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Executives

Ian Clements - Senior Director, Corporate Communications

Harry Hixson - Chairman and Interim CEO

Jay File - Controller, Principal Financial and Accounting Officer

Analysts

Ram Selvaraju - Hapoalim Securities

Zarak Khurshid - Caris & Company

Bud Leedom - Global Hunter Securities

Sequenom, Inc. (SQNM) Q3 2009 Earnings Call November 9, 2009 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the third quarter Sequenom earnings conference call. My name is Shamita and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr. Ian Clements, Senior Director, Corporate Communications. Please proceed.

Ian Clements

Joining me today are Dr. Harry Hixson, Interim Chief Executive Officer and Chairman of the Board; and Jay File, Controller and Principal Financial and Accounting Officer; Paul Maier, Interim Chief Financial Officer would join us for our question-and-answer session.

Earlier this afternoon Sequenom issued a news release announcing the company's results for the third quarter of 2009. If you've not received this news release or if you'd like to be added to the company's distribution list, please call Investor Relations at the company or you can sign up through the IR section of the company's 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, expectations regarding the sufficiency of Sequenom's financial resources to do so, including expected year-end cash and other forward-looking statements.

I would like to emphasize that these statements are based on the information available to Sequenom today and subject to various risks and uncertainties, including the risks associated with the ongoing investigations and litigations 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 would now like to turn the call over to Harry Hixson. Harry?

Harry Hixson

Before, I begin discussing highlights from this quarter regarding all aspects of our business, I would like to take a moment to put the challenges that Sequenom is currently facing and the potential opportunities that the company may have into context.

Although 2009 has been a difficult emotional year for Sequenom, we believe that our research and development activities and intellectual property stake hold great promise for the development of a portfolio of molecular diagnostic products. Although the development and commercialization of our T21 diagnostic test has been delayed, we believe that a non-invasive T21 test based on our technology will become commercially viable in the future.

Among recent developments and our achievements, we've released our first commercial diagnostic test, a Cystic Fibrosis Carrier Screening test. We will continue to develop other molecular diagnostic opportunities that are built upon our core scientific assets.

Furthermore, as we will discuss a little later in the call, our core Genetic Analysis business continues to sequentially grow from the first quarter, providing a stable revenue platform for future growth opportunities.

In the light of the ongoing litigation and governmental investigations, I will be unable to answer any questions relating to the personnel changes that we announced at the end of September or provide specific comments about the mishandling of the data and results from our T21 R&D studies that we announced in April.

Also, I will be unable to comment on any aspect of our internal investigation beyond what has been previously stated. I will be unable to comment on our communications with the SEC, NASDAQ, the FBI, and the U.S. Attorney's Office, other than to say that Sequenom will fully cooperate with all of these agencies.

Before turning to an update on our business, I would like to clarify an answer that I gave to a question on our previous conference call. At that time, I was asked a question about whether there had been any securities transactions by the departing officers.

None of the officers named in our proxy statement sold any stock, but our special committee did find that one officer, who resigned in September had previously sold some stock to make a down payment on a house. This sale was properly and timely reported on SEC Form-4. Two other lower-level employees whose employment was terminated in September had also previously sold stock.

With that said, our prepared comments today will focus on the following, progress in the Genetic Analysis business and progress on the diagnostics front. I will discuss details on our Cystic Fibrosis Carrier Screening test and lay out more information regarding our fetal sex determination test and the fetal Rhesus D genotyping test. I will share with you the current status of the T21 test and our next planned steps.

With that introduction, let me turn first to our Genetic Analysis business. This business continues to be impacted by a reduction in capital expenditures by our customers. During the third quarter, we did see some up tick in all of the markets that we serve and indications are for continued improvement as we move into 2010.

With revenues of $9.2 million in the third quarter, we saw strength in both instrumentation and particularly in consumable sales, which is notable as these sales come at a higher margin.

As a result of the introduction of our MassARRAY Compact 96 system, we're beginning to see traction in clinical research settings, where our technology is ideally suited for the validation of candidate genetic markers.

From a research and development perspective, we plan to continue to invest in our Genetic Analysis business and we expect to release additional MassARRAY platform enhancements, as well as new panels over the next year.

Now turning to our diagnostic business, on September 28, many of you asked if Sequenom was at risk of losing its license to our key patent in the area of circulating cell-free fetal nucleic acids, patent number 6258540, the 540 patent, which we licensed exclusively from Isis Innovation Limited.

Ron Lindsay and other senior members of the Sequenom leadership team recently met with colleagues at Isis Innovation to discuss their development and commercialization plans. I'm delighted to report that we remain the exclusive licensee of this very important technology.

Last week we reported on SEC Form 8-K the details of our entry into the amended license agreement with Isis Innovation Limited. Under the amended agreement, Sequenom secured continued, exclusive royalty bearing rights to the 540 patent and its foreign equivalents that are related to the noninvasive analysis of fetal nucleic acids.

