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Sequenom, Inc. (SQNM)

Q1 2013 Earnings Conference Call

May 09, 2013, 17:00 PM ET

Executives

Harry F. Hixson Jr. - Chairman and Chief Executive Officer

Paul V. Maier - CFO

William Welch - President and COO

Dirk van den Boom - EVP, Research and Development and CTO

Marcy Graham - Senior Director, IR

Analysts

Dave Clair - Piper Jaffray

Zarak Khurshid - Wedbush Securities

Matthew O'Brien - William Blair & Co.

Eric Chang - Oppenheimer & Co.

Bryan Brokmeier - Maxim Group

Vamil Divan - Credit Suisse

Karen Koski - Lazard Capital Markets

Brandon Couillard - Jefferies & Company

Operator

Hello. Welcome to Sequenom, Inc. First Quarter 2013 Earnings Conference Call. All participants will be in a listen-only mode. (Operator Instructions). After today's presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note that this event is being recorded.

Now, I'd like to turn the conference over Marcy Graham, Senior Director of Investor Relations. Ms. Graham, please go ahead.

Marcy Graham

Thank you, and welcome to the Sequenom conference call to discuss operating results for the first quarter of 2013. Joining me today is Dr. Harry Hixson, Chairman and CEO; and Paul Maier, CFO. Dr. Ron Lindsay, Executive Vice President of Strategic Planning; Bill Welch, President and COO; and Dr. Dirk van den Boom, Executive Vice President of Research and Development and CTO will join us later for the Q&A portion of the call.

This call is also being broadcast live over the web, and will be available for replay through Thursday, May 16, 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 F. Hixson Jr.

Thank you, Marcy. Good afternoon, and thanks to everyone on the line for joining us on today's call to discuss Sequenom's first quarter results for 2013. The first quarter of 2013 was very productive for Sequenom, as the Sequenom Center for Molecular Medicine or Sequenom CMM continued to take advantage of its first mover position in the non-invasive prenatal diagnostic or NIPT market.

Sequenom CMM continued to increase its penetration of the NIPT market and maintained its dominant market share. We were pleased to report significant increases in testing volumes and improvements in revenue and margin when compared to prior year period or to the previous quarter, and we expect this trend to continue throughout the year.

First quarter 2013 revenues for the genetic analysis operating segment decreased 7% from the same period in 2012, due to a softening in consumables orders, partially due to timing. We are on track with our plan to submit a 510(k) notification to the U.S. FDA for the MassARRAY system in the second half of 2013.

We also have made excellent progress towards our early access research program for the MassARRAY ultrasensitive detection analytics and are expanding our Research Use Only panel menu for our translational research customers.

Sequenom CMM continued to see sustained growth from the use of the MaterniT21 PLUS test. In April, we announced that more than 100,000 high-risk samples have been accessioned since the launch of the test in October of 2011. Approximately 60% of the Maternal-Fetal medicine specialists and more than 300,300 OBGYN physicians in the United States have ordered the MaterniT21 PLUS test since its introduction.

As of the end of the first quarter, the annualized run rate for the MaterniT21 PLUS test was greater than 140,000 tests, a significant increase over our 2012 yearend run rate. The growth in the MaterniT21 PLUS sample volume has continued since the close of the quarter and set a weekly record with the number of samples accessioned in the last week of April. We expect Sequenom CMM to exceed its internal goal of 150,000 total MaterniT21 PLUS samples accessioned for 2013.

We also continue to make progress in our negotiations with the payor community. More than 70 million lives are now covered for our tests and we're making excellent progress to achieving our goal of 120 million lives covered by the end of 2013.

In addition to this excellent progress, I'm extremely pleased to announce today that Sequenom has entered into a national agreement with the Blue Cross and Blue Shield Association that offer the independent Blue Cross and Blue Shield companies on a voluntary basis, access to our laboratory testing services. This agreement has a five-year term.

The associations comprised of 38 independent licensed Blue Cross and Blue Shield plans covering 100 million lives. Sequenom already has signed contracts with a number of these plans covering more than 24 million lives.

During the first quarter, Sequenom CMM published several key studies that support enhanced performance and clinical utility of both the MaterniT21 PLUS test and the RetnaGene AMD test for age-related macular degeneration or AMD.

