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Sequenom, Inc. (NASDAQ:SQNM)

Q1 2009 Earnings Call Transcript

April 29, 2009 4:30 pm ET

Executives

Ian Clements – Senior Director, Corporate Communications

Harry Stylli – President and CEO

Paul Hawran – CFO

Analysts

Tony Butler – Barclays Capital

Charles Duncan – JMP Securities

Elemer Piros – Rodman & Renshaw

Pamela Bassett – Cantor Fitzgerald

Keay Nakae – Collins Stewart

Kelley Roche – Leerink Swann

Zarak Khurshid – Caris & Company

Bob Hodgson – BlackRock, Inc.

Ram Selvaraju – Hapoalim Securities

Derik De Bruin – UBS

Jerry Kalmatos [ph] – Trifund [ph]

Louis Corrigan – Kingsford Capital

Evan Lodes [ph] – Barclays Capital

Bart Classen – Research Partners

Richard Deutsch – Ladenburg Thalmann

Scott Gleason – Stephens, Inc.

Operator

Welcome to the Sequenom First Quarter 2009 and Operational Update Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a Q&A session. (Operator instructions) As a reminder, this conference is being recorded, April 29, 2009. I would now like to turn the conference over to Mr. Ian Clements, Senior Director of Corporate Communications. Please, go ahead, sir.

Ian Clements

Thank you. Good afternoon, everybody. Joining me today are Dr. Harry Stylli, President and Chief Executive Officer, and Paul Hawran, Chief Financial Officer.

Earlier this afternoon, Sequenom issued two news releases, one release announcing a delay in the launch of Sequenom's Down Syndrome test and the other announcing Sequenom's financial results for the 2009 first quarter. If you have not received these releases or if you would like to be added to the Company's distribution list, please call Investor Relations at the Company or you can sign up through the IR section of our website.

Before we begin, I would like to inform you that this call will include a discussion of Sequenom's current plans for the launch of the Down's Syndrome test and the sufficiency of Sequenom's financial resources to do so, as well as Sequenom's financial guidance and other forward-looking statements. I would like to emphasize that these statements are based on information available to Sequenom to-date and subject to various risks and uncertainties including those more fully described in the company's SEC filings. The company's actual results may differ materially from statements made during today's conference call and the company undertakes no obligation to update any of these statements.

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

Harry Stylli

Thanks Ian and thanks to each of you for joining us. As you all are aware, we have accelerated the timing of our earnings call in order to give you information on a number of issues that have come to light which will have a significant bearing on the timing of the launch of our Down's Syndrome assay.

As a result of internal inquiries, we have determined that the R&D study data associated with the Down's Syndrome assay was mishandled by individuals in our company. This raises significant concerns regarding the integrity of that data. I am enormously disappointed to discover this could happen here and I am even more disappointed that it would delay such a promising technology that is based on what we still believe to be solid and truly breakthrough science.

To say we are taking this situation seriously would be a massive understatement. The Board and I have taken several steps at this point. We have suspended four individuals and have put a new team in place to oversee the R&D studies for our prenatal diagnostics. The Board has convened a special committee of independent directors to oversee an investigation. The committee will oversee that effort and have selected Bob Rose to conduct the probe. He is a partner in the Law Firm of Sheppard Mullin Richter & Hampton where he currently specializes in civil fraud. Bob's experience includes 12 years as a federal prosecutor specializing in fraud investigations.

We have alerted the SEC and we will keep them apprised of our actions. We have also informed the FDA and will continue to follow any recommendations they may have for us. I want to be very clear about this. We will take whatever additional actions that are necessary to protect confidence in this Company, our research, and our products. The Company has suffered a temporary setback to its plans. Let me reiterate that we are fully determined to bring our Down's Syndrome assay to market expeditiously. Ideally, Sequenom plans to continue to develop both the RNA and DNA methods in parallel and also plans to have a validated Down's Syndrome test in the fourth quarter of 2009.

Under the circumstances and as supported by our key clinical opinion leaders, the Company now intends to launch the Down's Syndrome test upon publication in a peer review journal of the results from the ongoing large independent clinical studies which are designed to be practice changing for Down's Syndrome testing. The Company believes it is adequately capitalized to develop and launch its menu of non-invasive prenatal tests. We look forward to improving prenatal care through our innovative, non-invasive prenatal tests, based on our proprietary technology.

Before taking questions on this matter, I would like to turn over the call to Paul Hawran to discuss our quarterly numbers and then we will answer your questions.

Paul Hawran

Thanks, Harry. My comments will be brief today. As published in our press release, our revenues in the first quarter were much softer than expected, primarily due to effects of budgetary cuts due to the global macroeconomic downturn. As part of the restructuring, we laid off about 30 employees; although this was a tough decision, we believe the changes are necessary to put the Company on a path to profitability and that is in the right response to the market conditions.

We have also examined our genetic analysis business in detail and we have realigned this business so that not only can we continue to support our existing customer base but we can also take advantage of what we see as growth areas such as the use of our technologies in translational research and clinical trials.

