I’m Derek Brown, the Life Sciences Tools and Diagnostics Analyst from Bank of America Merrill Lynch.
Our next company and closing out our healthcare conference will be Sequenom. Speaking today from the company will be Paul Maier, Chief Financial Officer and Dirk van den Boom, Executive Vice President – R&D and Chief Technology Officer.
There’ll be a short presentation and then we’ll follow it up with some Q&A. Gentlemen.
Thank you Derek for the kind introduction and it’s a pleasure to be here today, even if we are the last on the agenda and look forward to providing an update on an exciting time in the company’s history for Sequenom.
First of all I’d like to point out our Safe Harbor statement. I will be making some forward-looking statements today, so I would invite you to read this, as well as Sequenom’s SEC filings to have a complete picture on the risks and uncertainities.
Sequenom operates with two different business segments. The largest and rapidly growing is our molecular diagnostics segment, in which case we provide laboratory services. We have three locations; San Diego where our home office is, another lab in Grand Rapids, Michigan and we’re in the process of getting our North Carolina facility licensed.
Our second segment is the genetic analysis segment, which is the original business of the company, where we sell instruments, reagents and genetic analysis services. We have that headquartered in San Diego with sales offices in the U.S., Europe and Asia Pacific.
We reported out last week our first quarter financial results. It was a record quarter for the company, an exciting time. Our revenues grew 158% compared to the first quarter of last year. We had $38.5 million in revenues. Our diagnostics revenue grew even greater from our $4.8 million a year ago to $29 million in the first quarter, and that accounted for more than 75% of the total revenue.
Equally important, the total diagnostic test samples that we accessioned in the first quarter was 44,500. That compares to 92,000 for all of last year, so it’s a quite rapidly growing business for us.
We did experience some softening in the genetic analysis business. It was off about 7% compared to last year and primarily that was contributed to by timing of some of our consumable orders.
The genetic analysis business, for us we operate very comfortably in a niche, primarily with translational and basic research. We are broadening out into agricultural genomics, as well as pharmaceutical and biotech and that’s primarily the driver behind our investment as we go forward, with an expanding menu of research-only test panels.
We’ve launched several panels each over the last couple of years and we are continuing to work on that, and we are actually transitioning into clinical research and diagnostics, which is why we’ve invested in a 510(k) process for the MassARRAY system in the U.S. and we expect that that, as well as obtaining our CE mark in Europe is targeted for the second half of this year. That should broaden the application of that instrument and the use of it.
Clearly the key driver for Sequenom’s growth now in this year is our MaterniT21 PLUS test and all of you who’ve been following this space know that it opens a door for Noninvasive Prenatal Testing when we launched the product back in October of 2011.
The test profile has been on record and primarily the clinical study and validation studies that we published prior to launch relate to the one in infant study. That was done where we had a very robust data set and detection rate for T21, T18 and T13, subsequent to our initial launch we’ve added with publication support T18, T13, more recently fetal X and Y and fetal sex aneuploidy in addition to fetal sex.
So it’s a very robust test, broader than some of the others in the marketplace and we’re pleased with the accuracy in the test, as well as the no result rate, which in our clinical study was less than 1% and in our commercial setting its been slightly higher than that, but tracking very nicely to that.
One of the keys to our commercial success has been our investment in the support around this test and we’ve averaged consistently less than seven business days and to do that, we’ve invested in all of the infrastructure to provide a very highest quality test to the market and we have a two shift, six day a week operation in our lab currently in San Diego.
If you look at the samples that we’ve accessioned, we show on a quarterly basis on this slide since the first quarter of 2012, you can witness a very steady rapid growth of that, which shows that the adoption has gone very well and we have always wanted to lead with capacity.
So in the beginning of the year as we started 2013, we had a 200,000 annual capacity in place and that will expand to 300,000 plus as we bring our North Carolina facility online, currently expected somewhere around mid year. So we have adequate capability to address this rapidly growing adoption.
One of the key drivers with the success of our test has been the relatively rapid adoption by ACOG and the Society for Maternal-Fetal Medicine, with the joint committee opinion that was issued in December of last year on Nonivasive Prenatal Testing.
