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Executives

Ian Clements - Senior Director, Corporate Communications

Harry Stylli - President and CEO

Paul Hawran - CFO

Analysts

Elemer Piros - Rodman

Sean Lavin - Lazard

Bruce Cranna - Leerink Swann

Raghuram Selvaraju - Hapoalim

Zarak Khurshid - Caris

Pamela Bassett - Cantor

Evan Lope - Barclays Capital

Junaid Husain - Soleil

Gabe Hoffman - Accipiter

SEQUENOM, Inc. (SQNM) Q2 2009 Earnings Call August 6, 2009 4:30 AM ET

Operator

Welcome to the Q2 2009 SEQUENOM earnings call. (Operator Instructions)

I would now like to turn the call over to Mr. Ian Clements, Senior Director of Corporate Communications. Please proceed, sir.

Ian Clements

Thank you and good afternoon, everybody. Joining me today are Dr. Harry Stylli, President and Chief Executive Officer; Paul Hawran, Chief Financial Officer; Dr. Allan Bombard, Chief Medical Officer, and Gary Riordan, VP, Regulatory Affairs.

Earlier this afternoon SEQUENOM issued a news release announcing SEQUENOM's results for the 2009 quarter. If you've not received this news release or if you'd like to be added to the company's distribution lists, 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 and intentions regarding developing and launching various laboratory developed tests, future plans for panel development, expectations regarding sufficiency of SEQUENOM's financial resources to do so, as well as financial guidance and other forward-looking statements. I would like to emphasize that these statements are based on information available to SEQUENOM today and subject to various risks and uncertainties, including the risks associated with the company's ongoing independent investigation and other risks more fully described in the company's SEC filings. The company's actual results may differ materially from the statements made during today's conference call, and the company undertakes no obligation to update any of these statements.

With that said, I'd now like to turn the call over to Harry. Harry?

Harry Stylli

Thanks, Ian, and my thanks to each of you for joining us. We recognize our responsibility to keep our investors informed, especially in view of our announcement on April 29 related to our Down Syndrome Test. However, we are also obliged to allow the independent investigation being directed by a Special Committee of our Board to proceed and conclude unfettered. We intend to announce the results of the investigation at the direction of the Special Committee. Thus, in the meantime, it may appear that the company is being guarded in its external communications, but this is necessary until we have all the facts, and these facts can be properly disclosed to all our investors.

That said, let me provide the following update. We had a setback in our molecular diagnostic programs. However, we are recovering. SEQUENOM has a deep and capable R&D organization and we are drawing on these resources to drive forward the R&D studies for our prenatal diagnostic tests.

As you can imagine, since May 2009, the majority of our R&D effort was initially focused on assessing the status of the Down Syndrome Test. Our focus is now transitioning to the development of a test. We are evaluating an RNA-based test in addition to a family of DNA-based tests, both at SEQUENOM and with our scientific collaborators. Amongst our scientific collaborators, Professor Dennis Lo is both exceptionally productive and supportive.

Clinical samples are literally the lifeblood of our efforts. Our clinical advisors have been supportive and remain committed to providing us with patient samples that will be required for the development and ultimate commercialization of our Down Syndrome Test. New clinical sites both in the US and internationally are being enrolled, and these efforts have been supplemented with a clinical research organization partner. In spite of the setback, I'm encouraged by our progress to-date and look forward to updating you with regard to the Down Syndrome Test in future calls.

I would now like to provide an update on the progress of our business and various programs. We have initiated a number of key changes, which we believe will benefit our genetic analysis business and potentially capture the synergy we envisage with our molecular diagnostics business.

Looking at our MassARRAY core technology, we have focused on its fundamental strengths, which we and the market believe include its unique ability for its cost effectiveness, sensitivity, quantification and its high throughput capacity. Frankly, we are not aware of another platform that has the same combination of attributes as our MassARRAY system. These capabilities are important not only in our traditional fine mapping market, but are also becoming increasingly important in clinical research, or as some say, the traditional research markets for both academia and pharmaceuticals.

Furthermore, we are also targeting key segments of the agricultural and livestocks markets with growing success. In order to pursue these market opportunities more effectively, we have recently introduced a number of new products and have made some key organizational changes.

First, we introduced the Compact 96 MassARRAY system at a more competitive price point for lower throughput users. This system is uniquely positioned to address the needs of the translational research market. With the generation of massive amounts of data from various discovery initiatives, the ability to analyze and validate this data cost effectively is critical, and PCR-MS technology plays a vital role in this process.

The MassARRAY systems enables detection of the most common molecular biomarker classes, in mutations, snips, copy number variations, methylation patterns and expression signatures with exceptional quantitative accuracy and sensitivity. This is exactly the type of high data quality that can push biomarkers to clinical utilization and make the promise of personalized medicine a reality.

Second, last year we introduced the OncoCarta Panel, our oncogene mutation panel. As personalized medicine becomes a focus for clinicians, we believe that SEQUENOM and its technology will be well positioned to take advantage of work paradigms that can be used to genetically type human biopsies to definitely help guide molecular therapy selection by physicians.