We believe the financial guidance issued today takes into account the slowdown in our genetic analysis and the recent developments in our molecular diagnostic businesses. A primary objective for the remainder of this year is to preserve capital to ensure the commercialization of our noninvasive prenatal diagnostic tests.

Accordingly, we expect our total corporate cash burn for 2009 to be between $45 million and $52 million and that we would end 2009 with cash in excess of $50 million.

I would now like to turn the call back to Harry.

Harry Stylli

Thanks, Paul. So, with that overview of our results and our plans, at this time I would like to open the call to questions. Operator?

Question-and-Answer Session

Operator

(Operator instructions).

Harry Stylli

Okay, operator. We are ready for the first question.

Operator

And your first question comes from Tony Butler with Barclays Capital.

Tony Butler – Barclays Capital

Thanks very much. Harry, three questions. One is what evidence do you have that the diagnostic test is validated at all? The second is, can you define a little more specifically what internal inquiries actually meant? How did you go about an internal series of questions and why did you do it? And the third question, please just review for us the large independent study that you are referring to, where you are in that process, how many patients, etcetera, do you anticipate again the timing? Thanks very much.

Harry Stylli

Tony, thank you for the questions. Because of confidentiality considerations and because the investigation is not complete, I am limited as to what I can say. But I can tell you this, regarding the large independent clinical studies which are ongoing, these are the Brown University study which is in a patient collection mode and the LDT study which is also in a patient collection mode. Between them, they involve about 15,000 patients and it is these studies, when they are executed, either more than likely in the first part of 2010 that we are likely to launch the test with. We expect to have a validated Down's Syndrome test by Q4 or in Q4 of this year.

Paul Hawran

Thank you, Tony.

Operator

Your next question comes from the line of Charles Duncan with JMP Securities.

Charles Duncan – JMP Securities

Hi. Harry, I had a question regarding really when you started to suspect or become concerned about the validation of the test. Can you give us more color on that and whether or not it was related to the presentation of data in January?

Harry Stylli

What I would say is that the data in question relates to data that goes back to June. The September and January releases of information, I believe that information is now suspect. And again, I am going to sort of repeat this. I can't really go into any of the details because of the confidentiality considerations of the investigation is not complete. That really ties my hands.

Charles Duncan – JMP Securities

Harry, I understand that but could you provide us any color on not necessarily the individuals of involved but the types of functions that they performed?

Harry Stylli

They were all folks in the R&D organization.

Charles Duncan – JMP Securities

Okay. A little bit more color on when you intend to launch? Can you provide, is this after the data and after the present publication? Do you expect publication by the first part of 2010? Or is that perhaps going to be in the later part of 2010?

Harry Stylli

That's still being finalized. We expect the assay to be fully validated in Q4 of this year and then we are going to be working very diligently with the principal investigators to ensure that the patient cohorts for the large independent studies are in place. We would expect the testing to happen very rapidly and publication to follow in pretty fast order. I am not going to give a specific time as to when we expect publication to occur.

Charles Duncan – JMP Securities

Okay. I have got that. And then finally, sorry to dog this, can you give me a sense as to whether or not this was data, data analysis, or sample handling or presentation of the data that was a concern?

Harry Stylli

Again, I would like to provide more color but because I hate to be saying this all the time but there are certain things I just can't talk about because this is still a live investigation. What I will say that it really relates to the announced R&D test data and results. That's about the only thing I can say. I can't give you any more color beyond that.

Charles Duncan – JMP Securities

And then do you expect to provide an update once you complete the investigation and is that measured in days, weeks, months?

Harry Stylli

Again, I do not have a specific time range in mind. That's really down to the independent investigator. So, I can't really give you a timeframe. But I would anticipate that we would provide more color in due course.

Charles Duncan – JMP Securities

Okay. Thanks. I will hop back in the queue.

Operator

Your next question comes from Elemer Piros with Rodman.

Elemer Piros – Rodman & Renshaw

Hi, Harry, can you hear me?

Harry Stylli

Yes. I can hear you.

Elemer Piros – Rodman & Renshaw

Not a good day.

Harry Stylli

Not a good day.

Elemer Piros – Rodman & Renshaw

Harry, I would repeat Tony's question. What evidence do you have that we have something that is accurate? Do you have anything when you examine the compromised data set? I am sure you want to know personally. Why would you – ? What evidence do you have that you should continually invest in this program? This is a difficult question. But I think you should understand that if we can get any comfort level, if we only have theoretical evidence that this test is promising then people will not continue to believe in it until you show evidence to the

Harry Stylli

Thank you, Elemer. That's a very pointed question. I have got to answer the first part, in discussing any evidence, I cannot, because I need to respect the Board committee's authority and their choice is to conduct an independent investigation. I will add this. The science is extremely solid. The assays show the potential and we believe both the RNA and DNA assay is going to fulfill their potential. We have got some very high powered teams working on this currently. There is more than optimism that these tests will see the light of day as noninvasive prenatal diagnostics.

Elemer Piros – Rodman & Renshaw

You used the term "belief", Harry. We are dealing with science. Let me move on to another different part. Do you think that the integrity of your announcement, vis-à-vis both the RNA and DNA tests are in jeopardy?