It turns out that the guideline is focused on the high risk market, which is where our test is, exclusively focused on the high risk market and all of the indicators for testing are really those that didn’t know the high risk market: Maternal age of 35 years or older at delivery; positive ultrasound; history from prior pregnancies or positive blood serum screening test results. So we follow the joint committee opinion in the use of our services and we only accept high-risk patients for this testing service.
The next slide is a sample of the requisition form and you can see there are four boxes that are to be checked there by the physician. If one of those boxes isn’t checked, we do not perform the test. So we’re very, very disciplined in who gets access to the test. On the right is a sample of the test result. We give them a clear answer. Its either negatively positive and that is accepted very well in the marketplace.
If you look at the market opportunity for our test, there the latest good data that we have was from 2007, 4.3 million births in the U.S. The high-risk market is comprised of about 750,000 of the live births, that’s primarily the maternal age, which is over 600,000 and the balance comes from those other categories I mentioned earlier.
So it’s a very large market. Just to give you a comparison, if you look at the new oncology diagnosis every year for cancer, its somewhere in the range of 1 million from all different cancers combined. So it’s a very large market and right now we have very solid data supporting it and with the advent of the medical society guidelines, has really helped us with the rapid penetration into this market.
So if you look at the high risk births, just 750,000. By the end of 2012 we were at a run rate of 120,000. We actually completed over 60,000 tests last year in the first full year of launch, which is fairly dramatic and is really a wonderful quick adoption rate for a brand new technology.
By the end of the first quarter our annualized run rate was at 140,000 tests. We processed about 35,000 accessions in the first quarter. We expect that rate to continue. We actually hit a record number of accessions in the week at the end of April and we expect that we’ll have a continued growth throughout the year.
If you look at hard data, hard data from the commercial business, for the first 90,000 patient samples that we processed, we’ve collected what the reason was for taking the test and these numbers add up to more than 100%, because certain boxes might be checked more than once, but clearly the largest driver in high risk population is age. That accounted for about 68% of the samples that we processed. Then having a positive ultrasound or a positive serum-screening test was the second largest reason for having a test.
What’s more comforting I think with the same pool of 90,000 commercial samples run, the positive rate for T21, T18 and T13 is less than 3%, which means that over 97% of those patients had a negative result. The numbers that came out, that are on this slide, are very consistent with the results that we’ve experienced in the clinical validation study, which tells us that our test is performing the way we expected it would in terms of the results, and I think that’s very comforting to us that we see this consistency of test performance.
One of the high levels of interest of course is in our reimbursement environment and is the progress that we’re making here. If you look at the pie chart, about 70% of the high-risk hospital births that are aged 35 and above have some sort of private insurance, Medicaid represents about 23% and self-pay is the balance.
As many of you know, last week we announced in our earnings call that we signed our first national agreement with a nationwide payer that is Blue Cross and Blue Shield. That organization consists of about 38 affiliates and now under this blanket agreement, the affiliates have an opportunity that sign up with us.
That represents the largest single payer organization in the country, with approximately 100 million lives and in our case we currently had under agreement before we signed this national agreement, about 24 million with individual franchisees in the Blue Cross and Blue Shield organization. So we now have a goal of having more of those adopt this agreement.
We did also report that as we ended the first quarter we had in place contracts covering about 70 million lives and that’s been growing on a consistent basis up from about 56 million at the end of 2012 and we have negotiations ongoing with a number of regional and national payers, with the advent of the ACOG and SMFM guidelines, as well as the national coverage decisions, where many of the major payers, we’ve listed some of them here in united and from our point.
With the coverage decision, that set us to their organization that they will be reimbursing these tests and that actually helps us speed up the claims settlement and payment cycle once they issue those decisions. So that started in December after the guidelines were issued.
So we are quite pleased with the evolution of the reimbursement, while we will not go into what our average reimbursement is per test. The reimbursement that we are achieving is well within the range that we expected and we are quite pleased with the speed at which we are entering into these negotiations for contracting.
Normally it takes quite a few months from launch and I think because of the overwhelming interest and the quality of the test that we have established as the market leader test, that has helped many of the physicians and patients become comfortable with the product that we offer.
Each year for the past several years the current management team has established goals that we publish in the beginning of the year and then we track and monitor our performance towards those goals. We’ve broken them into those for the parent company Sequenom and that really focuses on our MassARRAY instrumentation.
