on Genetics and the Society for Maternal-Fetal Medicine Publications Committee. The joint-committee opinion also stated that it does not recommend the use of NIPT technology in pregnant women at low risk of carrying a fetus with an aneuploidy.

SCMM abides by the joint-committee opinion in the marketing of its NIPT services to physicians only for high-risk pregnancies. We believe these guidelines will drive further adoption of the MaterniT21 PLUS test and strengthen our efforts to obtain insurance reimbursement.

Most recently, we’ve seen positive coverage decisions from prominent commercial payors, indicating their recognition of the importance of NIPT technology and their intention to pay for noninvasive prenatal testing. We believe our MaterniT21 PLUS test sets the highest standard in the NIPT market by providing the highest accuracy with clear positive or negative test results, the broadest test menu, the shortest turnaround time, the lowest non reportable result rates and the highest level of customer responsiveness. During 2013, we plan to continue on this course, as we further reinforce our leadership position in the noninvasive prenatal testing market.

Recently, the Sequenom Center for Molecular Medicine announced that the MaterniT21 PLUS laboratory developed test or LDT is reporting on the presence of fetal sex chromosomal aneuploidies in addition to the identification of autosomal aneuploidies or trisomies 21, 18 and 13.

As part of SCMM’s efforts to continually expand and improve its testing servicing offerings, they are working to introduce further improvements to the prenatal and age-related macular degeneration LDTs. SCMM expects to launch an expanded version of its cystic fibrosis carrier screening laboratory developed test. It captures a broader sense of disease-causing mutations identified by the CFTR2 project and its associated research.

Sequenom continues to make significant investments in research in prenatal and other areas of molecular diagnostics. We also look forward to a peer-reviewed publication of SCMM’s macular degeneration test in the coming months to further demonstrate the need for genetic testing in the management of patients with age-related macular degeneration.

As I mentioned earlier, SCMM is in the process of increasing its MaterniT21 PLUS test capacity by completing the build-out and initiating the validation and licensure of an additional location in North Carolina. This new location is expected to be operational in the second half of 2013 and will increase the total noninvasive prenatal testing capacity from the current 200,000 test samples per year to a minimum of 300,000 test samples per year.

SCMM also continues to expand access to diagnosting testing services for physicians and their patients by hiring additional field sales representatives in the first quarter of 2013. The sale force is expected to grow to more than 85 representatives across the U.S. by the end of the first quarter.

We believe that physicians make their testing decisions based on what they judge to be in the best interest of their patients and they have been loyal and supportive of SCMM’s offerings due to the superior attributes of its laboratory developed test. The size of the dedicated sales force, the extensive medical education programs and the client services team allow SCMM to provide high quality services to physicians and their patients.

I will now turn the call over to Paul who will discuss the details of our performance in the fourth quarter and for the full year 2012. Paul?

Paul Maier

Thanks, Harry. 2012 was a year of great accomplishment for the company ending with a strong fourth quarter which contributed to solid year-over-year results, thanks both to the growth of our diagnosting testing business and the consistent performance of our genetic analysis segment.

For the fourth quarter of 2012, total revenues increased to $33.7 million, 117% over revenues of $15.5 million for the comparable period of 2011. Fourth quarter 2012 revenues from the genetic analysis operating segment were essentially flat year-over-year, while revenues from the Sequenom Center for Molecular Medicine diagnostic services operating segment grew to $21.1 million in the fourth quarter of 2012 from $2.8 million in the prior year period.

Today we filed a Form 8-K with the Securities and Exchange Commission which described that management identified an accounting classification error in our previously issued consolidated financial statements. In periods prior to the fourth quarter of 2012, we classified certain field service personnel and related cost that support genetic analysis services revenue as selling and marketing expense on our consolidated statements of operations. In the restated consolidated financial statements we have correctly classified these costs as cost of genetic analysis product sales and services. Our reported revenues and net loss are unchanged for any period.

The amounts presented in our earnings release and discussed today reflect the corrections which amounted to additional cost of revenues of $800,000 for the fourth quarter 2011 and $3.1 million for the full year 2011.