In addition to continuing to improving the OncoCarta Panel by adding further oncogenes and mutations, we plan to develop and introduce new content. For instance, ADME panels, lupus, kidney failure and focused oncology panels, as breast, colorectal, lungs, leukemia and prostate. These panels and various collaborations could mature into the future into laboratory tests or even into in vitro diagnostics.

In addition to our Down Syndrome Test, SEQUENOM has a rich portfolio of promising molecular diagnostics assays and has established the operational and commercial infrastructure through the SEQUENOM Center for Molecular Medicine to advance a number of them to market.

We expect to commercialize our cystic fibrosis carrier screening assay, our fetal sex determination assay, and our Rhesus D genotyping assay as laboratory developed tests. We're also developing an assay for confirming the presence of cell-free fetal DNA in maternal plasma. This is called the fetal identifier assay. This assay will in future complement our Rhesus D test and fetal sex determination assay to enable the confirmation of female fetuses.

Now, I will provide you with more details regarding these tests. We are currently planning to make our cystic fibrosis carrier screening test available this quarter or early next quarter as a laboratory developed test. Cystic fibrosis carriers screening is a cornerstone genetic test in the OB/GYN market, and I'm optimistic about the potential of this test and our ability to share in a market that currently approaches $300 million in annual US sales.

We recognize the competitive nature of the market for these tests, but we believe that our advantage of speed, accuracy and the ability to detect more CF mutations than currently available will provide a competitive advantage. Using the standard 23 mutation CF panel, approximately one in 17 cystic fibrosis carriers are missed.

Our new cystic fibrosis carrier screening panel, which covers approximately 105 mutations, including all the mutations recommended by the American College of Obstetricians and Gynecologists and the American College of Medical Genetics, may allow physicians and their patients to make more informed decisions regarding the cystic fibrosis carrier basis.

Our sales force plans to introduce this product in 18 metropolitan markets in the US and it will be our first product launched by our CLIA laboratory, SCMM, into the clinical testing market. I look forward to providing future assay post launches. I believe that not only is this an important step for SEQUENOM, but also an important new test in the physician's arsenal.

We are planning to launch our fetal sex determination and Rhesus D genotyping test around the first quarter of 2010. These will be the first of hopefully many tests based on our cell-free fetal nucleic acid technology, which we believe will prove to be an important technology for developing noninvasive prenatal diagnostic tests. These tests will also be made available in at least 18 metropolitan markets from launch and leverage the same OB/GYN channel as cystic fibrosis carrier screening.

We estimate that the general use of our fetal sex determination test may represent a potential overall market opportunity in the range of 150 to $200 million annually in the US alone. Our tests will be offered from the first trimester, and we will initially focus on the physicians ordered segments which we believe represent about $50 million of the overall US market.

Rhesus D is another test based upon measurement of circulating cell-free fetal nucleic acids in the mother's blood. It is estimated that there are 528,000 Rhesus D negative women in the US of which about 40% are unnecessarily treated with anti-D immunoglobulin, which is derived from human blood products and is the treatment for women who are Rhesus D negative. The total potential market size in the US alone is estimated at 250 million to 300 million annually for this particular test.

Turning to our Down Syndrome Test, we have repeatedly stated that we strongly believe in the underlying science relating to detection of cell-free fetal nucleic acids, which has been cited in many Rhesus publications since its discovery in 1997. As part of our ongoing assessment, we have replicated Professor Dennis Lo's original work on RNA for 221.

The breadth and depth of our intellectual property, especially with regard to the use of cell-free fetal nucleic acids for noninvasive prenatal tests, is illustrated by our ability to evaluate both RNA and DNA-based approaches. We are taking a rigorous detailed approach to the evaluation.

Under the current circumstances relating to the ongoing internal investigation, we remain cautious and careful with regard to providing timelines and milestones. We believe that a commercially differentiated cell-free fetal nucleic acid based test for Down Syndrome is a matter of time and we are committed to continuing to advance the development of this test. We hope that commercialization of the Down Syndrome test will occur in 2010, subject to the publication results from the independent clinical studies. However, as I indicated earlier, we can make no assurances with respect to timelines for the development and launch of the Down Syndrome Test.

Finally, a word on our other diagnostic assays. Last month, we announced that the University of Michigan published promising results in the use of the AttoSense HPV test. Results from this study showed that as many as 15% of women in the study group determined to be negative to the presence of human papillomavirus, HPV, in the cervix via the most commonly used test for HPV DNA may actually be infected with the virus at clinically relevant viral loads.

We are enthusiastic about the future prospects for the AttoSense HPV test, particularly the potential to close the last major gap in screening for cervical cancer, and thus, possibly save the lives of thousands of women worldwide. We are planning to utilize the capabilities of our MassARRAY platform to improve this test further as having an assay that shows great standalone potential as well as the possibility of combining with other tests for HPV, could play a key role in HPV genotyping.

HPV genotyping is an emerging market, which could potentially grow to over $300 million in the US alone. We believe that the AttoSense HPV test could be an important addition to our growing women's health portfolio and is another example of our commitment to improving the health of women around the world. It also leverages our OB/GYN channel. The company is exploring actually broader commercialization of opportunities for the HPV technology, including partnering.