Harry Stylli

I would say the data that was presented is questionable. I want to make the distinction, the clinical performance that was portrayed for these tests appears to be questionable.

Elemer Piros – Rodman & Renshaw

Okay. Now, you said that by the fourth quarter, we would have a validated test. So, I assume that we have to revalidate both the RNA and the DNA tests. Is this correct?

Harry Stylli

Yes. Under the circumstances, that's exactly what we are going to do.

Elemer Piros – Rodman & Renshaw

What do you mean by "validation"? 1000 samples from both? From each?

Harry Stylli

I don't want to go to absolute specifics, but what we are planning to do in terms of validation is take the tests through some improvements to the fundamentals of the assay. We have talked in the past by adding additional markers, for example, and other control features. That ultimately will include systematic testing which may involve 1000 patients if not more for each test. But the point is that we will not commercialize the test at that point. We will then initiate the practice changing independent studies and only launch the tests if those are satisfactory.

Elemer Piros – Rodman & Renshaw

Obviously. So, then we are going into the fourth quarter. You have a validated test or tests, let's presume. Would you be able to share the results with investors?

Harry Stylli

We would hope so, that we can. Okay? The other thing I want to point out is that we also anticipate maturing other tests which includes Rhesus D, cystic fibrosis, and Fetalxy.

Elemer Piros – Rodman & Renshaw

So, those would be launched, the other tests would be launched in the third quarter?

Harry Stylli

From the third quarter on. Absolutely. Those will be launched based on what we know today.

Elemer Piros – Rodman & Renshaw

The four employees who were suspended? Are they foot soldiers or are they up in the higher echelon?

Harry Stylli

I do not want to provide any comment out of respect of the confidentiality.

Elemer Piros – Rodman & Renshaw

Okay. I will get back into the queue, Harry.

Harry Stylli

Thank you.

Operator

Your next question comes from the line of Pamela Bassett with Cantor Fitzgerald.

Pamela Bassett – Cantor Fitzgerald

Hi. Thanks for taking my call. Just to follow-up on what Elemer was asking with regard to timing of this new validation study that you are doing? Do I understand correctly, Harry?

Harry Stylli

Yes?

Pamela Bassett – Cantor Fitzgerald

That would be completed prior to processing samples that are being collected, that would be collected for the LDT and the large study?

Harry Stylli

Absolutely. That's exactly the plan.

Pamela Bassett – Cantor Fitzgerald

So, is that kind of a mid-year focus like by maybe June or end of – ? You might have that new validation

Harry Stylli

No. We expect to have validation data in Q4. That does not mean we won't have clinical data beforehand but we would need to see significant validation data in Q4, along the lines of what we discussed with Elemer Piros. That juncture, if we are happy with what we are seeing and it meets our quality and processes, we would then transfer the tests to initiate full clinical studies along the lines of the LDT study and Brown University study.

Pamela Bassett – Cantor Fitzgerald

Okay. So it's a much longer timeframe?

Harry Stylli

Actually, I want to point out one thing. The clinical trial, the Brown University and LDT study were not going to report until the end of this year and up to the first half of 2010 and I have got to say that if things go according to our plans, our revised plans, we would expect to be in that timeframe.

Pamela Bassett – Cantor Fitzgerald

So, right now I am a little confused about what's going on with the large scale study and the LDT currently.

Harry Stylli

Absolutely. What's going on with both of those studies is that we are recruiting patients, okay? We are recruiting patients and those patients are being archived at the principal investigator's facilities in general. Once we get the full allotment of patients, we should have a validated test and at that point we will begin very rapid testing and if that goes well and the analysis goes well, we expect the principal investigators would expect to submit for publication. Only then would we launch these tests.

Pamela Bassett – Cantor Fitzgerald

So, there is enough confidence currently among executives at the Company, as well as PIs and others to move forward with patient recruitment. That's a significant decision right there.

Harry Stylli

Absolutely. Like I said, we are not doing this lightly. We don't want to waste time or anything like that. There is a strong belief in the fundamentals of our science. There is strong belief in the ability to develop these assays. And I know through discussions, very recent discussions, that there is a commitment from the principal investigators to move these tests forward.

Pamela Bassett – Cantor Fitzgerald

Okay. Thanks for reviewing the timing yet again. I appreciate it.

Harry Stylli

I appreciate your question, Pam.

Operator

Your next question comes from Keay Nakae with Collins Stewart.

Keay Nakae – Collins Stewart

Yes. Good afternoon.

Harry Stylli

Hello there, Keay.

Keay Nakae – Collins Stewart

Just to be clear, Harry, the compromised data includes the June '08, September '08, January '09 RNA plus the January '09 DNA?

Harry Stylli

Yes. I mean, today's announcement regarding the test results, the test data and results, I think we said this in the press release, two procedural previous announcements about the data. That includes the data from June 4, 2008, September 23, 2008. I have got a few other dates there as well. December 1, 2008, January 28, 2009, and February 3, 2009.

Keay Nakae – Collins Stewart

Okay.