Cost of revenues for the total company increased to $21.4 million for the fourth quarter of 2012 compared to $9.3 million for the prior year period. Cost of revenues increased due to significant increase in the number of diagnostic tests performed with accessions of 33,000 samples during the fourth quarter of 2012 compared to 8,000 samples accessioned during the prior year period.

In 2012, we met our internal goal of reducing the cost per test of the MaterniT21 PLUS test. For 2013, this cost will increase initially as we absorb the additional capacity once our North Carolina location becomes operational.

Overall, gross margin for the fourth quarter of 2012 was 37% as compared to gross margin of 40% for the fourth quarter of 2011. Gross margin for our diagnostics business was positive for the first time since the launch of SCMM’s MaterniT21 PLUS test even with revenues recorded on the cash basis. Gross margin for our genetic analysis business for the fourth quarter of 2012 was 67% compared to 70% for the prior year period.

Research and development expenses increased to $14.3 million for the fourth quarter of 2012 compared to $13.1 million in the fourth quarter of 2011 resulting primarily from the expansion of capacity and the progress toward validation of the SCMM laboratory location in North Carolina.

Selling and marketing expenses increased to $13.8 million for the fourth quarter of 2012 from $8.2 million for the fourth quarter of 2011 resulting primarily from higher labor cost associated with the expansion of the Sequenom Center for Molecular Medicine sales force and marketing efforts.

General and administrative expenses for the fourth quarter of 2012 were $13.7 million as compared to $6.8 million for the fourth quarter of 2011 due primarily to increased litigation expenses and increased infrastructure to support operations.

Net cash used in operating activities was $14.5 million for the fourth quarter 2012 which reflects improvement compared to the prior quarters. Net loss for the fourth quarter 2012 was $32.8 million or $0.29 per share as compared to net loss of $22.2 million or $0.22 per share for the same period in 2011.

For the full year 2012, the company reported revenues of $89.7 million, an increase of 60% compared to revenues of $55.9 million for the full year 2011. Diagnostic revenue was 52% of total revenues surpassing revenues from the genetic analysis operating segment for the first time in the company’s history.

The company will continue to account for product revenue from our diagnostic testing services on a cash basis until further experience and third party contracts are gained and additional internal controls are established that will allow for a reasonable estimate of collectable amounts before we move to the accrual method of accounting. In 2013, we will bring our billing in-house which will provide us with improved visibility and internal controls to support our gradual transition to accrual accounting.

Cost of revenues increased to $62.3 million for 2012 compared to $26.4 million for 2011 due to the greatly increased number of diagnostic tests performed. SCMM accessioned 92,000 samples during 2012 as compared to 23,300 samples accessioned during the prior year.

Overall gross margin for the full year 2012 was 31% of revenues decreasing from 53% of revenues for the full year 2011, primarily as a result of the additional cost of diagnostic test services which are expensed when incurred, whereas diagnostic services revenue primarily recorded on a cash basis.

Total operating expenses for the full year 2012 were $140.1 million as compared to total expenses of $103.8 million for 2011. This increase was primarily the result of higher selling and marketing expenses to penetrate the market for noninvasive prenatal testing, in particular, higher legal costs associated with patent litigation and infrastructure to support our growth.

Net loss for the full year 2012 was $117.1 million or $1.03 per share as compared to net loss of $74.2 million or $0.75 per share for 2011.

As of December 31, 2012, the company’s total cash, cash equivalents and marketable securities were $175.9 million. Net cash used in operating activities was $78.1 million for the full year 2012, while purchases of capital equipment for the same period totaled $15.2 million.

I’ll now turn the call back over to Harry for his closing remarks.

Harry Hixson

Thanks, Paul. As you can see, 2012 was a banner year for Sequenom with both operational and financial performance that exceeded our expectations. As of December 31, 2012, we had contracts with payors and networks covering 56 million lives. Third-party payors are increasingly providing coverage for non-invasive prenatal test and we’re continuing on our efforts to contract with payors.

We have continually defended and advanced our position as the market leader in the NIPT space and we look forward to our continued focus in 2013. In response through our ongoing engagement with physicians and professionals around the world, we remain firmly dedicated to providing superior testing services, reliable results and unmatched customer service this year and in the future.

