Sequenom's CEO Discusses Q3 2013 Results - Earnings Call Transcript

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 |  About: Sequenom, Inc. (SQNM)
by: SA Transcripts

Operator

Good afternoon, and welcome to Sequenom, Inc. Third Quarter 2013 Financial Results Conference Call. All participants will be in listen-only mode. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Mr. Paul Maier, Chief Financial Officer. Please go ahead sir.

Paul Maier - Chief Financial Officer

Thank you. Welcome to the Sequenom conference call to discuss operating results for the third quarter of 2013. Joining me today is Dr. Harry Hixson, Chairman and CEO; Bill Welch, President and Chief Operating Officer; Ron Lindsay, Executive Vice President, Strategic Planning; Dr. Dirk van den Boom, Executive Vice President, Research and Development and Chief Technology Officer; and Carolyn Beaver, Vice President and Chief Accounting Officer will join us later for the question-and-answer portion of our call.

This call is also being broadcast live over the web and will be available for replay through Friday, November 29, 2013 on the Investors section of our website at www.sequenom.com.

Before we begin, please note that this call will include a discussion of Sequenom and Sequenom Center for Molecular Medicine now doing business as Sequenom Laboratories current plans and intentions regarding product development and commercialization and other matters, as well as expectations regarding Sequenom’s financial resources or future financial performance, statements that are not historical facts, but are forward-looking statements. Forward-looking statements are not guarantees of performance. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by any forward-looking statement.

For information about the risks and uncertainties that Sequenom faces, please refer to the Risk Factors set forth in our recent filings with the Securities and Exchange Commission. Sequenom assumes no obligation and expressly disclaims any duty to update any forward-looking statements to reflect events or circumstances after today’s call or to reflect the occurrence of unanticipated events.

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

Dr. Harry Hixson - Chairman and Chief Executive Officer

Thank you, Paul. Good afternoon and thanks to everyone on the line for joining us on today’s call to discuss Sequenom’s third quarter results for 2013. We are pleased to report that we have made significant progress during the quarter.

I would like to emphasize four key points. First, we reported record revenues of $44 million with increased diagnostic revenue of $33.3 million compared to $24.5 million in the second quarter and $12.5 million in the third quarter of 2012. Revenues in the Sequenom Biosciences business formerly called genetic analysis increased 3% to $10.7 million. Second, we celebrated the second anniversary of the MaterniT21 PLUS test and just launched the enhanced sequencing series to begin reporting on findings for the presence of certain clinically relevant micro-deletions as well as autosomal trisomies for chromosomes 16 and 22. Third, we signed additional payer contracts bringing the number of covered lives for our diagnostic services to approximately $90 million. And fourth, we reduced our annualized future operating expenses by approximately $13 million by eliminating 75 positions and reducing other costs through our restructuring efforts.

Before I talk further about the progress we have made in the quarter and provide more detail on these points, I want to take some time to address the recent events related to our intellectual property. Last week, the U.S. District Court for the Northern District of California issued an order finding that the Lo '540 patent, U.S. Patent No. 6,258,540 is invalid. We believe that court’s decision is wrong and misapplies or ignores controlling law. We believe that Drs. Lo and Wainscoat invented a novel method for detecting paternally inherited fetal DNA in maternal plasma and that their invention is more than just the discovery of natural phenomenon.

I would like to point out that the foreign equivalents of the low 540 patent are not affected by this U.S. court ruling and remain valid in the European Union, Japan, Australia, Canada and Hong Kong where they are issued. We intend to appeal the court’s order to the United States Court of Appeals for the Federal Circuit. In August 2013 the United States Court of Appeals for the Federal Circuit and the unanimous decision vacated the District Court’s order denying the company’s motion for preliminary injunction and also corrected the District Court’s preliminary patent claim construction. The October 30, summary judgment does not change the current competitive landscape. As we have been competing without the benefit of 540 patent being recognized. For example, we estimate that we have over 60% unit share of the U.S. high risk pregnancy market at this time.