Some additional licenses held by Sequenom that are important are the licenses from The Chinese University of Hong Kong. We spoke with Dennis Lo several times since our April and September announcements, including our announcement of findings from the internal investigation.

I'm delighted to report that Dr. Lo is still very much committed to working with Sequenom to enable delivery of what we all believe will be an important new diagnostic tool. We are confident that we're secured in our intellectual property position. We have over 500 patents and patents pending, covering many aspects of our business.

In the last quarter we added two new licenses. The first license is for our fetal cell isolation and enrichment technology from The University of Queensland. The second is for a DNA methylation analysis technology from Bayerische Patent Allianz.

These technologies will enable Sequenom to stay at the cutting-edge of genetic techniques, helping to strengthen the company's leading position and translational medicine areas, such as oncology and noninvasive prenatal diagnostics.

Turning to the tests, launching our SensiGene Cystic Fibrosis Carrier Screening test back in September was an important milestone for us, as it was our first diagnostic test launched through our CLIA certified laboratory, the Sequenom Center for Molecular Medicine. Although, it is early in terms of seeing revenues from this test, I am encouraged by the early ordering patterns.

Additionally, we were recently granted a clinical laboratory permit by the State of California. With the addition of this license, we can now offer our laboratory developed tests in 48 states. The ongoing Sequenom sponsored clinical studies are key to the development of our diagnostic business.

Dr. Allan Bombard, our Chief Medical Officer and his team, have forested strong relationships within the U.S. and the international clinician community. These collaborators are providing us access to the necessary samples for R&D purposes, clinical verification and validation.

We expect to launch both fetal Rhesus D genotyping and fetal sex determination tests late in the first quarter or early in the second quarter of 2010. As previously announced, these tests and associated data and results were not impacted by the data mishandling that affected our T21 program.

With respect to our T21 program, as previously discussed, our R&D program is investigating both RNA and DNA assay methodologies and we'll continue to make progress with both. To be commercially viable, we believe this T21 assay needs to meet several criteria. It should exceed the sensitivity and specificity of currently available screening test. It should be independent of gestational age.

It should maximize the coverage of global populations. It should be a direct genetic test and not a surrogate marker. It should be fundamentally novel improvement over currently available screening methods. Certainly, we believe that a test that detects T21 aneuploidies in a maternal blood sample meets this criteria.

In terms of clinical activities, we are sponsoring three ongoing T21 studies. The sample collections for R&D purposes in both the verification and validation studies are proceeding well. For these verifications and validation studies, we are currently collecting samples, which will only be ultimately used when we have an assay that is ready for such studies.

On the management front, I am very pleased to announce that Paul Maier has joined Sequenom as Interim Chief Financial Officer. Paul is a well-respected financial veteran of the biotech industry. We are delighted to have his significant expertise and experience to call upon.

Paul's background makes him an ideal fit for us, including nearly 15 years at Ligand Pharmaceuticals as Senior Vice President and Chief Financial Officer. Prior to his tenure at Ligand, Paul held various management and finance positions at ICN Pharmaceuticals.

Sequenom employees are a critical part of the company's long-term success. I'm extremely encouraged by the professionalism shown by our staff across all parts of the organization during this difficult period. I do not believe that our turnover has increased. I believe that this represents our employees' confidence in our technology and our molecular diagnostics product pipeline.

With that update on our operations, I will now ask Jay to address our third quarter and year-to-date financial results. Jay?

Jay File

Thanks, Harry and good afternoon, everyone. First, I'll discuss our third-quarter numbers. We reported total revenues for the three months ended September 30 of $9.2 million, as compared to $11.6 million for the third quarter of 2008. The decrease from the prior year was primarily due to the continued softness in capital expenditures beneath the bioresearch market.

Cost of product and service revenue for the third quarter of 2009 was $2.7 million, compared with $4.5 million for the third quarter of 2008. Gross margin was 71% for the third quarter of 2009 that's compared with 61% in the third quarter of last year. Gross margin was primarily affected by higher sales of consumables, which sell at higher margins.

Research and development expenses were $8.5 million for the third quarter of 2009, compared with $7.1 million for the same period in the prior year. R&D expenses for the 2009 third quarter reflected additional expenses with the company's molecular diagnostic technology, product development; and increased clinical trial costs.

Selling, general and administrative expenses of $12.6 million for the third quarter of 2009 increased from $10.7 million for the third quarter of the prior year. This is a result of increased legal expenses, higher stock-based compensation expense, higher facilities costs and expenses associated with the expansion of our diagnostics contract sales force.

Total costs and expenses for the quarter were $24.3 million, compared with $22.3 million for the comparable quarter in 2008. Our net loss for the third quarter for 2009 was $14.9 million or $0.24 per share, compared with a net loss of $10.4 million or $0.18 per share for the same quarter in 2008.