We also are evaluating further noninvasive prenatal tests such as for T18 and T13 and additional carrier screens. SEQUENOM has also secured key markers or assay technologies for various cancers, including HPV head and neck, as well as lupus, which overwhelmingly affects women, and the (inaudible) market for chronic kidney failure.

Going forward we expect to publish our key findings and to continue to present our scientific and clinical work at conferences. We shall discuss T18, T13, lupus, chronic kidney failure, various oncology assets and other tests on future calls.

These are challenging times for SEQUENOM. However, I hope that I've imparted a few reasons for the excitement we feel here at the company. It is also important that our many investors recognize that our strategic vision for the future incorporates all elements of our businesses. Our MassARRAY platform has unique competitive characteristics that we are taking advantage of, both in our genetic analysis and molecular diagnostics activities.

Our molecular diagnostics activities are rapidly transitioning to a commercial phase, and we are deploying our resources where we believe we can generate the greatest returns for our shareholders.

Before opening the call up to questions, I will let Paul discuss our quarterly numbers and six-month numbers. Paul?

Paul Hawran

Thanks, Harry, and good afternoon, everyone. With respect to the second quarter numbers, we reported total revenues for the three months ended June 30 of 9.2 million as compared to 12.8 million for the second quarter and as compared to 8.7 million in the first quarter of 2009. The decrease from the prior year was primarily due to the softness in the capital expenditure market.

However, we are seeing light at the end of the tunnel and are cautiously optimistic that in combination with our additional focus and rebound of the economy, the genetic analysis business will resume a normal growth pattern.

Cost of product and service revenue for the second quarter was 3.1 million as compared with 5.5 million for the second quarter of 2008. Gross margin was 66% for the second quarter of 2009 as compared to 57% for the same quarter last year. Gross margin was primarily affected by higher sales of consumables, which sell at higher margins.

We are on target with our formally projected increase in clinical research file activities. To that end, research and development expenses were 10.2 million for the second quarter of 2009 compared with 6.4 million for the same period in the prior year. R&D expenses for the second quarter reflected additional expense with the company's molecular diagnostics technology, as well as its MassARRAY product development. We also reported higher stock-based compensation expense.

SG&A expenses of 15.1 million for the second quarter of 2009 increased from $10.6 million from the second quarter of the prior year as a result of increased legal expenses, higher stock-based compensation expense, higher facility costs and expenses association with the expansion of our contract sales force.

Total costs and expenses for the quarter were 29.5 million, including 1 million in restructuring costs compared with 22.5 million for the comparable quarter in 2008. Our net loss for the second quarter was 20.2 million or $0.33 per share as compared with a net loss of 9.7 million or 0.21 per share for the same quarter on 2008.

Now turning quickly to the six months of 2009, revenues totaled 17.9 million compared with 23.4 million for the first six months of 2008. Cost of product and service revenues for the first six months of 2009 were 6.6 million compared with 10.1 million reported for the first six months of 2008. Total cost and expenses for the first six months of 2009 were 55.9 million versus 41.2 million for the comparable period in 2008.

We reported a net loss for the first six months of 37.7 million or $0.62 per share versus a net loss for the comparable period of 18.4 million or $0.40 per share. As of June 30, SEQUENOM had total cash, cash equivalents, short and long-term marketable securities of 69.3 million.

Turning to our 2009 financial guidance, we are reaffirming our expectations that full year 2009 total revenues will range between 32 and 35 million. Gross margin is expected to be approximately 57% in 2009. Genetic analysis is expected to report a loss of approximately 11 million, which includes approximately 5 million in non-cash FAS 123(R) expense, as well as 9 million in corporate allocations, while incurring a breakeven cash burn.

The company is not providing revenue guidance for the molecular diagnostics business. However, molecular diagnostics is expected to incur a net loss of approximately 54 million, which includes approximately 7 million in non-cash FAS 123 expense and 21 million in corporate allocations, while incurring a cash burn of approximately 52 to 55 million.

On a consolidated basis, the company is expected to report a [2000] net loss of approximately 65 million and is expected to end 2009 with total cash and marketable securities of about $45 million.

With that, I will turn it back to Harry.

Harry Stylli

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

Question-and-Answer Session

Operator

(Operator Instructions).

Harry Stylli

While we wait for our question queue to be compiled or complied, I would like to take a moment to welcome a couple of new additions to our leadership team.

Clinical operations are clearly an important focus for the company. I'm delighted that Mary Rose Keller has joined SEQUENOM as Vice President of Clinical Operations reporting to our Chief Medical Officer, Dr. Allan Bombard. Mary Rose brings more than 25 years of clinical research experience across a broad range of therapeutic areas as well as diagnostic and treatment modalities.

She has significant prior experience in all facets of clinical development working with biotech and pharmaceutical companies, academic institutions and contract research organizations, including managing numerous global regulatory submissions and approvals.