With that summary of our business and financial update, we now like to open the call up to questions. Operator, please open the line.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from Jon Wood from Jefferies. Please go ahead with your question.

Jon Wood – Jefferies

Hey, thanks a lot. Good evening. So, Harry, I respect your decision to move to a quarterly disclosure rate here on the volume. Folks are obviously antsy given all the competitive movement in the space. So are you willing to go into at least for this time a little bit more color on where your current volume run rate is?

Harry Hixson

No, only to say that the trajectory that we’ve been on in the fourth quarter seemed to continue into the first quarter.

Jon Wood – Jefferies

Okay. Understood. For Paul, have you seen yet or do you expect to see kind of more regularity or faster cycle times or change in reimbursement rate from the out-of-network piece of your business now that basically all the major insurers have endorsed your technology? I mean, have you seen kind of a change in behavior at least on the appeal side when you’re fighting for the reimbursement rate?

Paul Maier

That’s a good question, Jon, and as you might expect that certainly removes one of the barriers that many of the payors had and while it’s hard to pinpoint down on a detailed basis, in general, we do see that that helps with the efficiency of the collection process and at the same time we are expanding our investment and our billing infrastructure so we can help those payors pay a little quicker and we were pleased with the response that we saw in the fourth quarter of last year. And the only other issue that might be out there that is hard to calibrate is the fact that the coding changes took effect for the industry on January 1 of this year and that has, even though it’s a little early to tell, that will certainly have some impact on it. But, overall, I think we see the payment cycle process improving during this year.

Jon Wood – Jefferies

Okay. Understood. And then on the expense structure, there was a pretty big uptick in SG&A in the fourth quarter. Is that a trend we should expect to continue or should we normalize back more towards the rate before the fourth quarter? Just any color you’re willing to give on that. Yeah.

Paul Maier

Yes. While we don’t give guidance on that, clearly and there’ll be more details in our 10-K once we file that in future. Clearly, legal expense was a driver of SG&A last year, and it represented a good portion of the growth and the volatility that we saw and we would expect there to continue to be volatility in that particular category, but it’s very difficult to give any expectation of a pattern because the legal process, we don’t necessarily have the control over the timing of that.

Jon Wood – Jefferies

Understood. Thank you.

Operator

Our next question comes from David Ferreiro from Oppenheimer. Please go ahead with your question.

David Ferreiro – Oppenheimer

Thank you for taking the questions. I was just wondering if you can give us a little bit more color on the competitive landscape. In terms of market share, I mean what percentage of the high-risk volume do you think you guys have? And then, maybe just on the market as a whole, what percentage do you think of low-risk noninvasive testing volume represents total volume? It’s a very roundabout way of asking that question.

Bill Welch

Well, this is Bill Welch. Those are great questions. This space does not have any external as far as I know ways to get broader market share. In the drug side, you have IMS and other things and approaching the LDT market, it’s just what people will self-report. And we’ve been very transparent on two things, what the units we have and where the units come from and those were all from the high-risk category for patient testing.

We do think that transparency works well with providers providing clear results and we also think it works well with payors when we go in and have discussions. In terms of how we’re doing, we see things continue to move forward. It’s hard to gauge the impact of competition as it applies to what could be considered a general purpose screen test. I don’t see that getting much traction with payors, but certainly providers I suppose could have a leakage on that and that leakage is not coming from us.

David Ferreiro – Oppenheimer

Okay. And then just generally since we’re sort of talking about low-risk market right now. When do you think that will be an opportunity for you guys, and how you’re thinking about that and what it’s going to take in terms of clinical data to actually realize that kind of potential?

Bill Welch

Well, I think there is two parts to that. It’s a very interesting I think alluring, appealing for a variety of folks, say physicians and others. But we stood behind the data we have and the reports we do come out of the studies that we had done and that’s how reports come out with the positive sensitivity and specificity thereof.

I do think this NIPT can get to a general purpose, although the economic tradeoff there is interesting because we’re offsetting that being aminos and for broader the question is, are you offsetting the aminos? So, anyway, I think from our standpoint we would go forward with probably a more low-risk type program once we have tested the data and feel confident and as you may or may not know we have ongoing clinical studies for collecting in the low-risk marketplace and those things are ongoing.