Harry Stylli

Which were all releases around the three studies that began, that were first publicized in June and September and in January.

Keay Nakae – Collins Stewart

Given that this issue has now come up, why do you think it's still appropriate to go forward with what had been the prior validation and independent validation studies. Would not this issue now call for maybe a change in strategy, maybe going back to what you had originally proposed for the RNA study of having the data evaluated at independent, external labs, not your R&D lab or your lab in Michigan?

Harry Stylli

This is not about the lab. That is not really a factor here. Unfortunately, I can't elaborate at this stage because of the independent investigation.

Keay Nakae – Collins Stewart

Okay. It just seems to me the game has changed here and the level of scrutiny that's going to be put upon you guys and therefore the importance of independent validation has gone up significantly.

Harry Stylli

I would agree. It was always significant. I want to assure you of that. Independent validation was always part of the strategy. This is why we had these large practice changing studies which were independent. Okay? Getting through those studies, we wanted to ensure that we were operating in a manner that would enable us to actually be successful in those studies. Okay? So, I think the strategy is a sound one and I am looking forward to the conclusions of the independent investigator so we can elaborate into the specifics at a future date.

Keay Nakae – Collins Stewart

Okay. I will move on. Thanks.

Operator

Our next question comes from Kelley Roche with Leerink Swann.

Kelley Roche – Leerink Swann

Hi, Harry and Paul. How are you?

Harry Stylli

Hello.

Kelley Roche – Leerink Swann

So, just to clarify one more time, you have the LDT and the Brown study, but then the data you intend to launch with in the fourth quarter through the peer review, how many samples can we expect through that?

Harry Stylli

We don't intend to launch in the fourth quarter. That's when we believe we will have a validated assay. So, we now are only going to launch this test if it's successful in both either the LDT study or the Brown University study.

Kelley Roche – Leerink Swann

Okay. And publication of those is not till 2010 though, correct?

Harry Stylli

We would expect publication in the first half of 2010. Now I want to reiterate, in terms of other than one of the publications which we were targeting in Q4, the other two publications were expected in the first half of 2010.

Kelley Roche – Leerink Swann

Okay.

Harry Stylli

Sorry?

Kelley Roche – Leerink Swann

I was just tripped up with the different clinical studies and validation studies and I just wanted to clarify. And so either you are ongoing recruiting for the LDT and the Brown but when you see validation through either of those studies, if it's successful, we can expect publication.

Harry Stylli

We would expect that to b e determined by a peer reviewed publication. If the peer review publication demonstrates that we are successful, then at that point we will launch the tests.

Kelley Roche – Leerink Swann

Okay. The number of patients in the LDT, is that still – ?

Harry Stylli

That's between 3,000 to 5,000 and in the Brown University, it's about 10,000. Both of the also will include a low risk group. Okay?

Kelley Roche – Leerink Swann

Okay.

Harry Stylli

Those have not actually changed in any way other than one of the publications was due at the end of Q4 and the other two were during the first half of 2010. We would expect all of the publications in the first half of 2010 for those large independent studies.

Kelley Roche – Leerink Swann

You think you will communicate with The Street in the fourth quarter with results pending – ?

Harry Stylli

We are likely to communicate that we have a validated test. Once we have a validated test, we will then initiate the independent large clinical trials.

Kelley Roche – Leerink Swann

Okay.

Harry Stylli

Initiating complete, of course.

Kelley Roche – Leerink Swann

That's for the PMA submission?

Harry Stylli

No. This would be LDT. But you are also correct. They are in parallel, we are moving to hopefully have PMA submission in the second half of 2010. Those timelines have not been impacted.

Kelley Roche – Leerink Swann

Okay. Alright. Then one quick housekeeping question. How many MassARRAYsystems did you place in the quarter?

Paul Hawran

Nine.

Kelley Roche – Leerink Swann

Thanks so much.

Operator

Your next question comes from Zarak Khurshid with Caris & Company.

Zarak Khurshid – Caris & Company

Hi. This is Zarak at Caris & Company. Thanks for taking my question, Harry. Does this recent discovery call into question any of Dennis Lo's prior work?

Harry Stylli

No. Absolutely not. This is not related to the technology or the science itself, this is related to issues internal to Sequenom, we believe.

Zarak Khurshid – Caris & Company

Thank you.

Harry Stylli

Thank you.

Operator

Your next question comes from Bob Hodgson with BlackRock.

Bob Hodgson – BlackRock, Inc.

Thank you. I am trying to sort out what you have told us and trying to figure out it appears to me that you basically have no data that confirms this test works based on the press release that you had, the dates that are covered, and so forth. You have exactly zero data. Yet you are insisting that you are going to go forward with very large scale trials that are very expensive, that are going to give you your validated test and go forward?

Correct me if I am wrong, but if you have no data that you can rely upon, why would you spend that money to go forward with large studies as opposed to doing something smaller to get the data which does validate it and then make your choice to go forward?

It just does not make sense from a burn rate standpoint and the cash position that you have. When you are developing other tests, which could move your company along, whereas this particular test, no data to support it unless you are saying that you can use some of the samples that you have collected prior to this and I don't think that's what you are saying.