The publication in PLOS One in March 2013 describes the basis for process enhancements to the MaterniT21 PLUS test, along with equivalence data in a large clinical sample set.

Sequenom CMM also announced that the MaterniT21 PLUS test now reports on the presence of fetal sex chromosomal aneuploidies, in addition to the identification of aneuploidies for chromosomes 21, 18 and 13. Results of a blinded clinical study reporting on the detection of sex aneuploidies have been accepted for publication in Prenatal Diagnosis and are available online.

A large patient study published in Ophthalmology in March 2013 describes enhancements to the clinical utility of the RetnaGene AMD test by demonstrating that the test can now be used to predict progression risk to choroidal neovascularization or late wet AMD in patients with early stage disease.

Sequenom CMM had a strong presence during the annual clinical meeting of the American College of Medical Genetics and Genomics in March, during which NIPT was a prominent topic. Sequenom CMM hosted a dynamic symposium on NIPT attended by approximately 700 medical professionals and presented a series of posters on NIPT and the validation data for the Heredi-T cystic fibrosis carrier screening test.

Additionally, at this week's American College of Obstetricians and Gynecologists meeting in New Orleans, Sequenom CMM presented data on the MaterniT21 PLUS test in 3,000 twin pregnancies further supporting the use of the test in pregnancies with twins. We also presented a summary of our laboratory experience showing that Sequenom CMM's commercial performance is consistent with our published clinical validation studies.

In response to the growing commercial interest and demand for its testing services, Sequenom CMM continued to expand its diagnostics sales force during the first quarter and now has a total of 84 diagnostic sales representatives actively selling in all 50 states. Sequenom CMM is also in the process of increasing its testing capacity with the additional laboratory location in North Carolina which recently received its clear registration and is expected to be operational by midyear.

This was also a record quarter for processing cystic fibrosis carrier screening test samples as Sequenom CMM introduced their Heredi-T cystic fibrosis carrier screening test and advanced new CF tests. The Heredi-T CF test analysis 136 mutations and five variants proven to be clinically relevant in causing CF. These disease-causing mutations and variance were selected from the Johns Hopkins CFTR2 database. The test analyzes nearly six times the number of mutations currently available in the most common commercial CF carrier screening test methods.

There have been significant recent developments regarding the company's intellectual property relating to the use of massively parallel sequencing for pre-natal testing. As a result of the company's efforts, two competitive patents that are asserted against us and our patent litigation in the Northern District of California are now also the subject of patent interference proceedings.

Last week, the U.S. patent office declared a patent interference between issued U.S. Patent number 8,195,415, which is asserted against us in litigation, and a U.S. patent application which is exclusively licensed to us. On the same data, the PTO also re-declared a patent interference between issued U.S. Patent number 8,008,018, which is also asserted against us in litigation, and U.S. patent application, which is exclusively licensed to us.

On May 3, the PTO also declared two additional patent interferences, numbers 105,923 and 105,924, between patent applications licensed to another party and patent applications licensed to us. We are encouraged by the recent PTO interference decisions and we continue to stand behind the strength of our patent portfolio and our legal strategy.

We believe that the accomplishments and milestones in the first quarter are a positive sign that we are on a trajectory for a very successful year. As expected, we saw an additional competitor enter the NIPT market in the first quarter of this year. This has presented an excellent opportunity to further reinforce the clinical and commercial advantages with the MaterniT21 PLUS testing service while expanding its market-leading position.

We continued to see significant growth in the number of patient and physician increase. The customer experience is a critical element of our success as physicians and customers have come to expect and rely upon Sequenom CMM's quality, consistency of results, prompt turnaround time and dedicated responsive testing with support teams. Sequenom CMM's expanded sales and medical education teams and its leading commercial laboratory organization allow us to continue to enhance and expand our positive relationships with doctors and their patients.

I will now turn the call over to Paul who will discuss the details of our performance in the first quarter. Paul?

Paul V. Maier

Thank you, Harry. We have started the year on a great position with sequential improvements in volumes, revenue and margin. For the first quarter of 2013, total revenues were $39.5 million as compared to $14.9 million reported for the first quarter of 2012.