Ramping up for laboratory developed test launches is going to be a major focus for our commercial operations group in the coming months. It is worth mentioning another new addition to the team, Joe Zimmerman, who has joined as Vice President of Managed Care. Joe's background includes management positions at AmeriPath and LabCorp. Joe also held several key sales, marketing and managed care positions at UroCor and Dianon prior to the acquisition by LabCorp.

Okay, operator, we're ready for the first question.

Operator

Your first question comes from the line of Elemer Piros with Rodman. Please proceed.

Elemer Piros - Rodman

Good afternoon. Can you hear me?

Harry Stylli

We hear you loud and clear, Elemer.

Elemer Piros - Rodman

A fairly reasonable quarter considering, and just by looking at your guidance for the rest of the year, it seems like you project to experience continued softness because in order to meet even the top and the rear guidance, I have to decrease some of the items here for the second half. Is that a correct way at looking at the situation?

Paul Hawran

Yeah. I think actually we are actually waiting for the third quarter to get a better handle on a full year results right now, Elemer. But right now we just want to be cautious and stay with the same guidance that we've had, modified for things that we know that are absolute. So, that's the reason why we've kept it essentially unchanged.

Elemer Piros - Rodman

I tried to reconcile the guidance, Paul, and just back of the envelope calculation assumed 35 million revenue, cost of goods roughly 15, and just keeping the R&D at the same level as we are roughly 40 for the year, that's maybe a little bit too much, selling and marketing around $30 million, G&A at $32 million, I'm coming up with a number that is closer to 115 in total costs and expenses. If I back out the 35 million revenue projected, then I'm still getting roughly an $80 million loss, which is in contrast to what you have projected. Where do I go wrong?

Paul Hawran

Yeah. Again, I wouldn't know to be able to go over your numbers specifically, but I'd be happy to entertain a call offline. But I don't believe that an $80 million number is in the cards right now for the organization. Okay?

Elemer Piros - Rodman

That's okay.

Paul Hawran

Plus also one of the elements that you are potentially missing among a couple might be the piece on the molecular diagnostics business as well. So that would add to that number.

Elemer Piros - Rodman

In terms of revenue?

Paul Hawran

Yes, exactly. As we said, we're not projecting or we haven't provided any guidance regarding molecular diagnostics.

Elemer Piros - Rodman

But that in your net loss figure you may have included some of that number?

Paul Hawran

Exactly. In my net loss number, that includes everything. But what is not seen by my guidance is the fact that I'm not exactly explicitly pointing out what the molecular diagnostics revenues are.

Elemer Piros - Rodman

Understand. Okay. Since we are with the numbers, Paul, I have one more question on in terms of legal expenses. What is it roughly on a quarterly basis and there are we in the process; i.e., looking at this quarter's number, would it be indicative of what we are going to look at in future quarters or we haven't reached that level yet?

Paul Hawran

I think that's a great question, Elemer. I think that what we're looking at in this quarter, we haven't broken out legal expenses separately, and accordingly, I wouldn't break that out for you. But I can tell you that we believe that during the second quarter we saw a lot of legal expenses. We think that there might be a small pop or similar to the second quarter in legal expenses, and then potentially going down or staying the same.

Elemer Piros - Rodman

Okay. Harry, I'd like to ask a couple of questions about the anticipated test that you are going to launch. So, the key differentiating feature, if I understood it correctly, for example, if we are looking at the CFTR test would be the number of new patients that are approximately four times as many that you could be tagged with your platform vis-à-vis the competitors that are out there. Is that correct?

Harry Stylli

I think it's fair to say that true for the competitors who are offering the ACOG approved panel. There are some potential competitors who offer larger panel tests between 70 and 97 markers.

Elemer Piros - Rodman

Okay. And when we think about reimbursement, does reimbursement as it is right now, probably just looking at how many mutations you are detecting and goes after permutation you get a certain amount or how does that work?

Harry Stylli

Well, the market for cystic fibrosis works differently. It would be nice to be able to get reimbursed from all mutations on a CPT code stack, but because it's a competitive market, there is a price range for which reimbursement occurs for cystic fibrosis.

Elemer Piros - Rodman

And what would that range be just roughly?

Harry Stylli

Just roughly probably from about $250 to around four or $500.

Elemer Piros - Rodman

So normally how many mutations you have?

Harry Stylli

Well, I would say the more mutations you have, that would be closer to the higher end of my range.

Elemer Piros - Rodman

And what would the ACOG guidelines be; i.e., go for as much as possible or there are some key mutations that…

Harry Stylli

No. I think the guidelines really focus on the 23 member panel today. But our understanding is those guidelines are changing and perhaps may move. And this is forward-looking to a direction where you have broader ethnic coverage, for example, especially in the US market, which is very ethnically diverse.

Elemer Piros - Rodman

Right. And one last question if I may direct it to Dr. Bombard. Is he on the phone, by the way?

Allan Bombard

Yes, I'm here.

Elemer Piros - Rodman

Great. How are you? If you look at the centers, Dr. Bombard, that were available and ready to go prior to the announcement at the end of April, how is the makeup of those centers? Have you engaged new centers, Have some dropped off, what's the steady state at this moment? And then, I would have a follow-up question as well.