Harry Stylli

Thanks for the question. So, first of all, we are confident in the assay performance of the test. It's fair to say that the high level clinical performance that we have disclosed to you is questionable.

The second part to the other question is that why should we continue with these trials or collection of these samples? Collection of these samples is essential for validating the test and there are long lead item aspects to securing these samples. They are very difficult to get and so on and so forth. And that by doing so, given the confidence we have and the assay integrity and the underlying technology, we believe by doing so it's a worthwhile investment of our capital.

Bob Hodgson – BlackRock, Inc.

Do you still have the samples that you collected that you based upon your prior release? Do you have those samples still?

Harry Stylli

Those samples are largely exhausted. They are largely exhausted. But we are in the process we have been collecting new samples and we will continue to collect new samples.

Bob Hodgson – BlackRock, Inc.

Maybe I guess as part of your investigation, clearly these people, these four people, one or more of them had some kind of financial incentive to falsify or otherwise quote mishandle the data. The question is what the ties are there and trying to figure out how much money you guys are going to burn. In fact, you may in fact have some liability on this with respect to if there was any patient activities that were based upon the results of these tests.

Harry Stylli

I believe you are speculating. Okay? On both the employee aspect as well as the patients. No data was revealed to patients. For example, we were in a clinical study mode where the patient identity is blinded. The information is not used for that patient. Patients were simply supplying us with a tube or two or three of blood anonymously, okay? Now as to the other points that you are trying to get to, again, I don't want to reiterate this, but really I believe a lot will come to light once the independent committee concludes its actions and reports.

Bob Hodgson – BlackRock, Inc.

Thanks.

Harry Stylli

Thank you for your questions.

Operator

Your next question comes from Ram Selvaraju with Hapoalim.

Ram Selvaraju – Hapoalim Securities

Hi. Thank you very much for taking my question. Can you hear me?

Harry Stylli

Hello, Ram.

Ram Selvaraju – Hapoalim Securities

So, I had a couple of clarification points. First of all, with respect to the data that was generated with the original test, can you just clarify for us whether the data that are now in question also include the retrospectively defined samples which were collected from Hong Kong and Amsterdam?

Harry Stylli

I cannot answer that until the independent review is complete. I would like to answer that but because that's all subject to this analysis, I need to hold off.

Ram Selvaraju – Hapoalim Securities

Just so we understand fully the logistics of what the future validation would represent, you have already collected a number of samples than have effectively been stockpiled, as it were. Is that correct? That have not been subjected to any screening yet?

Harry Stylli

Absolutely.

Ram Selvaraju – Hapoalim Securities

Okay. I would assume now that any use of these samples for validation of the tests is now going to be done external to Sequenom?

Harry Stylli

The validation studies will actually be done within Sequenom. The data analysis will be done differently.

Ram Selvaraju – Hapoalim Securities

Can you just clarify for us where the samples for the validation of the tests that you expect to have completed by the fourth quarter are coming from? And to what extent those samples are being taken from the Brown study and the LDT study.

Harry Stylli

They are all incremental studies and they are coming from various clinical sites but in the U.S. and internationally.

Ram Selvaraju – Hapoalim Securities

Can you give us some color on approximately how large a data set that would represent? That would permit you to consider the Down's Syndrome test to be validated in the fourth quarter?

Harry Stylli

I think again we will be looking at around, don't hold me to this exactly. We would be looking at least 1000 patients.

Ram Selvaraju – Hapoalim Securities

Okay. And then you stated in the press release that you would be going forward with sort of co-development of the RNA based and DNA based tests? So, this means that you would conduct the validation on the RNA and the DNA based tests in parallel?

Harry Stylli

We would expect so.

Ram Selvaraju – Hapoalim Securities

Okay. Is there any indication that you have at this point that would permit you to make a selection of one methodology versus another or are you basically back at square one?

Harry Stylli

We are not back at square one. We have a lot of information and we see virtue in both assay technologies.

Ram Selvaraju – Hapoalim Securities

Okay. Paul, if you are still there and able to answer a couple of brief housekeeping items, I have a few for you.

Paul Hawran

Sure. Go ahead, Ram.

Ram Selvaraju – Hapoalim Securities

Could you provide me with the quarter end shares outstanding?

Paul Hawran

Approximately 66 million.

Ram Selvaraju – Hapoalim Securities

Okay. And then could you also provide me with the, hold on a second. You did say that you had placed nine MassARRAYsystems in the first quarter?

Paul Hawran

That's correct.

Ram Selvaraju – Hapoalim Securities

At this point given the headcount reduction that you have had in the genetic analysis business, can you provide any color on what your expectations are for the MassARRAY business over the remainder of 2009, if you think that there might be any additional strength there above and beyond what you have seen in the first quarter? Or is that pretty much a run rate that we should expect?