Diagnostic revenues increased to $29 million for the first quarter, up from $4.8 million from the same period last year. Revenue from our genetic analysis business in the first quarter decreased 7% as compared to revenue one year ago.

Sequenom CMM also completed the process of moving its billing process in-house in May of 2013. The new system is expected to enable us to maximize reimbursement efforts, improve cash flows and add efficiencies in the billing and collection process.

As in 2012, we will continue to account for product revenue from our diagnostic testing services on a cash basis before moving to the accrual method of accounting when we can reliably estimate the amount that would be ultimately collected.

Overall, gross margin for the first quarter was 36% of revenue as compared to gross margin of 31% for the first quarter last year. This improvement is attributable primarily to the positive contribution from the Sequenom CMM diagnostic services business and results from higher cash collections and improved efficiencies in processing patient samples.

Total operating expenses for the first quarter of 2013 were $41 million as compared to total operating expenses of $28.9 million for the first quarter of 2012, down sequentially from total operating expenses of $42 million for the fourth quarter of 2012.

Research and development expense increased to 13.8 million from 11.8 million for the first quarter of 2013, an increase primarily associated with increased labor and supplies and costs relative to the expansion of capacity and progress towards validation of the additional Sequenom CMM laboratory location in North Carolina.

Selling and marketing expenses increased to $13.7 million for the first quarter of 2013 from $9.7 million for the first quarter of 2012, resulting primarily from higher labor costs associated with the expansion of the Sequenom CMM sales force and increased headcount to support commercial operations.

General and administrative expense for the first quarter of 2013 were $13.5 million as compared to $7.4 million for the first quarter of 2012, due to increased legal expenses associated with patent litigation, increased collection costs due to the increase in diagnostics revenue and increased headcount to support the company's operations.

Total stock-based compensation expense was $3.1 million for the first quarter of 2013, an increase from $2.9 million in stock-based compensation recorded for the first quarter of 2012.

Net loss for the first quarter of 2013 was $29.4 million, or $0.26 per share, as compared to a net loss of $24.4 million, or $0.22 per share, for the same period in 2012. Net cash used in operating activities was $19.7 million for the first quarter of 2013 compared to $23.3 million in the same period in the prior year.

The company also used cash of $4.1 million for capital investments and $1.8 million for debt repayment during the first quarter of 2013. As of March 31, 2013, total cash, cash equivalents, and marketable securities were $151.1 million.

Looking forward to the remainder of the year, we expect to continue our focus on achieving efficiencies in volume and revenue growth.

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

Harry F. Hixson Jr.

Thanks, Paul. 2012 was a breakout year for Sequenom and our progress in 2013 reflects our continued strength in the rapidly expanding molecular diagnostic market by increasing the number of covered lives under contract, improving the pace of reimbursement for our innovative tests and expanding the infrastructure to support Sequenom CMM's commercial operations, which I believe was superior in the marketplace.

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

Thank you. We will now begin the question-and-answer session. (Operator Instructions). The first question comes from Brian Weinstein from William Blair. Okay, a question from Bill Quirk from Piper Jaffray.

Dave Clair - Piper Jaffray

Hi. Good afternoon, everybody. It's Dave Clair here for Bill. My first question is on the Blue Cross, Blue Shield national agreements that you announced. So is this that you have an incremental 100 million covered lives or you have to go to each individual Blue Cross, Blue Shield now and this just makes it easier to get reimbursement with each one of these?

Paul V. Maier

It's a little bit of both. Blue Cross Blue Shield Association represents the independent franchises of Blue Cross, Blue Shield which cover 100 million lives in the U.S. and they are the largest payor in the U.S. I think that one out of every three individuals on the private insurance is under Blue Cross, Blue Shield umbrella. This is with the association and a lot of work was involved in this. They do the diligence and so each Blue Cross, Blue Shield franchisee can look at that and then contract. It facilitates things quite a bit. And as Harry mentioned on the call, we already have a number of the Blue Cross, Blue Shield franchises under contract.

Dave Clair - Piper Jaffray

Okay.

Paul V. Maier

They only have to sign a two-page addendum to the existing association contract, each incremental…

Harry F. Hixson Jr.

Exactly. A number of these things are logistical, understanding where the lab is, forms and such that go to every agreement. This facilitates everything including coverage and pricing and such. And so for individuals of Blue Cross affiliate, it would be a very simple contracting process.