Comparing now to the first nine months of 2009, revenues totaled $27.1 million, compared with $35 million for the first nine months of 2008. Cost of product and service revenues for the first nine months of 2009 was $9.2 million, compared with $14.7 million reported for the first nine months of 2008.

Total costs and expenses for the first nine months of 2009 were $80.2 million, versus $63.5 million for the comparable period in 2008. We reported a net loss for the first nine months ended September 30, 2009 of $52.6 million or $0.86 per share, versus a net loss for the comparable period in 2008 of $28.7 million or $0.57 per share.

As of September 30, 2009 Sequenom had total cash, cash equivalents and short-term marketable securities of $50.1 million. For the remainder of 2009, we expect that revenues will continue on the trend that we've seen over the last three quarters, and we anticipate ending the year with approximately $39 million in cash.

With respect to financial guidance, given ongoing litigations and investigations and the uncertainties relating to legal expense and the planning process currently underway, we will no longer be providing detailed financial guidance, at least not for the next several quarters.

With that financial update, I'd like to turn the call back over to Harry. Harry?

Harry Hixson

Before opening the call up to questions, I like to take a few minutes to address concerns regarding our financial situation. I mentioned on our last call that we were beginning the process of 2010 strategic and financial planning. As a part of this process, we are reviewing and prioritizing our new product development programs.

We plan to identify those programs which will receive priority attention, those projects which will be shelved for the time being and those projects which might either be sold, out-licensed or partnered. In addition to these activities, it is also possible that we might look to strength our cash position through the debt or equity capital markets in 2010.

With that, I would now like to open the call up to any questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Ram Selvaraju of Hapoalim Securities.

Ram Selvaraju - Hapoalim Securities

A couple of financial related items, first of all, can you please give me the number of shares outstanding as of the end of the quarter, please?

Jay File

Approximately $61.2 million.

Ram Selvaraju - Hapoalim Securities

Can you give me a number for the share-based compensation in the quarter, please?

Jay File

Total share-based compensation for the quarter was $3 million.

Ram Selvaraju - Hapoalim Securities

With respect to the 8-K that was filed regarding the recent renegotiation of the Isis Innovation licensing agreement, could you give us a bit more color as to what the revised royalty obligations are and whether this represents a meaningful change from what was previously in place?

Harry Hixson

I think the only thing we would say about royalties was that basically, the last year of the license agreement, we agreed to double the royalty payment. That's in recognition of approximately one-year delay in the program.

Ram Selvaraju - Hapoalim Securities

With respect to the revised milestones, these have not changed in a significantly meaningful manner. In other words, we should not be looking at this revised agreement as being materially impactful to overall assumptions concerning the valuation of the technology and how it pertains to noninvasive prenatal testing?

Harry Hixson

I think that's a fair assumption.

Ram Selvaraju - Hapoalim Securities

With respect to the ongoing clinical trials that were listed in the press release you issued today, are any of these studies that were actually begun in the third quarter?

Harry Hixson

No, I don't believe so. I believe we were collecting samples before the third quarter.

Ram Selvaraju - Hapoalim Securities

With respect to the R&D study, which is apparently now being called the CHARMM study, can you disclose what status that is at right now? Are all of these studies currently just undergoing sample collection or are any of them in the analysis phase?

Harry Hixson

They are all in the sample collection phase.

Ram Selvaraju - Hapoalim Securities

Then the final thing would be with respect to the women and infants validation study, which is the independent party that is currently carrying that out?

Harry Hixson

We're just collecting samples at this point.

Ram Selvaraju - Hapoalim Securities

That would be destined for a verification conducted by an external party, is that correct?

Harry Hixson

Yes.

Ram Selvaraju - Hapoalim Securities

Can you disclose who the independent party is or no?

Harry Hixson

Well, I don't think we are prepared to disclose right now.

Ram Selvaraju - Hapoalim Securities

Then with respect to guidance on when we might expect to see the results of the independent verification, do you have any clarity at this point on that? Also, perhaps, equally importantly, when you would be able to make a decision as to whether it would be an RNA-based or DNA-based technology that you would go forward with?

Harry Hixson

We are not prepared to say anything about the test methodology selection at this time, nor do I think we'll be able to do so anytime in the fourth quarter.

Operator

Your next question comes from the line of Zarak Khurshid of Caris & Company.

Zarak Khurshid - Caris & Company

Just following up on the 8-K question, I was just curious what exactly precipitated these, I guess, renegotiations or modifications?

Harry Hixson

Well, because of the test delay, I think we were at some risk of being in non-compliance with the license. There was some risk of losing it. So, we're very happy that that's no longer a risk and that we are the exclusive licensee.