Paul Hawran

I don't want to sound optimistic, but rather give you what we see right now. I think the overall goal that we mentioned back at the fourth quarter call was that we wanted to run that business in 2009 at a breakeven or potentially slightly profitable basis, but certainly breakeven from a cash flow point of view. So, what we did was that we took our, I don't want to call our worst case scenario, but certainly a case where we are just looking at the current run rate and suggesting that based on that run rate, what exactly do we need in terms of resource in order to make that a break even cash flow business? And that's essentially what we have done with the reduction in force last week as well as the reduction in expenses.

Ram Selvaraju – Hapoalim Securities

Okay. And then finally with respect to the additional sample screening that needs to be done to revalidate the Down's Syndrome test. Can you provide us with a number on how much additional cost that represents, approximately?

Paul Hawran

Actually if you take a look at the cost of a sample, it's usually running on average about $400 per sample. So, these are not drug like trials where you are running $10,000 per PT or along those lines. The costs are actually built into the numbers that are provided as the financial guidance.

Ram Selvaraju – Hapoalim Securities

Okay. Thank you.

Operator

Your next question comes from Derik De Bruin with UBS.

Derik De Bruin – UBS

Hello. Just to clarify, you have questions about both the way the RNA and the DNA data was handled?

Paul Hawran

That's correct.

Derik De Bruin – UBS

Okay. With that said, are you still planning to publish something on the DNA method in second quarter?

Harry Stylli

We intend to publish something on the DNA method hopefully in the second quarter but it may be early third quarter.

Derik De Bruin – UBS

Okay. I guess I am just a little confused about given the questions you have until this is settled, how can you still go on and start enrolling patients in the trials when you don't really have a validated assay yet? I am just curious about that. I guess, is there any issue in terms of getting informed consent from the patients?

Harry Stylli

There is no issue experience so far in gaining informed consent from any patient. The principal investigators actually sort of like the idea that we now are launching on the back of those practice changing trials. And that's the broad feedback we have had from the clinical community. So, there's dimensions to this that are playing. This is, if you like, a silver lining that is playing and resonating very well in the clinical community, that we now intend to launch these tests on the back of those large studies.

Derik De Bruin – UBS

Okay. Given the importance to the clinical community here, what does this change in respect to what you are going to show at the Society for Maternal and Fetal Medicine meeting? I know you were planning on showing data there. Are you going to have materials ready to show?

Harry Stylli

We may have, but I think we are just going to keep our powder dry for the peer review publications.

Derik De Bruin – UBS

Okay. Thank you.

Harry Stylli

Thank you.

Operator

Your next question comes from Jerry Kalmatos [ph] with Trifund [ph] Capital.

Jerry Kalmatos – Trifund

Yes. Hi. Thanks for taking the question. My question surrounded similar questions from before. You really didn't answer them but most of the data, would you used the word "mishandled". Would you say that "falsified" is too strong a word? Were there mistakes made scientifically on the assay part of it? Or do you think data was falsified on purpose? What exactly do you think happened?

Harry Stylli

I would like to answer those questions, but again, I have got to respect the other committee until it concludes its analysis.

Jerry Kalmatos – Trifund

Okay. I appreciate that. Thank you.

Harry Stylli

I really can't answer those.

Operator

Your next question comes from Louis Corrigan with Kingsford Capital.

Louis Corrigan – Kingsford Capital

Many of my questions have been answered but I am curious what has been your communications with the SEC?

Harry Stylli

With the SEC? I can't say specifically, but they have occurred between the company's representatives, in fact this morning.

Louis Corrigan – Kingsford Capital

Has the SEC launched a formal investigation?

Harry Stylli

Not to my knowledge.

Louis Corrigan – Kingsford Capital

Will you make that public when they do?

Harry Stylli

I think that would be public if they do.

Louis Corrigan – Kingsford Capital

Will you make it public if they launch.

Harry Stylli

We would have to disclose it.

Louis Corrigan – Kingsford Capital

Okay. In terms of the timeline, it's looking to me like you are going to be out of cash by the time you would actually be able to launch a test assuming that the test that you have no validation for actually becomes validated in the future. You are talking about probably a Q3 or Q4 of 2010 launch at the earliest?

Paul Hawran

I don't think that's what we have been saying, actually. Just to put things in proper perspective, what we are seeing is that at the end of this year, we should have anywhere around $50 million to $55 million in cash. We expect to launch, as Harry mentioned, on the heels of a peer reviewed journals and those peer review journals were initially scheduled to be sometime in the fourth quarter, first quarter, and second quarter or next year. We are now saying that those peer review journal will be in the first quarter and second quarter of next year. Therefore, I would probably suggest to you that we have enough capital certainly to bring us through to the commercialization notwithstanding any other diagnostic tests that we might be launching during the year.

Louis Corrigan – Kingsford Capital

Okay. Thank you.

Operator

Your next question comes from Evan Lodes [ph] with Barclays Capital.

Evan Lodes – Barclays Capital

Hi, Harry. Thank you. I was wondering, obviously data was handled different at Sequenom in San Diego and the Sequenom Center for Molecular Medicine in Michigan. I was wondering if that was how you discovered this in the first place and also what it is that the SCMM folks are going to be doing for the next several months if they are not validating data?