Sequenom invested over $30 million for the acquisition of about 19,000 clinical samples from high risk expected mothers to prepare for its clinical validation study. The company spent additional millions to develop and demonstrate the efficacy of its methodology using these samples. We created and developed the non-invasive prenatal testing or NIPT market by publishing the pivotal large clinical validation study that demonstrated the extremely high sensitivity and specificity over the MaterniT21 PLUS non-invasive prenatal test. We also launched the first non-invasive prenatal test in the United States. These investments were made with the firm belief that our technology and inventions would be protected under the Sequenom 540 patent and other Sequenom intellectual property.

If the District Court ruling on the 540 patent prevails other diagnostic and pharmaceutical companies will likely question the advisability of making significant investments to develop products for the molecular testing market and the disclosure of knowledge, which would benefit the healthcare system. We will keep you updated as appropriate on this.

Now I want to proceed into the discussion of the quarter. Before the end of the third quarter, we announced our engagement with Jefferies & Company to review strategic alternatives for the generic analysis business now doing business as Sequenom Bioscience. Each of our businesses has growth opportunities, which require investment. With the recent submission of our premarket 510(k) notification for the IMPACT Dx which is the clinical laboratory version of our MassARRAY instrument. We believe that the bioscience business is well-positioned to benefit from additional investment and assay panels, which can be used to perform tests in the clinical laboratory setting.

With the completion of early access program for our groundbreaking ultrasensitive mutation detection methodology, we are in a position to add new and exciting new application to our MassARRAY platform. This ultrasensitive method once commercialized has the potential to be best in practice at detecting clinically significant mutations from heterogeneous tissue and liquid biopsies at very high sensitivity levels. We expect to launch at least two new panels for research use in the fourth quarter. Given the changes within the market, we believe that Sequenom Bioscience may be better situated with a larger company that has the global reach and resources to fully capitalize on the technology and commercial synergies. Our landmark development and subsequent launch of the MaterniT21 test two years ago, which was the first NIPT laboratory developed test for detection of trisomy 21 ushered in a new era of non-invasive prenatal testing. Sequenom Laboratories has continued to innovate and lead the NIPT market with additional reporting for trisomies 18, 13 and fetal Y as well as X chromosome aneuploidies.

Another example, our leaders – and its another example of leadership position another company recently announced its ability to report on aneuploidies in twin pregnancies. Sequenom Laboratories has been reporting on aneuploidies in twin pregnancies for over 18 months with over 6,500 such cases reported since launch. In October this year, Sequenom Laboratories announced the launch of its enhanced sequencing series. This additional and clinically relevant content is a significant achievement and a testament to our ongoing research and development efforts and commitment as the leader in NIPT. Sequenom Laboratories is now reporting under presence of DiGeorge, Cri-du-chat, Prader-Willi/Angelman syndromes as well as the 1p36 syndrome in addition to reporting trisomies of chromosomes 16 and 22.

With this enhancement, the MaterniT21 PLUS test is able to provide content previously undetected from a maternal blood draw. These results now present healthcare providers and their patients with prenatal clinical information that may previously have been obtained through invasive prenatal procedures are detected in the first few years after birth. The enhanced sequencing series demonstrates the value of using genome-wide massively parallel sequencing as opposed to content limited targeted approaches. Using a genome-wide solution, Sequenom Laboratories is positioned to continuously expand the test with clinically meaningful content in an effective efficient way.

Further updates are anticipated in the series highlighting the versatility of the underlying test methodology. We remain committed to being at the forefront of innovation. We believe that the recent introduction of the enhanced series for the MaterniT21 PLUS test will help improve our competitive position going forward and initial results over the past two weeks have been encouraging. We believe that we have the largest clinical dataset for NIPT, which allows us to provide the most robust clinical information to physicians both in quality and volume.

We believe that Sequenom Laboratories continues to be the market leader in the noninvasive prenatal diagnostic testing market. Sequenom Laboratories accessioned nearly 38,600 MaterniT21 PLUS test samples during this quarter. During the third quarter, we significantly reduced accessions from Medicaid states that do not yet have positive coverage decisions in place for NIPT. As a precise of the total MaterniT21 PLUS test accession, Medicaid test declined from 26% in the second quarter to 21% in the third quarter with the trend declined to 17% in September. We still expect to meet our internal goal of accessioning 150,000 tests by the end of 2013. Overall, we are focusing our efforts on testing samples that provide us with the best opportunity for acceptable reimbursement. Our international sample volumes continue to grow and represented 11% of our diagnostic revenue in the third quarter. These revenues are recorded on an accrual basis.