Allan Bombard

Well, as expected, there is some fluctuation, but in general the number of centers that are enrolling patients have increased both in the US and outside of the US.

Elemer Piros - Rodman

Okay. How many centers we have in the US in order of magnitude, not the precise number?

Allan Bombard

I'm not at liberty to say.

Elemer Piros - Rodman

Okay. And a follow-up question to that, Dr. Bombard. Is there any competition for patient samples? Do you see other companies there was a lot of noise probably about six months ago with alternative technologies for these patient samples.

Allan Bombard

It's been uncommonly quiet out there, and I really haven't seen much in the way of competitor activity.

Elemer Piros - Rodman

So it doesn't appear at least for the time being that you are losing out on capacity to competitors?

Allan Bombard

No, it doesn't appear that at all.

Harry Stylli

I think to the contrary we're not hearing a thing, whereas it's true to say a few months ago we were.

Operator

Your next question comes from the line Sean Lavin with Lazard. Please proceed.

Sean Lavin - Lazard

So I understand you can't talk about the investigation and what may have gone wrong in the past. That said, you must have a better idea now than you did three months ago about what needs to be done to bring it down to the test market. Can you tell us at all about what items remain you either need to improve or perfect before you might validate a test?

Harry Stylli

I'd rather not say until after the investigation. But suffice it to say, we're getting a grip around what needs to be done. We understand what the gaps are and we're working diligently to address them.

Sean Lavin - Lazard

The process of finding things you need to do or are you working, I guess, are you addressing them now?

Harry Stylli

I think we're transitioning. Transitioning and improving.

Operator

Your next question comes from the line of Bruce Cranna with Leerink Swann. Please proceed.

Bruce Cranna - Leerink Swann

Harry, you can give us an actual placement number for MassARRAY in the quarter?

Paul Hawran

Sure, we had eight MassARRAYs placed in the quarter. That compares with nine in the first quarter. So it's 17 in total.

Bruce Cranna - Leerink Swann

And Paul, are any of those Compact 96s or not?

Paul Hawran

I believe there were one or two Compact 96s that were sold in the first quarter. And in the second quarter.

Bruce Cranna - Leerink Swann

Right. No, I got it. And Harry, the VP of Clinical Operations, is this a new position?

Harry Stylli

This was a position that we were recruiting for since probably the end of last year, beginning of this year.

Bruce Cranna - Leerink Swann

Okay. And on the last call, I know whenever that was back in, I guess, April, May, and I'm sure you don't want to put too fine a point on this, but we were talking about timing of various things related to SEQureDx. And maybe you can just give us some sense as to and I know at that time, I think mid '09 or maybe it was August '09, we were hoping to see something on the technical side, a journal piece perhaps describing the DNA methodology. Do you have any thoughts on whether that might be forthcoming?

Harry Stylli

I could tell you what we are looking to do is in due course and certainly after the investigation reports, we will be coming back with, hopefully, timelines.

Bruce Cranna - Leerink Swann

Okay. So you're still sort of hamstrung by that process even with respect to describing the DNA technology?

Harry Stylli

It is only a factor in the whole mix.

Bruce Cranna - Leerink Swann

Okay. And then, lastly for me, just so I'm clear on CF, Harry, I think you said 250 to maybe $400. I thought the question was on pricing, but that strikes me as that's really the reimbursement number?

Harry Stylli

That's the reimbursement number.

Bruce Cranna - Leerink Swann

Right. So any thoughts on your part as to pricing at this point?

Harry Stylli

Yes, I do have thoughts and it's extremely high, okay. So like I said, the market doesn't function here on the billing price. It functions on the reimbursement range. That's very well established in the marketplace and is driven principally by the number of markers that you have in your assay.

Bruce Cranna - Leerink Swann

Yeah.

Harry Stylli

And they lie within the range that I'm not saying there is some outside the ranges that I've given you, but they lie within the range that I shared with you earlier.

Bruce Cranna - Leerink Swann

Right. I'm kind of curious as to whether or not you think, I mean, obviously, it sounds like you guys have an accuracy pitch that maybe could be differentiating. But so…

Harry Stylli

We believe so. We believe we have got a number of potential differentiators, not least of which is a slightly broader ethnic coverage. We believe that this market really is driven by obviously the quality of the assay and the service, but also the degree of completeness of the ethnic coverage.

Bruce Cranna - Leerink Swann

Right. So you don't want to share a number with us?

Harry Stylli

I don't want to share a number with you at this stage, but in due course I'm going to very much look forward to do that.

Operator

Your next question comes from the line of Ram Selvaraju with Hapoalim. Please proceed.

Raghuram Selvaraju - Hapoalim

Fine. Thanks. So, coming back to the MassARRAY business for a second, would it be possible for you to give us a breakdown of where the MassARRAY placements occurred in the US and outside of the US in the current quarter?