Zarak Khurshid - Caris & Company

Going back to kind of the sample collection phase for these studies, it seems like sample collection has been going on for a while now. Will this step potentially be completed soon? Then, could you sort of walk us through the costs associated with these various stages? So if they collect all the samples, then, what happens to those costs until you then start processing samples?

Harry Hixson

Well, we expect to continue collecting samples into 2010. We have a numerical goal of how many we would like to obtain and that will determine when we stop. As to the cost, I don't think we have disclosed the cost of the sample collection.

Zarak Khurshid - Caris & Company

I guess my question would be what is the most costly portion of these studies? Is it this initial sample collection phase, presumably, the cost would may even go down once you begin sort of running the samples?

Harry Hixson

Well, I think the sample collection is a major cost, but running the tests and all is not inconsequential. Right now, I don't think we could give you any idea on that.

Zarak Khurshid - Caris & Company

Then a couple of questions on the Genetic Analysis business, could you disclose how many systems were sold in the quarter? Could you maybe talk about NIH stimulus how that may have affected the business? Then also, what are your thoughts on capital expenditure for the next, say, this next quarter and next year?

Harry Hixson

Well, we sold six instruments in the third quarter. We are aware of the NIH stimulus program. Our sales organization is also cognizant of it. I think their sense is it's a little slower coming than what one would read in the press, and that's about all I think we could say today.

Zarak Khurshid - Caris & Company

Then a follow-up question on the approval in California. What is the status of the New York facility approval?

Harry Hixson

It's still pending, and it's in process. I don't think that we have any ability to forecast or to impact that, without approval.

Operator

You have a follow-up question from the line of Ram Selvaraju of Hapoalim Securities.

Ram Selvaraju - Hapoalim Securities

You had recorded I think it was about $480,000 in restructuring charges in the third quarter. Can you confirm whether we should expect any additional restructuring charges in the fourth quarter or whether you are done for the year?

Harry Hixson

Jay?

Jay File

No, we do not expect to take any more costs in for the year and the accruals that we have recorded today should be sufficient.

Ram Selvaraju - Hapoalim Securities

You had mentioned that you expect to end the year with about $39 million in cash, is that correct?

Harry Hixson

Yes.

Ram Selvaraju - Hapoalim Securities

How long do you expect this to last?

Harry Hixson

We are in the midst of our 2010 strategic and financial planning process, and so we really can't answer that. We are going to reduce the total number of programs that we have that are funded in order to focus and prioritize. Also we have put in a cost control program internally already to try and reduce unnecessary expenses and maximize our cash position.

Until we get our 2010 plan finalized, we won't be able to give you a forecast for how long that would last. Although, we do think that if we have the opportunity, we'll take advantage of the debt or capital markets in 2010.

Operator

Your next question comes from the line of Bud Leedom of Global Hunter Securities.

Bud Leedom - Global Hunter Securities

I was wondering if you might be able to provide a little greater detail on the launch of the CF test, and I guess, in terms of initial reception and any sell through you might be able to share?

Harry Hixson

Well, it's really early days. We've got some nice uptake, but it's really too early to make any comments on that.

Bud Leedom - Global Hunter Securities

Then in terms of the molecular diagnostic test, I would assume at some point in the future you might break those out separately. Could you provide any metrics or detail on when or how you may do that if you need to reach a critical run rate or what might we expect there?

Harry Hixson

Right. Okay, Jay?

Jay File

We are prepared to disclose the results of the diagnostic for CF uptake through at least as far as what's been more revenue and costs at year-end in our 10-K.

Bud Leedom - Global Hunter Securities

Then I guess in the future, will you break these tests out separately or will there be just a diagnostics line item or what would be your plans there?

Harry Hixson

I think we will show them as a collective line item.

Bud Leedom - Global Hunter Securities

Then just finally, Harry, you are I guess rather emphatic on your thoughts that the Sequenom T21 technology will be commercialized in the future. I was just curious if there was something that you've, I guess, seen in research or in the data since the September 28 conference call, or is that just your underlying confidence that led to you to take over the reins there?

Harry Hixson

Well, I think you have to realize that this program got a restart, if you will, right after the April announcement. So, it was ongoing for five months, by the September 28 announcement. Everything I have seen thus far, gives me a lot of confidence that this is going to be productive and we're going to have a test.

Bud Leedom - Global Hunter Securities

So nothing has changed specifically, I guess, since September, I would imagine?

Harry Hixson

I would say, we may continue to make good progress.

Operator

This concludes the Q&A portion of our call today. I would now like to turn the call back over to Mr. Harry Hixson.

Harry Hixson

I actually expected more questions. In closing, I'd like to thank each of you for joining us today and for your continued interest in Sequenom. I look forward to continue to update you on the progress we're making here at Sequenom. Once again, thank you and goodbye.

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. Q3 2009 Earnings Call Transcript
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