On August 1, we received the clinical laboratory permit from the state of the New York. The subsequent increase in tests from New York has mitigated the reduction in accessioned Medicaid samples and our overall payer mix has improved. We currently have greater than 1,800 phlebotomy locations under contract throughout all 50 states. This number is expanding on a monthly basis. As an example, during the quarter, we added Enzo Clinical Labs serving physicians and their patients residing in the Northeastern United States.

Sequenom Laboratories recently presented the results of its initial study of the MaterniT21 PLUS test in the low risk patient population at a District Meeting of the American Congress of Obstetricians and Gynecologists, or ACOG. This study is the first to benchmark NIP test results to birth outcomes in a low risk population. As expected, the study demonstrates no fundamental differences in the testing of circulating cell-free DNA by sequencing result exist in high versus low risk patients. And no increase in the false positive rate was observed. While this is a significant accomplishment Sequenom Laboratories will continue to offer the test only to the high risk population until clinical guidelines are published by ACOG or the Society for Fetal and Maternal Fetal Medicine.

We are continuing active negotiations with third party payers, including Blue Cross and Blue Shield affiliates under the master agreement previously announced. We now have executed agreements that cover approximately 90 million U.S. lives for our test. We believe that will meet our 2013 goal of 120 million lives covered for our test by the end of the year. Importantly we are receiving payments either as in-network and out of the network provider from all of the major national payers.

We implemented a restructuring, which will reduce our personnel, facilities, and related costs by approximately $13 million in 2014. We continue to review all aspects of our operations for additional efficiencies, including our laboratory operations, sales, marketing and administrative expenses. We expect that these efforts combined with our efforts to collect revenues for tests already performed and to improve future reimbursement will lead to profitability. In the third quarter we successfully completed our early access program for ultra sensitive mutation detection on the research use MassARRAY system. We enabled select customers to complete research studies that demonstrate the ability of our technology to detect mutations down to 0.1% in a multiplex format.

We believe that this will further expand the MassARRAY capabilities and somatic mutation profiling to sensitivity levels that other technologies cannot meet with the same cost efficiency. With this demonstrated capability, we also see utility in combination with liquid biopsies, which eventually can aid in important areas such as minimal residual disease monitoring. This is another important step in increased utility of our MassARRAY system. Furthermore we are on target to launch additional research use-only panel in oncology and rare blood antigen typing this year.

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

Paul Maier - Chief Financial Officer

Thank you, Harry. We are pleased with our progress for the third quarter and are continuing our efforts to improve collections for test performed. For the third quarter of 2013 total revenues were $44 million, an increase of 92% compared to the third quarter of 2012. Diagnostic revenues were $33.3 million, up 166% from the same period last year and up 36% sequentially. Diagnostic revenues are recorded primarily on a cash basis.

During the latter half of the third quarter, we implemented a program to reduce the volume of Medicaid samples provided in states where the MaterniT21 Plus test is not currently covered. We have reduced the mix of Medicaid versus commercial samples from 26% in the second quarter to 21% in the third quarter with the trend declining to 17% in September. Strong growth in the heredity test for cystic fibrosis carriers also contributed to the growth in total test. Sequenom Laboratories billing process which was brought in-house in the second quarter is providing us with improved visibility into the status of our claims and enabling us to respond timely to requests by payers for additional information.

As we described in our second quarter call, along with many other laboratories in the diagnostics industry, Sequenom Laboratories continues to experience delays in receipt of payments as a result of coding changes adopted January 1 by government and third party payers. While many payers continue to request additional information, which causes longer collection cycles, we have been able to improve the process with some of the payers. Certain government payers, including most state Medicaid plans, managed Medicaid programs and Medicare still have not implemented the new codes, resulting in minimal collections for those services to-date. Upon the coding change, we are not currently receiving Medicare reimbursement for Sequenom Laboratories’ RetnaGene AMD test and are reevaluating the business model for that product line.

We continue to work with most of the major state Medicaid agencies to seek coverage for Sequenom Laboratories’ test. We expect that several major state Medicaid agencies will establish codes, coverage and pricing for our test during the fourth quarter. Some in the industry believe that some Medicaid programs will reimburse for tests already performed once they established the codes, coverage and pricing within their systems. However, we expect that any significant payment for those tests if obtained may not occur until 2014.