Harry Stylli

Yeah. I mean I could do it in terms of customer segments. I'd say we saw good business from translational groups that we're targeting, some of our traditional customers in fine mapping validation, but I think internationally it was a mixture of some testing facilities that both human testing as well as livestock testing as separate opportunities. That's where we saw our business really coming from. We're also seeing a pickup across the board in our consumables sales, which…

Raghuram Selvaraju - Hapoalim

Right. I was just going to get to that. Do you see any trends emerging with respect to the international business on the consumables side? Is use of consumables accelerating in the international market? Are you seeing placement for the MassARRAY itself picking up in the international market as opposed to the US?

Harry Stylli

I would say we're seeing what could be the early signs of recovery in the US. I would say the international market, if they are lagging the US, they may be, it's hard to say. But we're actually seeing those markets being relatively resilient, okay? Consumables seem to be growing across the board whether in the US or internationally. And if you want to be optimistic, which you can be, you could see those as leading indicators of a pickup in demand, but I'm not willing to go there at this stage.

Raghuram Selvaraju - Hapoalim

Okay. And then, with respect to timing of the launches of the proposed diagnostic tests that you mentioned, the cystic fibrosis, RhD and gender determination, you said that the first of these is going to be this quarter or early next quarter.

Harry Stylli

Right.

Raghuram Selvaraju - Hapoalim

What sort of gap would we expect with the other two? So I presume that by the first quarter of 2010 you would have all three, but what sort of gap is between getting the RhD and gender determination out there?

Harry Stylli

No, I don't believe we've finalized that, okay, but we'd like to put one out towards the end of this quarter, beginning of next quarter. Hopefully, one sort of on or around the end of the year and one towards the end of Q1. That's our strategy. We'll be looking to see what we can do to accelerate some of those things, but that's the plan we're on right now.

Raghuram Selvaraju - Hapoalim

Okay. How should we think about pricing for the RhD and the gender determination tests? Obviously, we've gone into some detail on CFTR. Is CPT code stacking applicable to RhD and gender determination, how should we think about those things?

Harry Stylli

I think CPT code stacking is very applicable to Rhesus D, and that's the approach we are going to take. And we've got a very good idea of where we feel our reimbursement is going to be, but I don't want to disclose that today. For Fetal XY, you could use a function of CPT codes, but really you could also price it according to market, okay? Our initial segment that we're going to target over the market is going to be physician ordered tests. It's a test that will be ordered directly by the physician and the majority of, let's just say, reimbursement may just simply be cash-based business, okay? So I'm not defining that, but that's where we're heading.

Raghuram Selvaraju - Hapoalim

Can you give us a range as to what physician ordered tests typically cost?

Harry Stylli

They could range from anything. So, the most important question should be, what should our sex determination test be? And we are refining that very, very carefully. So we haven't finalized the pricing for that particular test. And as always, it's a balance between market adoption rate and penetration and good margins in the beginning, and that's the part we are working out.

Raghuram Selvaraju - Hapoalim

Okay. And then, with respect to the way the launch mechanics would work with these tests, I would presume that this is quite different from the previously defined launch mechanics that were being proposed for the original Down Syndrome Test. Can you tell me how you plan to roll these out, what sort of pre-launch activities you are currently engaged in, what the overall strategy is for the company and is PDI still involved in any way?

Harry Stylli

The answer is, yes, PDI is very much involved, okay? We have about 13 folks in our sales organization, nine of whom are salespeople, okay? We're going to rollout initially in this quarter I'd say a soft rollout in around 18 metropolitan centers around the country. The pre-launch activity is just initiating with training a sales force specifically for the cystic fibrosis test. And then, we expect a gradual rollout consistent with launching an LVT. We're taking a gentle approach in the beginning. So this is a rollout of the test as opposed to a national coverage for the test, and all these tests work very, very nicely together because they leverage the same OB/GYN channel that I've just made a reference to. It positions us firmly as a growing women's health diversified molecular diagnostics business. And this future test, of course, we'll launch through exactly the same channel that we are developing in the pipeline or assessing. So it all works very, very nicely. Cystic fibrosis I refer to as a cornerstone test that if you are addressing the women's health and certainly the women's health genetics market is a helpful test. It's actually having your back to present a richer portfolio of opportunities to the physician, okay? And, of course, it's SCMN that is driving all of this. It's is our SCMN facility that's driving all this activity. I mean, they are all going to be LVT. SCMN has developed and will launch directly to the OB/GYN.

Raghuram Selvaraju - Hapoalim

Okay. And then just very quickly, one last question, are you currently exploring any opportunities for out-licensing of SEQUENOM's extensive intellectual property portfolio, and specifically have you entertained discussions with other parties interested in prenatal noninvasive diagnostics on the aspect specifically covering fetal genetic material analysis and maternal blood?

Harry Stylli

The answer to your question is none that I know of, but we're always open to the idea of finding appropriate partners to extract the greatest value from our assets, whether they are in prenatal or they are HPV or whatever. For these potential partnerships, we've got a number in place already that could take a variety of forms.

Operator

The next question comes from the line of Zarak Khurshid with Caris. Please proceed.