Dave Clair - Piper Jaffray

Okay, thanks for that. And then the greater than 70 million covered lives number that you quote in the press release, is that as of March 31 or is that as of recent? The reason why I'm asking is I thought United Health had recently come on board to and that's fairly large, so just want to make sure I understand that?

Harry F. Hixson Jr.

It's as of March 31.

Dave Clair - Piper Jaffray

Okay, so that does not include United Health then?

Paul V. Maier

We've not announced United Health contract of any sort, so I'm not sure when you're mentioning that, what you're talking about?

Dave Clair - Piper Jaffray

Well, I thought – okay.

Paul V. Maier

United Health had positive coverage policy decisions which took place actually very early in the first quarter. We're losing track of these, but most of the big payors have moved to positive coverage. And given (inaudible) what that means is we can either be in network working with them under their coverage and guidance and such and them working with us or we could work with them out of network. And I would say a good majority of their payors to-date now have made positive coverage decisions, which is great news for us in the NIPT marketplace.

Dave Clair - Piper Jaffray

Okay. And then, I appreciate the color on the patent interference, anything else that you want to share on the legal side?

Harry F. Hixson Jr.

No, I don't so.

Dave Clair - Piper Jaffray

Okay, that was easy. All right, thank you.

Harry F. Hixson Jr.

You're welcome. Thanks for the call.

Operator

Thank you. The next question comes from Zarak Khurshid from Wedbush Securities.

Zarak Khurshid - Wedbush Securities

Good afternoon, everybody. Thanks for taking my questions. With respect to collection efficiency, can you give a sense how that has evolved in the last eight quarters and do you expect the 35% level of revenue related to the tests in the same quarter to hold true for the remainder of the year? And if you could talk about kind of further out, that'd be great too.

Paul V. Maier

Well, first of all, we expect that that percentage of revenue in any given quarter attributable to test performed in that quarter will fluctuate. And it's influenced by the ramp rate, the growth rate of the test performed and the payment cycles among the various payors. And to the first part of your question, I think that we have seen improvements in the payment cycle time as we've grown and as the ACOG and SMFM guidelines were issued in the fourth quarter of last year, and as individual payors have issued their coverage decisions. And I think the critical element that we have achieved now that we've brought in-house our own billing system and billing effort is that we have all the data as opposed to using a third party. We have our own staff only focusing on our collections as opposed to a third party that has multiple customers. And we expect that will improve the collection times and it will give us greater control over the process. And in the long run, it will actually be a lower cost mechanism for us. And it's hard to estimate what that percentage of revenue in any given quarter will be related to tests performed in that quarter.

Zarak Khurshid - Wedbush Securities

Understood, thank you for that. And then just curious about the OBGYNs that are ordering the test. Can you give us a sense for the fraction of the current volume that comes from the OBGYNs, and are they repeat customers? Is there anything unique about how the OBGYN practice is using the test versus your bread and butter MFM customer? Thank you.

Harry F. Hixson Jr.

Those are all great questions. I'm not prepared to give fractions or otherwise in terms of MFMs, OBGYNs. I think it's safe to say though that we positioned last year with the specialists in the community, that being the maternal fetal medicine specialists. It's amazing to me that we've got up to 60% now in the U.S. within a year that have ordered our test. Our next goal during the course of the year is to add more reps to target the OBGYNs. And many of the OBs work in concert with their MFMs on high-risk pregnancies. And so we worked through the MFMs and now we're working in conjunction with them directly, and that 3,300 or so we said we hit in the first quarter is a good first start. There's about 8,000 overall in the U.S. and we've got plenty of room to grow.

Zarak Khurshid - Wedbush Securities

Got it. And last question, I promise to get off here. So how should we be thinking about the OBGYN opportunity versus the MFM opportunity? So in other words, how many tests eventually or you could say of that total opportunity of 700,000 tests or so, how many of that could actually come from the OBGYN community? Thank you.

Harry F. Hixson Jr.