During the third quarter, we improved our collections for services performed in both current and prior periods. Revenues for services performed during the third quarter increased by $3 million compared to the second quarter and revenues for services performed in prior quarters increased by $5.8 million compared to the second quarter. In the second and third quarter of 2013, collections for services in prior quarters included $6.3 million related to services performed in 2012 for a total of $25.2 million collected in 2013 related to services performed in 2012 and recorded on the cash basis. With the new codes, many payers require additional information to ensure the test meets their coverage guidelines, which for the MaterniT21 PLUS test is limited to high-risk patients. We believe the payers will not reimburse for low-risk patients until the medical societies publish guidelines for years.

Unlike our competitors, Sequenom Laboratories only offers the MaterniT21 PLUS test for use in women at increased risk of chromosomal abnormalities. We sometimes are required to appeal a denial before the claim is paid. Our success rate with appeals has improved during the year, which helped improve the percentage of prior claims paid. As a result of our efforts, we have been receiving catch up payments from some payers, including approximately $2.8 million from a national payer for test performed in prior quarters. We are pleased with the level of reimbursement for claims which are paid and we expect the percentage of claims paid by third-party payers to improve over time.

As of September 30, 2013, uncollected amounts outstanding for tests delivered, which were not recognized as revenue upon delivery of the test result because of the accrual revenue recognition criteria were not met ranged from approximately $46 million to $51 million. These estimates are net of estimated write-downs and adjustments and actual revenue will depend upon the reimbursement ultimately to be received for outstanding claims. Due to our current method of cash based revenue accounting, you will not see these estimates of potential accounts receivable on our consolidated balance sheet. We estimate that the amounts outstanding for tests delivered increased by approximately $8 million during the quarter ended September 30, 2013. The increase in receivables is a result of the long collection process caused by payers’ request for additional information and their initial denial of claims which are often reversed upon appeal.

We expect our collections to improve in the future as we work to gain agreement from more payers to pay claims without requiring additional information as we sign additional contracts with payers, which should eventually improve the timing of payments and as we work with additional government payers to gain coverage for our tests. In the meantime, we are working to improve our mix of commercial versus Medicaid volume to improve our ability to generate profitable test volume.

With every quarter, we are gaining experience in the collections process and building a history that will eventually result in our ability to accrue these revenues and match costs and revenues to the period in which services are provided. Diagnostics revenue from international clients grew to $3.5 million in the third quarter or 11% of diagnostic services revenue, compared to $2.8 million in the second quarter of 2013. This revenue is recorded on an accrual basis. Total cost of revenues increased to $27 million for the third quarter of 2013 compared to $17.5 million for the prior year period, but improved as a percentage of revenues on a year-over-year basis.

Cost of revenues increased due to a significant increase in Sequenom Laboratories test volumes and the cost to support increased testing capacity. Sequentially, diagnostic cost of goods sold was $2.6 million higher as compared to the second quarter of 2013 as a result of the additional capacity with Sequenom Laboratories, North Carolina location becoming operational for the full quarter compared to only one month in the second quarter and increased royalties on higher revenue and increase test volume. This additional capacity provides the ability to expand and ship the processing of test samples to a more cost effective location for the MaterniT21 PLUS test and importantly provide Sequenom Laboratories the ability to have a backup laboratory location.

The favorable gross margin during the third quarter of 2013 compared to a negative gross margin during the third quarter of 2012 and this is primarily attributable to collections for accessions in prior quarters and to the efficiencies gained by improved economies of scale. Research and development expenses of $10.4 million for the third quarter of 2013 were lower than in the prior year and prior quarter due to the completion of the validation of additional laboratory location during the second quarter.

General and administrative expenses for the third quarter of 2013 were $4 million higher than the third quarter of 2012, primarily due to increased legal expenses associated with patent litigation and increased internal billing cost due to our growth. During the third quarter we recorded restructuring expenses of $6 million associated with our elimination of approximately 75 positions and our decision not to occupy additional office space which we have leased. We intend to sublease this space to reduce our operating costs and have recorded a liability for the remaining lease payments now that with expected sublease income. We also reduce our revenue expectations for the RetnaGene AMD test for the foreseeable future, which resulted in a $650,000 intangible asset impairment charge in the third quarter.