David Ferreiro – Oppenheimer

Okay. And then finally just a longer term technical question. You’ve said in the past that you’d like to become technology agnostic and just wondering if you can provide an update on where you are there and what the hurdles and timeframes are? It would be greatly helpful.

Ron Lindsay

This is Ron Lindsay. Hi. I think technology agnostic in terms of instrumentation is true. You may or may not know this. I recently changed my title perhaps due to my age, but I’m not in charge of strategic planning. So, I think the success of the launch of T21 and the expected revenues and growth of that were in the midst of an early stage of planning. Where we’re going to go next? We’re going to keep that fairly quiet at the moment, but I can tell you that advanced technologies will be a big part of that and we look forward to ruling that out over the course of the next 12 months.

David Ferreiro – Oppenheimer

Okay. Thank you and congratulations on a new job, Ron.

Ron Lindsay

I think the pink slip comes next.

Operator

Our next question comes from Vamil Divan from Credit Suisse. Please go ahead with your question.

Vamil Divan – Credit Suisse

Yeah. Thanks for taking the question. Again, I appreciate some of the comments you made and some of what you don’t want to disclose at this point. Maybe if you could just kind of give us a little bit more of a sense on the timing around the payor contracts? Obviously, you had some comments between 2012. You’ve made some expectations for 2013 more broadly. Is there anything that we should expect in the near-term? Is there any sort of color around when you’d expect some of the contracts actually signed now that you’ve received some of the positive endorsements from the technical reviews?

Bill Welch

I think just to be clear on payment, we did get paid and we had a great year revenue wise last year. Those are all cash collections revenues and as we go forward, we would like to get more towards the accrual basis, but just to emphasize, a big chunk of those were done as the technology was developing and doctors were ordering and such. What really happened in the last few months is – and I think it’s phenomenal, but a number of different payors have been reversed or brought forward coverage decisions.

And so to be clear what that means is it moved away from investigational into that they agree to the doctors in their networks this is something they would agree to pay. And if you read those of course our brand name isn’t mentioned in many of those technology coverage assessments. What that means is that there is both in and out of network opportunities for labs and we’re out of network with a number of large payors and we’re looking to move in network, but that does not necessarily mean payments not being received.

And so I think the idea between coverage and contracting the payment it’s a variety of things that take place to get revenue, and we’re moving forward on all fronts. We do have goals to get contracts. We’re moving. Those are going fine, but I just want to emphasize that even outside of contracts, out of network laboratories do get funded.

Vamil Divan – Credit Suisse

Okay. And then my second question is more on the legal side and I’m not sure about others on the call, but I definitely have a little bit of a challenge keeping track of all the stuff that’s going on there. And you guys had some arguments in front of the Court of Appeals for the Federal Circuit back in January. Can you just give us broadly an update on kind of where things stand on the various legal issues?

Harry Hixson

Well, I think with respect – this is Harry Hixson. With respect to the Court of Appeals for the Federal Circuit, the action there, we are waiting the court’s opinion. It could come any day. And normally one would expect that just estimates that we would hear something in the next – within the next 45 days, but that’s only an estimate and the court is obviously free to render their opinion whenever they want to.

Vamil Divan – Credit Suisse

Okay. I know there’s been with the new – some of the newer players in the space has some comments around the IP and who has a foundational IP, any new comments that you wish to make on that front at this point?

Bill Bowen

Hi. This is Bill Bowen, General Counsel. I don’t think there have been any material developments with respect to the litigation matters since the disclosures in the most recent 10-Q!. There are things in process but there are no material developments to report at this point in time.

Vamil Divan – Credit Suisse

Okay. Thanks for taking the questions.

Operator

Our next question comes from Brian Weinstein from William Blair. Please go ahead with your question.

Brian Weinstein – William Blair

Hi. Good afternoon. Thanks for taking the question. My question is on why in general do you think that it is taking longer than you expected with the larger payors? You had talked about hopefully getting two by the end of the year. That’s obviously slipped a little bit. Is there a certain dynamic at play? Are they speaking with multiple players simultaneously at this point? Why do you think it’s longer?