Yeah, I think that's also a good modeling questions and we have our own model type. I think it's safe to say that the high risk is around the 750,000 or so. And high risk is – when you're in the high risk situations multifaceted, OBs are involved and MFMs are involved, sometimes the OBs involved into the test, sometimes they're working with the MFMs and I'm really not prepared to say is the OB substantially different based on the test per physician. There's certainly more OBs out there. And so overall that's probably – there's more opportunities for overall testing given the size of the OB community.

Zarak Khurshid - Wedbush Securities

Got it, great. Thank you.

Operator

Thank you. The next question is from Brian Weinstein from William Blair.

Matthew O'Brien - William Blair & Co.

Hi, guys. Thanks for taking the question. This is Matt in for Brian. Just curious, what is your belief on where the current market penetration is of all the different players out there right now?

Harry F. Hixson Jr.

Are you referring to like market share or market penetration?

Matthew O'Brien - William Blair & Co.

Market penetration mostly but certainly share thoughts on market share as well?

Harry F. Hixson Jr.

Okay. Those are all good questions and I think there's some data has come out on papers, that's the best (inaudible). We're transparent. Our units are probably asking about your units and there was a paper done at the ACOG and one that's opposed to earlier talking about the Verinata experience studies and Natera experience studies. Those are very substantially below our volumes and I don't know about the Ariosa. It's been quiet recently in terms of what their experience studies are. So I'd have to say we're over 90% but it is hard to get their numbers.

Paul V. Maier

The interesting thing here is as far as we can tell, we're the only company that's restricting sample accessioning to the high-risk market. So anything that the other private companies say may or may not include samples out of the low-risk market. My own view is leasing the high-risk market, I think the market is penetrating less than half and probably more in the 30%, 35% range but those are just estimates.

Matthew O'Brien - William Blair & Co.

Okay, thanks. That's some helpful color. And then I think the competitors have come on board with tests. Has that impacted the nature of some of your conversations with clinicians in terms of emphasizing certain aspects of the MaterniT21? Thanks guys.

Paul V. Maier

I think as Harry said in the call, this is a great opportunity for us to continue to reinforce our messaging and we have the large clinical studies, we've been getting clear active results, more the leader and the founder in the NIPT marketplace. And ultimately I think what people want is competence in results, good turnaround time and no call rates. And we just continue to position our leadership advantage with physicians when asked.

Marcy Graham

I think he's off the call. Can we go on to the next, please?

Operator

Okay, sure. The next question comes from David Ferreiro from Oppenheimer & Company.

Eric Chang - Oppenheimer & Co.

Hi. This is Eric Chang in for David Ferreiro. I was wondering, how long do you think it will take to sign the remainder of the Blue Cross, Blue Shield plans? And also can you update us on your thoughts on your expectations for the, I guess the rest of the major payors in 2013?

Harry F. Hixson Jr.

Well, your question – to answer the question and then I ask Bill. And so far I don't have an answer, but we think that this master business agreement will greatly facilitate reaching contracts as with the remainder of the Blue Cross Blue Shield Association members.

William Welch

I'd only add to that. The number of the affiliate memberships of Blue Cross, Blue Shield were waiting for the association to make their analysis or view in recommendation. So, again, this should streamline things. It certainly opens conversations and that's going to be a good chunk of our goal the next quarter or so I'm sure to plan the number of plans.

Harry F. Hixson Jr.

We certainly put a great deal of emphasis on the Blue Cross Blue Shield Association members.

William Welch

It's terrific to know that they're behind us (inaudible) discussions.

Eric Chang - Oppenheimer & Co.

Great. And I believe you guys said that you have an internal goal of 120 covered lives by the end of the year. Does that include any major payor agreements?

Harry F. Hixson Jr.

First, you're correct. That is a goal that we said was an interim goal and we announced it at the JPMorgan conference in January. We also announced that we had a goal of – put in place three agreements with large national payors and obviously the Blue Cross Blue Shield Association would represent the first of those.

Eric Chang - Oppenheimer & Co.

Got you, great. Thank you.

Operator

Thank you. The next question comes from Bryan Brokmeier from Maxim Group.

Bryan Brokmeier - Maxim Group

Hi. Good afternoon. So did those Blue Cross, Blue Shield contracts that you signed come after you signed the national contract with the association?

Harry F. Hixson Jr.

No, they were before.

Bryan Brokmeier - Maxim Group

They were before. And so those 24 million covered lives, they're included in the 70 million covered lives as of the end of March?