Net loss for the third quarter of 2013 was $28.1 million or $0.24 per share and the adjusted net loss for the third quarter was $22.1 million or $0.19 per share excluding the $6 million restructuring cost. These amounts compare to a net loss of $30.2 million or $0.26 per share for the same period in 2012. For the first nine months of 2013, the company reported revenues of $117.3 million, an increase of 109% from revenues of $56 million for the same period of 2012. Revenues in the first nine months of 2013 from Sequenom Laboratories operating segment grew 242%, while revenues from the bioscience operating segment were essentially flat in the first nine months of 2013 as compared to the prior year period.

Net loss for the first nine months of 2013 was $88.5 million or $0.77 per share as compared to net loss of $84.3 million or $0.74 per share for the same period in 2012 reflecting an increasing costs associated primarily with increased patent litigation and restructuring expense. As a result of our restructuring activities in the third quarter of 2013, we have reduced the run rate of our operating expenses by approximately $13 million on an annual basis, which will begin to take effect in the fourth quarter of 2013.

Net cash used in operating activities was $18.7 million for the third quarter of 2013 compared to $36.7 million for the second quarter and $22.6 million for the third quarter of 2012. The cash burn of $22.2 million for the quarter compares very favorably to the cash burn of $44.2 million for the second quarter this year. And as a result of improved collections and our efforts to control costs, we expect our cash burn to fluctuate on a quarterly basis, but to continue this downward trend as our collections and revenue improve. The company also used cash for cash capital investments of $2.6 million and $1.9 million for debt repayment during the third quarter. As of September 30, 2013, total cash, cash equivalents and marketable securities were $84.7 million.

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

Dr. Harry Hixson - Chairman and Chief Executive Officer

Thanks Paul. To summarize our results for the quarter, we improved our reimbursement and continue to work towards further improvements in obtaining reimbursement for our test. Many diagnostic and laboratory service companies have commented on the reimbursement challenges created by the 2013 CPT coding change. Former colleague Patrick Balthrop, CEO of Luminex used the word surreal experience in describing this process. We began to see improvements in collections and continue to believe this will be a transitional period for the diagnostic industry. So we have taken major steps to reduce our operating expenses. And we continue to look for further efficiencies in our operations going forward. These actions will further our progress on the path to profitability. We are excited by the extended content we've just released for our MaterniT21 PLUS test, which provides the most comprehensive information available in the NIPT market. With that summary of our business and financial update we now like to open up the call to questions. Operator, please open the line.

Question-and-Answer Session

Operator

(Operator Instructions) The first question will come from Brian Weinstein of William Blair. Please go ahead.

Brian Weinstein - William Blair

Hey, guys. Thanks for taking the question. Maybe we can talk a little bit about the covered lives here, you guys are at 90 million today talking about getting to $120 million by year-end, can you talk about does this imply obviously a big contract win or to the blue cross blue shield affiliates as they sign up, is that what's kind of driving that and can you just clarify how you’re aiming at $30 million more by kind of within the next six to seven weeks?

Bill Welch

Well, Brian this is Bill. Certainly the blue cross blue shield association agreement is helping us continue to gain traction and we now find them what allows us more room to go there. And we are having hot discussions on Friday with other peers too, so you never know till its through, but we are feeling that the 120 million is certainly within reach.

Brian Weinstein - William Blair

Okay. And then $90 million covered lives today, is there any type of range that you can provide us on pricing where that is and compared that to what you're getting an out-of-network basis?

Bill Welch

Brian, we can’t disclose what we are receiving on an individual contracts, but I will say trying to be helpful in answering your question that we've seen a fairly consistent overall reimbursement rates in the commercial payers even though there may be a wide range on any individual test we’ve had a relatively stable average revenue per test and we're quite pleased with that amount.

Brian Weinstein - William Blair

Okay. And then last question from me would be as you guys increase the content that you're adding in there, how important is that when you're not going head-to-head against the other guys in the market. What is the real differentiating features you're going after new wins. How are these physicians making a decision on which test provider to go with?