Bill Welch

Brian, I’m not sure it’s taking longer. I mean, I think what’s going on is we have a disruptive change by our technology. I think it’s going really fast. The payors work through their own process. It’s actually very much procedural. I think we were – we’ve had a goal that to get two contracts in last year. We set goals. It wasn’t like you had to make a statement. I think we had a goal that we had 25,000 tests last year too. That one we overachieved.

But getting a contract with two national payors we didn’t, but we are getting paid. And so we still have goals to get contracts this year and we still have goals for receiving payment of such. So I don’t see, to be honest, anything unusual. The unusual part is that five major payors have now issued positive coverage or reversed their decisions that they had in place for the last three or four months, I think that’s pretty insightful.

Harry Hixson

Yeah. And then you look at the history of the adoption of new technology, new tests in the marketplace, the speed with which the professional societies came out with their guidelines and the major payors recognize those guidelines and said that they would reimburse for the technology. The time scale there is, has to be the most rapid in the history of the diagnostic business. So I think the speed here is very rapid and – or it has been to this point. So, we continue to believe that we will achieve the goals on the major payors and provides under contract that we have – we announced in our goals at the JPMorgan conference.

Brian Weinstein – William Blair

Okay. And then on gross margin, I believe you said that you met your internal goals on gross margin for the year. I’m just going back to my notes trying to see what those were. I believe it was $350 or $400. Can you confirm what those internal goals were and where you think that your cost to goods sold can get over time?

Paul Maier

Brian, this is Paul Maier. For the MaterniT21 PLUS test, our internal goal was to get in the range of $500 to $600 per test by the end of the year 2012. That was the goal, the internal goal that we achieved. And we aren’t giving any goal going forward. As we mentioned, we do expect in the short run once we bring our North Carolina facility into operational status, the amount of cost of goods allocated to an individual test might increase, but it will depend on volumes. And I think long-term, we do expect with the efficiencies that come with volume and other parts of the expense basis we look at, we try to manage those and optimize those. And so, we do expect that we’ll be able to improve that over time and with volume increases. But we haven’t disclosed any specific target.

Brian Weinstein – William Blair

At the Analyst Day last year I thought that you had given a number 12 or 18 months out after kind of reaching scale. Are those numbers and those decreases still valid to think about?

Paul Maier

Well, I think that we achieved a number of those last year, because we implemented certain efficiency improvements with our multiplexing and with the new version of reagents, and I think longer term, over time we would still continue to do that. And one of the benefits we get from operating in North Carolina, once we finish the validation and license phase and we get operational is the – a number of the cost elements in North Carolina are lower than the costs in California. So, we’ll look at our management of where those volumes are in the future. So, we have a few tools that are disposal, but I think we’ll be very careful about any guidance that we might give in that.

Brian Weinstein – William Blair

Okay. Thanks.

Operator

Our next question comes from Bill Quirk from Piper Jaffray. Please go ahead with your question.

Dave Clair – Piper Jaffray

Hi. Good afternoon, everybody. It’s actually Dave Clair in for Bill. So I was just hoping to get an update on pricing and what your pricing expectations are as you enter into contracts with the payors.

Paul Maier

Well, this is Paul Maier again. We don’t really disclose any of our pricing expectations, and for a lot of reasons, for competitive reasons, for purposes of not biasing any of our negotiations with the payors and, in fact, wherever we have agreements we’re not allowed to disclose what those are, but thus far, the experience we’ve had, we’ve been very pleased with it and I just don’t think we can be any more helpful in that regard.

Dave Clair – Piper Jaffray

Okay. Thank you. And then in terms of the sales force, I know you kind of laid out that we should expect over 85 reps at the end of the quarter here. But what should we expect in terms of the appropriate sales force ultimately to address the market?

Bill Welch

Okay. So this is Bill again. This last sales expansion completes our initial assessment of the entire marketplace. Not to say that we wouldn’t add in the future, but it’s really what part of the final pre-plan that gives us good reach and ability to the target audience we have in the high risk market from a prescriber standpoint. And that means we should be able to get to our key customers within say a month or more or another way to think about our reach to be between 80% or so.