Harry Stylli

First of all, Evan, I think you are speculating there. And like I said, I need to respect the confidentiality of the independent investigation. I can't elaborate on anything to do with the issues around data analysis. SCMM has plenty to do in developing assays and in validating these assays in the coming weeks and months.

Evan Lodes – Barclays Capital

Okay. And secondly, in terms of your contract with the contract sales organization, are you required to pay them even if they are not selling anything?

Harry Stylli

We have got a lot of flexibility with that relationship. But we will actually have sales people deployed because we do anticipate launching tests within the third quarter onwards.

Evan Lodes – Barclays Capital

Okay. And my last question is just to reiterate one more time, this does not in any way effect anything that Dennis Lo has published? That's correct?

Harry Stylli

Nothing whatsoever. The science itself is fundamentally sound. The technology works. I want to reiterate that. The basic science is fundamentally sound. The technology works. The DNA technology works. Unfortunately, given the mishandling of the R&D data, we have had a setback and it's subject to the independent investigation. I am hoping at that point we will be able to communicate more clearly as to what happened and then it should become very apparent that the technology that underpins this is really robust and sound. Okay?

Evan Lodes – Barclays Capital

Okay. Thank you.

Operator

Your next question comes from Bart Classen with Research Partners.

Bart Classen – Research Partners

Yes. Harry, I wanted to ask you a question. You said earlier that you contacted the FDA. I was unclear why you contacted the FDA if you were going to have a CLIA launch? What was the need for bringing the FDA into this?

Harry Stylli

The need to bring the FDA is out of respect. As you know or you may not know that we are developing a PMA for Rhesus D. We are in dialogue with the FDA regarding a future T21 test that will be under the per view of the agency. We felt it prudent to bring our regulator in the loop.

Bart Classen – Research Partners

What did the FDA say?

Harry Stylli

That information is subject to confidentiality.

Bart Classen – Research Partners

Okay. Thank you.

Harry Stylli

Thank you.

Operator

Your next question comes from Charles Duncan with JMP Securities.

Charles Duncan – JMP Securities

Hi, guys. JMP Securities. Thanks for taking the follow-up. I have a question about your potential appetite to acquire companies to perhaps either fast forward or provide a backstop to your technology? Are you taking a look at the landscape of private companies that are interested in noninvasive prenatal testing? Might you consider going that direction?

Harry Stylli

We are actually very confident about our core technology. And we just believe we have had a little setback here. We always like to leave the door open to interesting ideas. We are interested in developing noninvasive prenatal tests or diagnostics irrespective of the technology type. But I want to reiterate that we are very confident about the potential of our core cell free fetal technology.

Charles Duncan – JMP Securities

Then my second question is if you happen to be not first to market, what do you think the strategy might be? What is perhaps what you think you could leave with? Is it better data? Is it faster turnaround etcetera.

Harry Stylli

Being fairly up to speed with the state of the market, I would be very surprised if we are not first to market. Having said that, we believe we have a number of attributes over technologies that are outside of our intellectual property.

Charles Duncan – JMP Securities

Thanks, Harry.

Charles Duncan – JMP Securities

Thank you, Charles.

Operator

Your next question comes from Tony Butler with Barclays Capital.

Tony Butler – Barclays Capital

Thanks for the follow-up. A few additional questions, Harry. Who actually selected the independent committee? Did Mr. Rose? And how many members are on that committee? And moreover, when in fact did you seek him out and he come onboard?

Harry Stylli

The committee was selected by the Board under the advice of our external legal advisors and it was under their recommendation that Mr. Rose was employed.

Tony Butler – Barclays Capital

Okay. And then as it relates to Fetalxy and Rhesus D launches, is there any evidence that suggest those test may not necessarily be validated either?

Harry Stylli

We believe that they are in pretty good shape and we have turned our attention to them and are taking stock to be absolutely sure. We have no reason at this stage to suspect the integrity of those tests.

Tony Butler – Barclays Capital

Final question. Why not simply go ahead and transfer the technology to Michigan? To Western Michigan? And therefore move away from having maybe any core influences that may have been let's just say oppressive there at the San Diego facility. Because you are going to need to do that anyway. Why not go ahead and do it now?

Harry Stylli

We actually have transferred technology to Michigan. Okay? And in fact, we have been in the process of developing two of our assays at Michigan. To go any further, I believe I will go into the boundaries of the special committee, but I want to reassure you that our Michigan facility is very much involved in the development of these assays and in fact I have got to say to you that SCMM is the sole developer of all LDTs. Okay? Future laboratory developed tests or homebrews.

Tony Butler – Barclays Capital

Thanks.

Harry Stylli

Thank you.

Operator

Your next question comes from Richard Deutsch with Ladenburg Thalmann.

Richard Deutsch – Ladenburg Thalmann

Yes. Thank you. I have just got a few quickies here. First of all, had anyone else left your firm prior to the discovery of the problems?

Harry Stylli

Not to my knowledge, but again I am pretty sure that would be investigated by the independent committee.

Richard Deutsch – Ladenburg Thalmann

Okay.