Bill Welch

That’s a great question Brian. And we think the new it’s in content series does two things. One it gives more information for pregnancies, and two it’s strategic advantage with maternal fetal medicine specialist for high-risk pregnancy. So it think it does both of those. It shows the value of doing enhanced sequencing because we can get this off the current ones we are performing and we picked on in terms of (indiscernible), those microarrays type of or microsomal antibodies to ones that are most relevant, so those the 4, 5 but we think going forward we can potentially add more content. Other players in this marketplace have a very hard time doing that.

Brian Weinstein - William Blair

Okay, thanks guys.

Dr. Harry Hixson

Thanks.

Operator

Our next question will come from Dave Clair of Piper Jaffray.

Dave Clair - Piper Jaffray

Thanks. Good afternoon everybody. First, a little bit about peer stability, obviously it’s balanced around a fair amount in terms of when thinking about yours is really kind of path collections on given that we have a number of codes and (indiscernible) not directly applicable to you, but nevertheless it looks like systems are starting to settle down a little bit. Can you talk us a little bit just about the outlook in terms of past collections? Do you think it’s going – it’s time to declare victory. We can say that we hit a fairly steady state in terms of collecting the overdue bills in any way that we can get some level of predictability around that? Thanks.

Dr. Harry Hixson

Well, there is volatility from quarter-to-quarter and we certainly have seen it Bill in the first quarter and in the third quarter we saw some lumpiness there, but we’re not finish in collecting for prior period tests. There is still a lot more to go and that gives us a very good feeling about the upside because now the coverage policy decisions have been made earlier in the year or the end of last year. The payers are working with us and it’s dependent upon the individual payers, but we’re seeing movement and because our volumes have been increasing and we’re generating more clients with the coding change. One of the phenomenon as we saw is a lot of payers didn’t recognize – their systems didn’t recognize the new codes for the asset for the additional information. In the short run that slowed down the payment cycle, but it allowed us to provide that additional information to appeal if there was any rejection of that client and they are now dealing manually with larger volumes and it gets their attention they sit down at the table with us and they work out what is happening going forward.

So we’re quite pleased with the direction the trend here but by no means, or are we finished collecting the prior period. As we have more contracts in place going forward for those individual payers that should speed up the collection process and removes some of those requests for additional information, but we don’t give up on the claims and obviously when we sit down with the major payers we talked about getting current with the billing and catching up, but also with resolving those older claims which they may have not previously addressed.

So we think there is – we’re making good progress, but there is still a quite a bit of upside, that’s one of the reasons we broke out and this time the revenue into the two streams that relating to current period testing and then prior periods and is also the reason we identified the potential accounts receivable so let the market know there is a considerable amount of revenue that were in the process of collecting.

With the Medicaid segment, it’s a little choppy here. There are number of states that haven’t moved very quickly in this regard. We are in dialogue with a number of them and do expect that we will have a number of stage to start paying and we would like to provide testing services and as many states as possible. And I do think that we and others have gotten their attention in the case where we have to cut back on our services there. On the upside though we do think eventually we’ll see the benefit, it may not be as visible until 2014 for some of the Medicaid payments, but we’re making good progress in both areas.

Paul Maier

I’d like to add that there is still an enormous amount of room for improvement in the reduction in a number of vials and our need to file appeals and also in the timeliness of payments. There is still a lot of room for improvement. We have the tools in place with our internal system now to address those problems and I believe we have intentions of the national payers as a result.

Dave Clair - Piper Jaffray

Very good. And then two quick ones here for me and then I’ll jump on here. So in terms of the backlog, the $46 million to $61 million so I take you guys you have a pretty high level of confidence in collecting that, I guess the reason why I’m asking is, it strikes me that if we look at the total backlog in terms of all of the tests you’ve run, it would strike me as it being larger than and so this essentially probability analysis you’ve done here if really high (indiscernible)?

Dr. Harry Hixson

Well, Bill, yes, we do feel very confident in being able to collect within that range. You know as we’re fairly conservative and we have already built-in expectations of offset and the like and we made a very minimal assumption about Medicaid payments in that total and so there is quite a bit upside – certainly we build significantly more than that. And in some cases, you can tell by the – the payment stream that we’re still collecting for tests that were done last year and so those are almost 12 months old and we don’t give up until we get an adequate level of reimbursement.

Dave Clair - Piper Jaffray

Got it. And then last one from me, Paul just looking into 2014 when alumina rolls out to one key upgrade. How should we think about that, helping our gross margin if it all obviously you have to upgrade and/or purchasing new equipment?