We just think it’s well sized. Now, at some point in time, if we think it makes sense to even have more, we’ll consider that. Or if the market expands, we can consider that as well. But I think if you think of the models just right now for the next foreseeable future, I think we feel pretty good with this last expansion.

Harry Hixson

I’d like to point out that 85 is the prenatal sales force.

Bill Welch

Yeah.

Harry Hixson

And that we have additional sales reps for the age related macular degeneration test.

Bill Welch

And also that sales team is dedicated to help educate providers and provide service. And it’s one of the largest I understand in the marketplace today. There’s others that do logistics and such. But in terms of calling on professionals and giving them the education they need, that’s a large sales force.

Dave Clair – Piper Jaffray

Okay. Thank you. And then earlier in the year you said 56 million covered lives. Do you have an update in terms of where we are currently?

Harry Hixson

That was the end of the year number.

Dave Clair – Piper Jaffray

Yeah.

Harry Hixson

We’ve continued to add contracts. We will provide an update at the end of – when we report our first quarter results.

Dave Clair – Piper Jaffray

Okay. Thank you.

Operator

Our next question comes from Zarak Khurshid from Wedbush. Please go ahead with your question.

Zarak Khurshid – Wedbush

Hi, guys. Good afternoon. Thanks for taking the questions. Congrats on an impressive ramp thus far. Just curious on Medicaid. How should we be thinking about the reimbursement there, the fraction and list price?

Bill Welch

On Medicaid, we had been getting paid in last year and going forward we do the same. Medicaid’s usually are slower to adopt and the reimbursement is spotty. Sometimes it’s good. Sometimes it varies by state and otherwise. I’m not prepared to tell you what the percent is of list, but our goal is to contract with all relevant payors.

And so, Medicaid’s to be price sensitive, and we’ll engage. If that makes sense to us, we want to make sure they have access as well as the other commercial and HMOs and the like. And the only one that we’re not working with right now would be New York because we’re still waiting to get our New York licensure, and that’s going well. And once that happens, we would approach New York Medicaid.

Zarak Khurshid – Wedbush

Okay. That’s helpful. And then in terms of your current customer base, just curious how exactly they’re using the test. Are they using it – are they using a noninvasive test for all high-risk women? Or is there a certain fraction if they still stand straight to invasive procedure? Is there any significant potential for increase in kind of same-store sales so to speak?

Bill Welch

Well, same-store sales, the last part confused me. But in terms of the first, we have been very transparent. I think that’s worked well. Do what you know and educate along those lines, and so the test request form which is simply – it’s like the prescription doctors fills out, we require them to fill in one of the four box to categorize the high-risk pregnancy and that’s what we’re testing.

What they do with our test is we hope is much like the guidelines that came out by MBRIA Tech Assessment Committees and it’s all about feeling safe in terms of when you get information that has indications of complexity, we would hope that they would continue forward to move towards invasive or other things to find out about the pregnancy. We don’t practice medicine, we provide information. That’s the best way to describe it.

Zarak Khurshid – Wedbush

Got it. But any sense for when you – when a doctor begins using their tests, do they go all in? Are they – from thereafter are they using the test for all high-risk women?

Bill Welch

We’ve touched a lot of – we’ve initially focused most of last year with the, what’s called the maternal fetal medicine specialists, the key opinion leaders, because they’re the ones ultimately making the high risk obstetrics decisions. And I think that’s proved really well for us. We’ve got a very high penetration there and there’s a trust in both the technology and the things we said. As we’ve gone forward – as we broaden out to the OB/GYN’s that work with the MFMs and the guidelines allow us to go little deeper in that. We have a high return rate by MFM as you might imagine, and that comes back through clarity and trust and customer service and things that come back with a strong professional organization.

Zarak Khurshid – Wedbush

Got it. Thanks for that. And then, I think that’s a good segue. Can you just talk about maybe the plain vanilla OB/GYN market? And I’m not talking about average risk, but rather high risk women that present to their OB/GYN. Does much volume come indirectly from orders at the OB/GYN level? Or is most of the business from the MFMs?