Harry F. Hixson Jr.

That's correct. There may have been a few of them that…

Paul V. Maier

I think it's about right. Blue Cross represents one out of every third insurers. You run the numbers, it's probably going to make sense; 70 and 24 is about what you expect to have and that's the answer.

Bryan Brokmeier - Maxim Group

All right. Were some of those associations or some of those contracts, were you able to sign those before the national contract and so there's only some of the contracts that were really waiting on the association?

Harry F. Hixson Jr.

Yes. There's about 38 different affiliates and we've got a number of those, but a lot more to work on.

Paul V. Maier

Yeah, if you do the math obviously, then with 100 million lives covered and we have contracts with 24, that's about 76 million lives still to go.

Bryan Brokmeier - Maxim Group

All right.

Paul V. Maier

If you add those 76 million to the 70 we already have, that would put us well in excess of 120 million goal.

Bryan Brokmeier - Maxim Group

Right. You're talking about your sales force, you got up to 84 in the quarter and as you add some more sales people, should we expect them to be within some of the same territories you already have with targeting the OBGYNs or are you going to be further chopping up the territories as you add more people?

Harry F. Hixson Jr.

That's a great question. We designed the sales territories a while ago. This is to be executed the last of the original plan and that is to give us about 70% to 80% penetration or the touch points of the key physicians. To do this, every sales territory now has – we just redefined the territories and they're defined in terms of easeability and frequency to get to providers that make best sense for customer and educational care. So that's how we end the day. I don't know if we're going to add any more. We feel pretty good about the reach today to get to the numbers we need to reach to this year.

Bryan Brokmeier - Maxim Group

Okay, great. Thanks a lot.

Operator

Thank you. The next question comes from Vamil Divan from Credit Suisse.

Vamil Divan - Credit Suisse

Yeah, thanks for taking the questions. So one question I had, you were talking about some of the guidance you gave at the beginning of the year. I think at that point your volumes for the full year, you said at least a minimum of 150,000 tests and I think you're saying now you'll try to exceed that number, but you also kind of provided some scenarios where it could be 175,000 or maybe 200,000. I just want to get a sense of kind of – now that we're kind of quarter the way through the year here, how likely do you think those other scenarios are or should we just kind of be thinking 150,000 or maybe slightly above that is the number to kind of think about for the full year?

Harry F. Hixson Jr.

Okay. First, those were internal goals or estimates, they were not guidance. So I will just remind you what we did last year and that was we started out with a similar number for the first part of the year and then as we got into the year and we saw that we were going to exceed our original internal goal, we announced publicly a larger, a higher internal goal. If we see the same sort of thing happening in 2013, we'd probably do something similar. But we're not doing anything at this point.

Vamil Divan - Credit Suisse

Okay, all right. That's helpful clarification. And the other question I just had, I understand with some of these assays now, there's one code that AMAs assigned for them, for all the ones in this class. And I wasn't (inaudible) why don't you provide some insight into what that actually means if anything with this A1507 progressing, it's going to effect in July. And does that in any way impact sort of the reimbursement you're getting from the different payors? Are they tied together in any way with the other tests or are we thinking about that incorrectly?

Harry F. Hixson Jr.

No. Coding is a very technical conversation, so the code I believe you're mentioning is a miscellaneous code that people are using. It was a qualifier for NIPT with our test. There is not a specific code assigned by the AMA for MaterniT21 PLUS besides a miscellaneous code. We've been doing that and I'm looking at Carolyn who overseas our billing since the beginning of this year going to the new process, it seems to be going fine.

Vamil Divan - Credit Suisse

So you think that miscellaneous code, but not the one that you specifically said. We're using just the [genre] miscellaneous code…?

Harry F. Hixson Jr.

I'm sure (inaudible) mentioned miscellaneous or not, so yeah – but it's [whole other] number you mentioned, we're using the miscellaneous code which has its own particular genre.

Vamil Divan - Credit Suisse

If I could just sneak one last one in. Just curious, I mean we've seen some stuff in the scientific literature and also in the (inaudible) some of these does not, not necessary yours but other ones also that may provide the false information which is expected with any of these stuff, I guess but – and some people not maybe going to [amino] or thinking about amino. I'm just wondering how are things going with physicians out there, has there been any change when some of this stuff came on the last month or so, any added reluctance for people that don't want to use these or people who are realizing that this is just part…?