Zarak Khurshid - Caris

Hi, Harry and company. Thanks for taking my question. First, with respect to the investigation, when it is complete, how quickly do you think we'd find out about that and how much detail about the findings and what exactly happened do you think that we'd get?

Harry Stylli

That's down to the investigation, the Special Committee, and I couldn't really comment on that. Provided it's all good, we'd like to put out as much information as we can.

Zarak Khurshid - Caris

Okay, great. And then with respect to be the Rhesus D test, can you just remind us how that timeline has kind of played out or changed over the last year? It seems like it may have been pushed out slightly. Did anything change with the product development in light of the mishandling?

Harry Stylli

I'd say as a consequence of what we reported on April the 29th that all tests were subject to a review in exact time, and during that process there was minimal or no development. As we came through that process, we found that we were in a better position for some of these tests than others. And the consequences of that and a couple of other technical things is what you see, okay?

Operator

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

Pamela Bassett - Cantor

Good. Fine. Thank you. You've made a lot of progress this quarter. If you haven't discussed it more fully already, could you talk a little bit more about, how you're going to proceed with HPV and are you considering combining this diagnostic with other kinds of cancer diagnostics, either something you might develop internally or externally? I'm thinking of head and neck here and I'm thinking of the OB/GYN application.

Harry Stylli

Yeah. So I would say those are great questions, thank you. I would say that one of the reasons we acquired HPV is we see it as a very valuable asset where the market has a substantial need, both in primary screening, and more importantly, in genotyping. And these two activities will perform a very important role. Now, the main prescribers of this particular test are OB/GYN. So that's clearly a great fit for our future business model. Now, having said that, we're also open to the idea of partnering in the HPV arena, particularly if it means getting to the market sooner. Then we would be able on as an individual entity. So it's something that is definitely happening. Now, on the HPV head and neck end of the equation, I believe we've got the basis of a very compelling assay and it is just a question of, frankly, prioritizing what we do next amongst the set of other very compelling opportunities that we have. But clearly, HPV head and neck is one that we are paying a lot of attention to where we believe we have a technical advantage in addressing that, what seems to be what could be a very important market.

Pamela Bassett - Cantor

I mean in both of these indications, what you really want to know is does the patient have cancer or will the patient get cancer? And then in oral cancer, the HPV can be an indication of how rapidly it will progress if it's found.

Harry Stylli

Correct. There are also integration tests that are being considered where a more direct, if you like, measurement of your cancer risk has the virus or particular domains in the virus integrated into your genome. That's a little further out there in terms of the science team fully abate, but it's also something we've been considering through our academic relationships.

Operator

Your next question comes from the line of [Evan Lope] with Barclays Capital. Please proceed.

Evan Lope - Barclays Capital

Good afternoon. I was wondering if you could first talk on the base genetic analysis business. Given the way that things are trending and given that it's essentially breakeven this year plus potential stimulus, do you see this being cash flow positive in 2010?

Harry Stylli

It may well be cash flow positive in 2010, but a factor we've not formulated yet is obviously we've not given 2010 guidance. And one of the considerations if we see growth is we may decide to invest into that growth.

Evan Lope - Barclays Capital

Okay. And then, could you talk maybe about what is the rate of consumable pull through per up and running MassARRAY currently?

Harry Stylli

Yeah. It's probably in the same kind of region of around 80 to $100,000 per platform installed. Although, like we said earlier, what's particularly encouraging is we've seen growth. We've seen a turnover in some of our major customers. And to actually have growth, well that's occurred, because new customers are kicking in and doing a lot of work on our platform. That's actually quite pleasing, okay? And again, as I said earlier, the optimists and this room for optimism suggests that this is an early sign that the market might be thawing a little bit, but I'm not there yet.

Evan Lope - Barclays Capital

All right. Thank you. And switching over to the diagnostics side of things, the tests that you are planning to launch, are these going to be only performed at SCMM or are they going to be sold to others to perform?

Harry Stylli

No, these tests will only be performed at SCMM consistent with the model we discussed in the past. And in cystic fibrosis, we are actually partnering with the Mayo Clinic. So they may - under our partnership, they may also eventually offer the test as a homebrew also.

Evan Lope - Barclays Capital

Okay. You talked some about, most of the tests not being affected, are there any other tests aside from Down Syndrome that have been affected by the mishap announced in April?

Harry Stylli

Not to my knowledge.

Evan Lope - Barclays Capital

Okay. And do you currently have an assay that you're working to validate? I mean, you talked some about being in a transition period.

Harry Stylli

I'd say we are in development.

Operator

Your next question comes from the line of (inaudible) with PCS Financial. Please proceed.

Unidentified Analyst

Harry, I believe you had mentioned that you are hoping to have the Down's test released in 2010 and I think you also gave a little guidance that's saying you were expecting that $40 million in cash by the end of the year. Are you expecting that to be able to carry you through until the Down's test or you have any thoughts that you may need to do additional fundraising?

Harry Stylli

You can never eliminate the need to do fundraising, but we believe we'll be well positioned provided the very loose and not firm set of guidance I've given you regarding when we have a Down's test is realized, okay? But there will also be other products that we launch ahead of T21 and I'm hoping that those begin to contribute decent margin revenues to the business.