Paul Maier

With respect to upgrading equipment, we haven’t made any decisions on that yes, and it all of our elevation was done on the current equipment we have. One of the upsides that occurs to us and that will accrued our benefit is some of the machines that we purchased in the beginning before we rolled out the test where we’ll have depreciated those. They were perfectly fine and most of the improvements that we’ve done and processing relate to the internal steps and there’s no reason at this point to move to the next another generation of machine. However, our R&D teams are looking at the future additional improvements and at such time that we feel that there is a cost benefit from adopting those improvements we will certainly educate the market on that.

Dr. Harry Hixson

I would like to add that we are – we’re looking at a number of other instrument platforms in addition to the one that we have now and we hope to have some things to say about that in future calls.

Dave Clair - Piper Jaffray

Very good. Thanks Paul and thanks Harry.

Operator

Our next question will come from Zarak Khurshid of Wedbush Securities. Please go ahead.

Zarak Khurshid – Wedbush Securities

Hey, guys, good afternoon. Thanks for taking the question. I guess first one, just updating on those questions. So, in terms of the delay issue, can you just clarify one there are any improvement versus last quarter and if you could talk about your in-house billing efforts and how that is may be helped the process as well.

Dr. Harry Hixson

Well first of all, we have made improvements with the commercial payers primarily not so much with the Medicaid and we are doing a better – we are experiencing better collection results and we’re increasing the speed of the turnaround in our ability with our new system to do the appeals and I think that’s getting the attention of the payers. We still have quite a bit of upside in terms of additional funds that we expect to collect, but as we said in the second quarter we anticipated that the coding changes would disrupt the system and perhaps we think that we underestimated initially what that impact would be, but now that we have good data from our own system. We are able to do a better job of estimating what we’re going to get paid.

And going back to the amount of the receivables that earn on our balance sheet that we showed the $46 million to $51 million, we were conservative and didn’t include any Medicaid in our assumption for that number. So, there is quite a bit of outside there. We do expect some of these states will go back to prior periods and payouts, but we don’t want to promise that, but a number of others in the industry expect that because this is not just affecting us, this is affecting everybody, but I would say the combination of having our own billing system with the addition of data and control it gives us, it’s performing the way we thought it would, it allows us to get back much more quickly with the comprehensive addition of data and we have our finger on the pulse of the appeal process and that’s getting the attention of the commercial payers. So we are making very good forward progress, but there is still a lot of money out there and we are focused on that and that certainly effects everything we do. And so it’s one of the highest priorities in the company.

Zarak Khurshid – Wedbush Securities

Glad to hear it and then with respect to the efforts to migrate away from Medicaid volume I was just curious, how exactly does that process work and I understand you probably are keeping some of the states around there about to turn the core, but why can’t you simply turn off more of that volume little more quickly.

Bill Welch

Okay, so this is Bill Welch. Two parts of that I think we are fortunate because we only do high risk patients, the payer mix for Medicaid for us is relatively low. If we put out early I mean first started this journey we thought it might be 25% or 30% and that’s exactly what we are seeing as we are going forward. So those who have done low risk or others would see and even higher Medicaid component for which we know it’s been a very difficult place to get paid. In terms of how we got 13 off states but we are approaching on those states where they do not have coverage or coding or a building to pay those are ones we are working towards minimizing. At the same time there are states where we are getting traction for getting a code that can work for them and payment in process. So we do feel that we can get some more in the fourth quarter. We will see how that plays and in terms of how much money we get red show or in the current state and roll those forward.

We have two of the states in terms of even the highest to the lows in terms of profitability how much borrowing, how much dollars are there. And we will be monitoring this going forward. So I think overall we feel good about it, it’s just the states are left with many have not even loaded in this new coding system and so the communications within their own IT infrastructure is this jury that had Walter I think alluded to in terms of pricing us.

Dr. Harry Hixson

And one of the iron is, it’s last year we were actually getting paid by some of these Medicaid states before the coding changes occurred and so that’s why we are very patiently continuing to work with the states so that they can get back on board. We have the dedicated resources in our reimbursement group that are talking with them and so it’s important that segment is important to us, it’s just moving at a slower pace.