Harry F. Hixson Jr.

Are you referring to the Wall Street Journal article?

Vamil Divan - Credit Suisse

Right. I think there was some stuff at ACOG and also – and then I think there was some stuff in the (inaudible), like the Wall Street Journal?

Harry F. Hixson Jr.

Okay, so if the question is the idea about false positive or false negatives as applies to NIPT, if that's your question, Dirk, do you want to take that? We just had a blind case study that…

Dirk van den Boom

Yeah, I think the most important aspect is when you look at validation data, we made it quite clear that there is a chance for very occasional false positives and false negatives. What we see is that ever since we launched the assay that we have actually very few from the feedback we get from physicians, very few false negatives and false positives and that actually that is in line with what the clinical validation data said when they originally published. So, I would say overall they performance of the test is extremely good and shouldn't cause any concern.

Harry F. Hixson Jr.

We presented data at ACOG and also presented data at ACMG, I believe. Our understanding of the response, it's our test, we encourage physicians and patients to report any discontinuity, it's well within consistent from our clinical result, we can't talk about our competitors. We have no idea how their test are performing.

Vamil Divan - Credit Suisse

Okay, all right. Thank you.

Operator

Thank you. The next question comes from Sean Lavin from Lazard Capital Markets.

Karen Koski - Lazard Capital Markets

Thanks. It's actually Karen Koski in for Sean. Just one quick question. We appreciate the color on the press release regarding 35% of the diagnostic revenue reported in the quarter being attributable to test in the quarter. Any chance you'll give us what percentage of tests done in the quarter actually received payment in the quarter?

Paul V. Maier

I think that we will never – well, I shouldn't say never. Right now the level of detail that we'll give you is consistent with what we reported. And since we're on a cash basis of accounting, until we switch to accrual, we probably won't go into that level of detail.

Karen Koski - Lazard Capital Markets

Okay, fair enough.

Paul V. Maier

That 35% is still a good indicator of the cash received what related to revenue of the test we did, what related to revenue in that same quarter.

Karen Koski - Lazard Capital Markets

Okay, thank you.

Operator

Thank you. The next question comes from Brandon Couillard from Jefferies.

Brandon Couillard - Jefferies & Company

Good afternoon. With respect to T21, just to be clear, are you recognizing any accrual accounting under any network contracts at this point?

Paul V. Maier

With respect to network contracts, not yet. We do have some client bill arrangements that account for a small portion of revenues that would be accrued.

Brandon Couillard - Jefferies & Company

All right. And just an update in terms of the timing of your expectations of when you expect to convert most of the diagnostic revenue to accrual. Are you still looking for some time in the fourth quarter? And then maybe if there was a better indication on, I think, what you stated before, it's just more than 50%?

Paul V. Maier

First of all, that 50% number was an internal goal. We're not giving any expectation or guidance on when we'll get there. It's all a function of us having the data and being able to estimate what is collectable. And we expect that before we can get there, we need to have contracts in place so that they're in network and that we need to have several quarters of experience where we can actually demonstrate that we're better able to estimate it. When that comes is all a function of our contracting process and one of the first steps that was so important to us was getting our own billing system in-house, so we would have the necessary accounting controls and then we could develop that level of data once the contracts are in place. So we'll try to update the market in the future as we make progress, but we're not giving any timing for expectation at this point.

Brandon Couillard - Jefferies & Company

Thanks. And last one if you're willing to discuss the percentage of the volume for T21 attributable to the international partners, that'd be helpful?

Paul V. Maier

We have not yet broken that out. At some point when it becomes material, we'll provide some additional insight on that. It's still relatively modest but we do expect that will grow as we go forward.

Brandon Couillard - Jefferies & Company

All right, thank you.

Operator

Thank you. As there are no more questions, I like to turn the call back over to Marcy Graham for any closing comments.

Marcy Graham

Great. Thank you for joining us today on the call and for your continued interest in Sequenom. If you have any further questions about today's results or you need additional information, please feel free to contact the Investor Relations department directly at 858-202-9028. Thank you.

Operator

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect. Have a nice day.

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