Bill Welch

We haven’t broken that out to investors, I don’t believe, in terms of like the fraction of the OB/GYN marketplace, but now with guidelines from the ACOG and I think it’s telling that they did their guidelines in conjunction with the SMFM. So they both came out together. I think that’s significant and we now are working with obstetrics, OB/GYNs along with those guidelines. And so, we’re basically following the community here. And as you might imagine, we’re getting better uptake. There’s more OB/GYNs out there numerically than MFMs and that’s an area for growth with us. But I think now it’s a matter of going to them with the education that MFMs would like us to say.

Zarak Khurshid – Wedbush

Got you. And then the final question just on the international opportunity, how are things progressing in Europe? And any sense for the penetration rate of noninvasive in Europe? Thanks.

Harry Hixson

Well, in Europe, as you know, we have a licensee, LifeCodexx, for the German-speaking countries and we are – we have a number of what we call client bill-type contracts with various groups. In other countries, I’d say LifeCodexx has had pretty of what we can tell a very nice start with their test. And I’d say for the rest of Europe, it’s a bit what I’d call early days and we’ll continue to do – sign other agreements and we’ll look for other licensees where it’s appropriate.

Zarak Khurshid – Wedbush

Great. Thank you.

Harry Hixson

Not only – okay, fine.

Operator

And our next question comes from Bryan Brokmeier from Maxim Group. Please go ahead with your question.

Bryan Brokmeier – Maxim Group

Hi. Good afternoon. So, the volume rate – I know somebody already asked you about the run rate, but the volume run rate in December increased to about 120,000. That was really strong acceleration from November. You said that it continues to grow so far this year, but are you talking year-over-year? Or is it still growing sequentially from December?

Harry Hixson

The trajectory we saw in the fourth quarter has continued into the first quarter.

Bryan Brokmeier – Maxim Group

Okay. And...

Harry Hixson

Okay.

Bryan Brokmeier – Maxim Group

Okay. Thanks. And on average, how much per test does the appeals process cost you? And is that hitting the G&A or where in the income statement does that hit?

Paul Maier

With respect to appeals, we don’t break that out. We have resources in our billing group that work on that, so that would be in G&A operating line, any expenses for billing.

Bryan Brokmeier – Maxim Group

Okay. And the focus of the call has been on MaterniT21 and rightfully so, but could you talk a little bit about your outlook for the Genetic Analysis business and what’s going on? What’s going to allow you to have that business grow or perform differently than it did in 2012?

Harry Hixson

Well, I think we expect that the GA business will have some modest growth in 2013. The most significant thing that’s going to impact the GA business going forward is that we plan to file a 510(k) for the MassARRAY system. And once that is approved, the MassARRAY, it will open up new markets for human diagnostics, and for us if we want to develop test – clinical tests for humans that work on the MassARRAY system.

So we think long-term that’s the – and probably we won’t see the impact of that until later this year or in 2014, depending on how long the FDA approval process takes, but we think that’s – we’re making significant investment to do that. And we had it as a goal to finish by the end of the fourth quarter of 2012. That slipped into 2013, but we believe – I think we’re currently thinking we’ll have it done by the end of the second quarter.

Bryan Brokmeier – Maxim Group

Okay. Thanks, Harry. And lastly, Paul, in 2012 you built the North Carolina facility and purchased the (inaudible) for that facility. What will be your CapEx needs in 2013? And are you able to give us an idea of what dollar amount that should be?

Paul Maier

We don’t give guidance on capital expenditures, but suffice it to say, I think our major capital expenditures are behind us and in the future it will be more within the normal range. And we already have the equipment in place in North Carolina that we need to be operational this year and we’re just going to finish up that validation process.

Bryan Brokmeier – Maxim Group

Okay. Thanks very much.

Harry Hixson

Thank you.

Operator

And ladies and gentlemen, at this time, we’ve reached the end of the Q&A session and I’d like to turn the conference call back over to management for any closing remarks.

Marcy Graham

Well, thank you, everyone, for joining us today on the call and for your continued interest in Sequenom. If there’s any further questions about today’s results or you need additional information, please contact me at 858-202-9028. Thanks.

Operator

Ladies and gentlemen, that concludes today’s conference call. We do thank you for attending. You may now disconnect your telephone lines.

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