As we talked earlier about the goal for the 510(k) filing this year for the MassARRAY in the second half additional panels and content for that platform and we have another program that we are working on for Ultra Sensitive Mutation Detection, which is a very exciting field and we expect to have some progress there in the second half of the year.
Turning to our laboratory subsidiary, wholly owned, the Sequenom Center for Molecular Medicine. I won’t go through all of these. We listed a number of important goals for the business for the year. One of those and this is our internal goal, to process a minimum of 150,000 tests for the maternity 21-plus test and we feel comfortable that we tracking nicely to that goal.
We already extended the test content to include sex chromosome aneuploidy. That was done in the first quarter of this year. We have a goal of at least three national players by the end of the year and 120 million lives under contract.
Additionally, we also set a goal for expanding our diagnostic sales force. We completed that in the first quarter. We now have 85 diagnostic sales territories, which allows us to cover very efficiently about 80% of the market. We are targeting of course the maternal fetal medicine specialist, as well as the high volume of the GYM market and now we have the feet on the ground to do that very efficiently.
We also as a goal in the second quarter, which we’ve already achieved, the launching of an expanded Cystic Fibrosis Carrier Screening panel and that’s called Heredi-T and we’re very pleased with the acceptance the market has given us on that and the publications surrounding that. And as I mentioned earlier in the second half of the year, we expect to complete the licensing and the CAP accreditation for our North Carolina facility and that will allow us to begin our commercial processing in the east cost for our T21 test.
The curves that we have established over the past several years as that would show adoption scenarios on this graph, we show a different range for you. At the low end is the 150,000 units that represent our internal goal.
We also showed the curves for 175,000 or 200,000 units and we reported last month that we had processed more than 100,000 MaterniT21 tests and that was reported in April, and we were quite pleased with that ramp rate. And I think thus far, with the exceptions that we set, internally have been met and we are seeing continues growth and we monitor this on a weekly basis as you might imagine.
One of the compounding issues that faces any new test in the market place is the accounting for the revenue and in our case we still use the cash method of accounting and according to GAAP, we do have to record the test cost when we conduct the test, when we accession the sample and perform the test, so our costs are very readily reported; however, the revenue we recognize once the cash is received.
Now in the first quarter of this year we recorded that approximately 35% of the revenue we reported related to tests that were performed in the first quarter and that’s the first time we gave that level of detail. That also suggests that 65% of the revenue we reported for our diagnostic test related to tests that were performed in 2012 or earlier.
As very important to us is to have control over this process and we recently announced that we have brought the billing process in-house, what this will allow us to do is to more promptly send the invoices with our own people organizing and running the billing systems and processes through a software that we have leased, instead of using a third party vendor to do all of that work and then we will be responsible for collection. That should speed up the payment cycle and give us ultimate control over it. We also have better data and detail on each clam and on the supporting documentation that we need to make sure that those calms are adjudicated property.
So at some point in the future, as we have more experience, we have more contracts in place and we can predict and demonstrate historically what that revenue per test will be, we hope to adopt the full accounting. Its uncertain exactly when that will be. We also have to give some certainty to our auditors that we are able to support and predict this and so that’s another hurdle that we will get over at some point in the future.
The last slide and the next to the last slide in the deck is our financial performance. As you can see, the revenue for the first quarter was $38.5 million and we had just under $90 million in revenue for all of last year. The diagnostic segment is taking on an every increasing percentage of that and we expect that rapid growth to continue.
We ended the first quarter and a very strong balance sheet position with an excess of $151 million in cash. Our cash burn for the first quarter was $25.7 million and that was well within our expectations of how we would perform in the quarter.
I think the final side is the market leadership that we demonstrated with our MaterniT21 PLUS test. We were the first to develop this test, first to launch it with dramatic innovation back in October 2011 and we now have more experience than anyone else with Noninvasive Prenatal Testing.
We’ve already passed the milestone of 100,000 commercial tests run. We have a strong balance sheet. We have very large sales force that allows us to call on physicals and genetic councilors and allows us a couple of very efficiently the key markets, both for the specialist as well as the Ob/Gyn practices.
We now have in place the instrument capacity that’s validated and ready to go to run more than 300,000 tests per year at 12-plus and we can further expand that as the market demand grows with our large North Carolina facility.