Harry Stylli

Sorry, did you say has anyone left the firm prior to the discovery of the mishandling? Is that what you said? I am sure Sequenom as a reasonable employee turnover. So, employees in general, leave Sequenom as they do other companies. We do have general employee turnover. But if you are suggesting was it in relation to this evident, then that aspect of it would be subject to the independent committee. And I want to remind that there was a RIF last week.

Richard Deutsch – Ladenburg Thalmann

There was a what last week?

Harry Stylli

A RIF. A Reduction In Force.

Richard Deutsch – Ladenburg Thalmann

Okay. Yes. I was looking to see if there were some people that might have left suspiciously prior to the discovery.

Harry Stylli

I see what you are saying. That's going to be subject to the independent committee.

Richard Deutsch – Ladenburg Thalmann

Alright. This was covered in general but I thought I would come back for a bit. Without identifying the personnel which I understand you can't do, do you have at least can you be able to tell what you think the motivation was? Was there any option purchases? Could it be stock trading? Would it be just a lack of actually doing the work and covering it up? Can you just give us that part of why you feel this happened?

Harry Stylli

Again, I have to make the reference that it's always hard to get to motivation in general for these things. I am not implying anything. This is speculation. But again, all of this hopefully will be uncovered by the independent committee.

Richard Deutsch – Ladenburg Thalmann

I am sure. And just the last little part of this, the four parties that you have identified, can you just tell us how they were related?

Harry Stylli

People around the table are nodding their heads shaking their heads which means I cannot.

Richard Deutsch – Ladenburg Thalmann

Okay. Well, thank you for taking my questions.

Harry Stylli

I am sorry I can't answer them more fully.

Richard Deutsch – Ladenburg Thalmann

No. I understand. It's a tough day. We are just trying to work through it. Thank you.

Harry Stylli

I appreciate it.

Operator

Your next question comes from Elemer Piros with Rodman.

Elemer Piros – Rodman & Renshaw

If and when you have the investigation completed and if there is anything in the data that the integrity was preserved, would you be able – ? That would be reassuring, I am sure, that at least you would have a partial sense on the accuracy from the remaining data sets. Would you be able to tell us at that

Harry Stylli

If we can, I am sure we will be able to share it with you.

Elemer Piros – Rodman & Renshaw

Okay. For these large studies, have all the sites that you plan to recruit, have all of them been recruited?

Harry Stylli

I believe for the LDT study they have or the vast majority have. I believe more of the Brown University sites have been recruited and recruitment is continuing.

Elemer Piros – Rodman & Renshaw

Have you been able to contact those sites with the information?

Harry Stylli

I believe our chief medical officer had a conference call with the principal investigators of most of the lead principal investigators of these studies and had a productive dialogue.

Elemer Piros – Rodman & Renshaw

What was the feedback?

Harry Stylli

The feedback was that it's actually quite interesting. The feedback was that they actually preferred the idea of out of these circumstances that we are now intending to develop and launch with the blessing of these large independent trials and that they are very much engaged and committed.

Elemer Piros – Rodman & Renshaw

No hesitance or drop out from those sites?

Harry Stylli

No hesitance or drop out so far.

Elemer Piros – Rodman & Renshaw

Thank you very much.

Harry Stylli

Thank you.

Operator

Your next question comes from Tom Turowski [ph] with Perceptive Advisors. Tom, your line is open.

That question has been removed. Your next question comes from Bob Hodgson with BlackRock.

Bob Hodgson – BlackRock, Inc.

Thank you again for taking a follow-up question. You referenced this independent committee that's doing the investigation. Can you give us an idea of what the timeline when you think that their work will be done and that information will be released to your shareholders? That's one question. And secondly, is there any indication that the mishandling took place because of perceived pressure to complete studies on an extremely fast pace or an aggressive timetable?

Harry Stylli

Again, both of those points are sort of answered earlier. I am saying this again. It's subject to determination by the independent committee. It's pretty hard to put a timeline on how long the investigation is going to occur. That's really at the pleasure of the independent investigator. Of course the Company would like to share the information with its shareholders as soon as we are able to do so.

Bob Hodgson – BlackRock, Inc.

Can you guess whether it's this year or next year?

Harry Stylli

No. I really can't give it to you. I wish I could. That's outside of the per view.

Operator

Your next question comes from Scott Gleason with Stephens Inc.

Scott Gleason – Stephens, Inc.

Thanks. My questions have been answered.

Harry Stylli

Thank you, Scott.

Operator

Your next question comes from Zarak Khurshid with Caris & Company.

Zarak Khurshid – Caris & Company

Harry, could you tell us if these four people were PhD level scientists?

Harry Stylli

Again, I sort of answered that question. You know I am not at liberty to say out of respect of the confidentiality.

Zarak Khurshid – Caris & Company

Understood. Thank you.

Harry Stylli

Okay. I believe the Q&A session is done. In closing, I would like to thank you for joining us on today's call and for your interest in Sequenom and good day. Thank you.

Operator

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

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Source: Sequenom, Inc. Q1 2009 Earnings Call Transcript
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