Operator

Your next question comes from the line of Junaid Husain with Soleil Securities. Please proceed.

Junaid Husain - Soleil

Good afternoon, everyone. Sorry about that technical problems on my end. Harry, relative to some of your new tests coming over the horizon, have you had the contracting discussions with managed care or is that more of a work in progress? I suppose that's done…

Harry Stylli

I'd say we had -- yeah, Joe is a very busy man. So he has been on board for probably two months now or three months. And he has hit the ground running for us, and I'd say we have had substantial discussions with the various organizations. We've got obviously a very good idea of where we fit with cystic fibrosis and what our strategy is going to be there. And we'll firm things up for the other tests, okay?

Junaid Husain - Soleil

And then, how should we be thinking about the revenue recognition for these tests in light of your contacting discussions with managed care? Should we presume that customers who request the test can get it, but then the revenue recognition would happen after the managed care contracting decisions are made?

Harry Stylli

I'm going to have Paul answer that question.

Paul Hawran

Actually, Junaid, it's going to be a little bit faster than what we had previously discussed on T21, and the reason for it is these are established tests. And so, we can probably think that they are probably going to be -- cash is going to be recovered much faster than if you came out with a brand new paradigm. So we are looking at actually somewhere within 90 days we should be able to collect the receivable from these various managed care units, even the ones that are even out of network. So on average, I'd say it is certainly going to be within 90 days.

Harry Stylli

And I will add the initial segment that we're targeting for is sex determination test is principally going to be cash.

Junaid Husain - Soleil

Okay, that's helpful. Harry, relative to the SCMM, could you tell me if you paired back on the cost side here after your announcement in April, May, any change in headcount?

Harry Stylli

No. The -- I would say, if anything, it's been relatively stable.

Junaid Husain - Soleil

Okay. And then relative to your sales force, have you made any adjustments here since last quarter?

Harry Stylli

Again, it has been stable…

Junaid Husain - Soleil

Okay. And then…

Harry Stylli

…in anticipation of the launches that are in front of us.

Junaid Husain - Soleil

Got you. Got you. With regards to your HPV assets, could you give us a feel for what your thoughts are on developing this assay, especially in light of the competition and impending competition?

Harry Stylli

I would say if you look at our genotyping assay, I think we've got a compelling differentiation. It's is a competitive market. I'd say our genotyping assay in particular is extremely differentiated from anything the competition is doing. I think you should view the primary screen on the genotyping assay that we have as being really a nex-gen -- I mean a nex-gen over the current competitors of looking to launch in the next year or two. What would be appealing for us is if we could unify forces with an entity that's already present in the marketplace or planning to reach the marketplace and leverage our resources in this area, okay? In the head and neck arena, I think we are well differentiated, okay? We believe we are well differentiated for head and neck, so that's HPV both. So that's generally the way we're thinking. And if we can get to market sooner through a partnership then -- and share the risk that way, that would be intriguing and -- for us.

Junaid Husain - Soleil

Okay. That's very helpful. And then if I could just lob one last question in on T21, I'm not sure if you can answer this or not in light of the investigation. But relative to the suspended employees, could you say one way or the other if these employees are still under suspension or if they've been terminated?

Harry Stylli

I think I could say that they are still under suspension and they are under the purview of the Special Committee and the independent investigation.

Junaid Husain - Soleil

Okay. That's helpful. Thanks so much, guys. That's all I have got.

Operator

Your next question comes from the line of Gabe Hoffman with Accipiter. Please proceed.

Gabe Hoffman - Accipiter

I was just curious if any named executives are amongst the suspended?

Harry Stylli

No.

Gabe Hoffman - Accipiter

So that would mean that Dr. Dragon is still with the company and not under a suspension or anything?

Harry Stylli

I can't comment about any employee.

Gabe Hoffman - Accipiter

Is this Dr. Dragon a named executive?

Harry Stylli

I said I cannot comment about any employee.

Gabe Hoffman - Accipiter

Well, per your proxy in your company filings, I would say…

Harry Stylli

Betty is a named executive.

Gabe Hoffman - Accipiter

Okay.

Harry Stylli

Okay? Absolutely.

Operator

There are no further questions in queue at this time. I would now like to turn the call back over to management for any closing remarks.

Harry Stylli

Thank you for joining us today. This is a time of change at SEQUENOM. And on behalf of the management team and all employees, I want to ensure all of our shareholders that we are committed to making this a time of positive change.

Although we will face challenges in the coming months, I believe that the combination of a strong platform in MassARRAY, SEQureDx, AttoSense and others; broad and deep intellectual property; fully fledged commercial operations and supply chain for our targeted opportunities; our dedicated, talented employees and our world-class scientific and clinical partners will really make a difference for us. This will show that SEQUENOM has the asset potential and continues to have the asset potential in which to build a preeminent genetic analysis and molecular diagnostics company.

In closing, I'd like to thank you for your continued interest in SEQUENOM and thank you.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.

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Source: SEQUENOM, Inc. Q2 2009 Earnings Call Transcript
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