The content that we have in our tests is as broad as anything available in the Noninvasive space with the content that we’ve added this year. We also consistently have performed better than our goal, which is less than seven business days turnaround. This is extremely important for the patients and the anxiety levels that they have.
We consistently beat this and we invested in the infrastructure to allow us to do that and our clinical study that the test was based on with over 4,000 patients is the most comprehensive published to-date and our performance of no result or no call is statistically in the range that we exhibited in our clinical trials and we are very pleased with that and that’s a very comforting statistics for those who are looking for a result from the test when its performed.
Our marked penetration among the specialists is over 60%, so we are quite pleased with that and I think that rapid adoption by the key opinion leaders of the specialist helped in ACOG's adopting, along with the SMFM, that guideline, very quickly in the lifecycle.
And we continue to focus on maintaining this infrastructure. We have four tests in the diagnostic space currently and so we continue to provide the best customer service, the best medical education and the best R&D support.
With that, that’s the end of our formal presentation. We are happy to take questions.
Great, I’ll start. This I usually my ending question, but I’m going to ask it first off to the company. So I’m just here, if you sort of like annualized your $38.5 million for this year, the revenue number and you sort of looked at where the stock is trading, its roughly about three times debt. Can you look at what the report is?
You reported a 138% revenue growth stock. You’ve made a lot of process with this. For a company wearing SaaS you can trade at higher multiples in this. I’m just curious, what do you think the street is skeptical about, and what do you think street is missing. I’m curious as to what – you’ve got your view.
Well, if I know the answer I would probably not share it with you, but I think the best sense that we have is, we as the management team are committed to having the best tests on the markets and providing the best support. We’re in this for the long term and there is certainly volatility in our space.
We are in a unique situation that we are really the only public company that has this test. So for the investor, they can participate in and you could tell, well recently one of our competitors was acquired by Lumina, but they still don’t have visibility, because that’s just a small part of the their overall mission.
And I think that the feedback we get from investors is primarily they are waiting to see the real revenue and the average revenue per test and there is no doubt that we can perform and that we have a significant mark of share and I think that there is a lot of market timing discussions that go on.
But when all is said and done, the goals that we have established, the transparency in terms of how well we are doing, other than saying what our average revenue is, I think we’ve fulfilled all of the major goals that have been established. We are very pleased with the way it’s performing and ultimately we expect that the market capitalization as the company would reflect that.
Great, I’m going to ask you a couple of questions on the periphery. I guess how many of the tests that you are currently doing, was this the patients, doctors first choice versus it being a reflect to some of the micro biochemical stream or a…
Well, that’s a good question. I don’t think there’s any simple way to collect hard data on that. Typically many patients have the screening, the scrum screening at the font end and many patients also have the ultrasound and we don’t have a way of collecting that data.
But if you look at the makeup of the population of who has taken the test, certainly the advanced material age is the biggest driver and often times there might be some ambiguity in what the serum screening test is, because we all know that there is a much lower of accuracy in those early tests and even ultrasound, it depends on the position of the baby, how the results are read, so its hard to know that.
But I think that if my wife were a high risk age and contemplating moving forward, I think I would recommend that if she was of advanced maternal age to take this Noninvasive test.
I guess it’s a screen test. I mean how are you – I know there were some comments in the press recently about essentially some people not using it more as a diagnostic and skipping AMEO, a person who has a confirmatory on this. I guess how are you assuming that its sort of like, the doctors are prescribing it just to go onto the next level.
Well, I think the bottom line is, this is a test that provides a lot of valuable information and its additional information that a physician and a patient didn’t have before they took the test and we have said that with our results that more than 97% of our test results come out negative; that’s got to be very reassuring.
And because of the accuracy of our test and, because of the very low no result rate, that has to be much more valuable information versus ultrasound alone or the screening results alone, and I think that’s why the healthcare system is paying for it and why the healthcare system is very pleased to have this opportunity out there and so that’s really of the crux of the value added.
Now if there’s a positive result in our test and we said our commercial results are very similar to our clinical results, if there is a positive result, we would always suggest that the physician consider a confirmatory invasive procedure. But on the front end with a negative on our test result, that should provide a high level of anxiety relief to both the patient and the physician.
And with that we are out of time. Thank you very much and thank you everybody for attending the conference. Have a safe travel.
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