Bill Welch

I would just also add to the positions in those states where they know this occurs. I mean they see it themselves. There is a number of them who are true believers in our technology and strong advocacy and they are working with us at those state levels to make this be resolved. And so it's a state-by-state rollout. We have a dedicated team for this and we think we will get certainly more traction in the fourth quarter and going to next year.

Zarak Khurshid – Wedbush Securities

Great, thanks for that Bill. And then just kind of a follow-up on that theme, how should we be thinking about the just the overall fraction of the Medicaid business two or three quarters out. And where do you think the gross margins are going to be trending to you in the near future? Thanks.

Paul Maier

The ratio it could go down as from those we are at 17% or so run rate I think we said in the script and they go to the lower but I can actually see as we are starting to get more that are paid we might will have lost somewhere in there. So it’s all a matter of where it ends up from again coverage and otherwise. And as we get these states and we get rates that we think are acceptable that obviously advances royalty. The doctors dealing with Medicaid and commercial payers who makes their system much easier.

Zarak Khurshid – Wedbush Securities

Sure and then on achieving the gross margins?

Paul Maier

Well, the margins where we are getting paid today are very good and they meet our standards. And we would like to bring everyone in the fold and that’s an individual conversation with an individual Medicaid organization or management organization. And we are of course continuously working on bringing our cost per test down. We have seen a good trend over time as we now have efficient volumes and as we made continued improvements to our test and how we process we will be working on both sides of that equation, both on the revenues side and on the cost side.

Zarak Khurshid – Wedbush Securities

Congrats on the progress. Thanks.

Operator

(Operator Instructions) The next question will come from Brian Brokmeier at Maxim Group. Please go ahead.

Bryan Brokmeier - Maxim Group

Hi, thanks for taking the questions. It sounds like enhanced sequencing series maybe made possible because of your massively parallel approach, however, is the ability to detect subchromosomal changes efficiently different from the detection of chromosomal abnormalities in your current IP that you are adding IP protection to the MaterniT21 or will the enhanced sequencing series also be covered by your current patents?

Dr. Dirk van den Boom

This is Dirk van den Boom speaking.

Bryan Brokmeier - Maxim Group

Hi Dirk.

Dr. Dirk van den Boom

Bryan, the main purposes here was that we leverage our old approach and what we worked on over the last year was to improve our bioinformatics to be able to report on additional content, additional findings based on the same assay that was the philosophy all along when we started the process. And the correlation to the IP, which was – that is irrelevant, but of course we have the whole genome IP in addition to the other portfolio we talked about earlier. So it kind of leveraged to that too if you want.

Bryan Brokmeier - Maxim Group

Okay. And you said a little while ago, if you are talking about the improving cost, but are you seeing – are we seeing the cost per test peak sort of this last quarter, is it increased a little bit, because of the North Carolina facility and we should start to see the cost per test improve sequentially as you gain scale and improve efficiencies?

Dr. Harry Hixson

I think that would be the general trend we would expect over time. And we have seen that recently and noted in the third quarter pumped a little bit as North Carolina facility came on stream. So we will continue to work on growing the volumes which will give us the efficiencies in amortizing and absorbing the fixed costs. And as our volumes shift, the ratio shifts from California to North Carolina, that will provide an advantage to us, but it’s a continuous improvement process. We still are working on the cost component of that. And we expect that it will have some improvements in the coming year to keep that trend going down.

Bryan Brokmeier - Maxim Group

And then also as you have cutoff some payers, have any of them agreed to pay in executed contracts as a result of any lash back from their numbers or just deciding that it was in their best interest to reimburse the tests?

Dr. Harry Hixson

Well, I am not sure that, that’s a depiction of how the process works. In the case of the states, where we are cutting back on our service level, that is an operational implementation. We still are having the dialogues with those states and on the reimbursement and contracting front. And so we are armed with the information of how many tests we have run and the performance of our test, all those things, but it’s kind of a separate initiative.

Bryan Brokmeier - Maxim Group

Okay, thanks.

Operator

And ladies and gentlemen, that will conclude our question-and-answer session. I would like to turn the conference back over to Dr. Hixson for his closing remarks.

Dr. Harry Hixson - Chairman and Chief Executive Officer

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

Operator

Ladies and gentlemen, that will conclude our conference for today. We thank you for attending today’s presentation. You may now disconnect your lines.

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