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Sequenom, Inc. (NASDAQ:SQNM)

Piper Jaffray 25th Annual Health Care Conference Call

December 4, 2013 9:00 a.m. ET

Executives

William Welch - President and Chief Operating Officer

Paul Maier - Chief Financial Officer

Ronald Lindsay - Executive Vice President, Strategic Planning

Analysts

William Quirk - Piper Jaffray

William Quirk - Piper Jaffray

Good morning and welcome to the 9 O'clock session. I am Bill Quirk, the tools and diagnostics analyst here at Piper Jaffray, and it's my pleasure to introduce the management team from Sequenom to our 25th Annual Healthcare Conference. Sitting to my right is Bill Welch, President and COO. To Bill's right is Paul Maier, the CFO, and the around the corner here, Ron Lindsay, EVP of Strategic Planning.

So I am going to open up the mike here in a few moments to the team to say a couple of introductory comments. As a reminder this is an open session so by all means feel free to jump in here during the Q&A process. And with that, Paul.

Paul Maier

Good morning. I would just like to point out that we will be making some forward-looking statements today and I would direct everyone's attention to the historic SEC filings that Sequenom has made and we undertake no obligation to revise or update any of those statements. I would also like to point out that today if you go the company's website you will see an updated corporate presentation that’s posted on the website that will include a lot of the data and information that we will be talking about during this fireside chat.

William Quirk - Piper Jaffray

All right, perfect. Well, with that let's just jump right into it. I would like to start first just on the legal side. Obviously there has been a number of things moving around with respect to your 540 patent and so I a guess a two part question. One, can you talk to just the implications from the 540? Obviously you have talked a little bit in your conference call about trying to appeal that decision. And the secondly, just to play devil's advocate here, to the extent that perhaps that -- if that strategy does not work, how does that change life for Sequenom? How do you think about that relative to competition? Thank you.

Ronald Lindsay

So this is Ron Lindsay. Thank you. I think there are really two comments there. First of all, we have been operating for the last two years with competitors who in our view have been infringing the patent. So from a structural perspective it has not had any impact on the downside I think for Sequenom in terms of the way we operate. We had viewed winning or having the 540 reasserted, that would be upside and we still believe that. So dare I say that it ain't over till the fat lady sings as far as this is concerned. As you know we applied for preliminary injunction that we know was a high bar, which was turned down. We had appealed to the Federal Circuit and they were very positive about our case. That was returned to the judge in San Francisco. And the present ruling that validates the patent we believe is wrong and we will continue to pursue that and I think we still believe that there is value in the 540. But in the interim we will be proceeding as if it were not going to be asserted.

So we don’t believe that necessarily as having big impact and we will continue business on the assumption that this is an exciting market. There is room for competitors. There is growth both in the high risk and potentially in the long-term in the low risk market that test will come to in.

William Quirk - Piper Jaffray

Very good. And as we think about how Sequenom is positioning MaterniT21 versus the competition, can you help us frame [indiscernible] a little bit. Obviously, all four tests answer a similar basic question but there are some nuances between them and Paul and Bill, or Ron, would you care to jump in here. You know think about or help us walk through, when are going up head to head in deals, really what Sequenom is pushing and potentially what sort of push back you might be getting from the competition.

William Welch

So this is Bill Welch. I think as Ron mentioned in the IP, it's not lost that we are the leader in the NIPT area. In the second anniversary we founded this technology with Dr. Lo invention [ph]. Did the pivotal studies and then launched. And it's been at whirlwinds [ph] since we sent that. We launched on T21 but the study had many different components. They came out through the publications of papers. And so we had 21 then T18, then T13. We had added this X chromosome aneuploidies. And most recent we added which we call the enhanced sequencing series which provides other trisomies and some micro-deletional type value.

We are approaching through a whole genome approach today and we are working towards the -- that’s called the high risk pregnancy, and so that’s segmentation. It's gone well. I think that some are trying to do it like a targeted approach in say a 21 or 18 only, and try to influence and get quicker to a general population which we understand. Meaning the numbers here are staggering. Just in the U.S. there is 4.3 million births a year. You can double that for Europe and we are not talking China, other locations. So this is a very big diagnostic opportunity. We have approached it incrementally, which is to go at the ones that make the most clinical relevance, and so at the high-risk our data show that you are offsetting on amniocentesis or microarray for some components.

Just to remind the audience, maybe the 1% of the invasive procedure or when you are doing non-invasive procedure you got a 1% potential complication rate with a 3% positivity rate. So the 97% of amnios or CVS are generally negative. So that’s the reason for a non-invasive process. I see the market continuing to evolve. We had a good share of the high risk in the U.S. and it's growing internationally. And over time I think this will apply in a way into a general population depending on what kind of data and what kind of content that may apply.

William Quirk - Piper Jaffray

And, Bill, I am going to pick off your last point there and segue in here. So I think that many of us around the room have been pretty surprised, presently surprised at how rapidly the uptake has been within the high-risk population. Of course the challenge that that presents is there a limited number of high-risk births relative to the 4.3 annual births in the U.S. So talk just a little bit about how this market transitions from high-risk into the so-called average risk market. As you noted, you have a couple of competitors who have been more aggressive going after this particular patient group. The guidelines aren't yet in place, no doubt, although conceptually the test should work just fine in either population, no doubt the recent [ph] data necessary as well. But we would love to hear your comments there.

Ronald Lindsay

Perhaps I will tackle this first and Bill has a follow-on comment. But I think at this stage on both a U.S. and a global basis we have made very good progress on the launch in the high-risk market. I think in total there are about 750,000 live births in that so-called high-risk group. They are probably more than the [indiscernible] pregnancies in that group on an annual basis. So that is pretty big market for us and competitors to penetrate. I think in terms of value to patients, the value in terms of risk, value to the healthcare system, the high-risk market is highly justified. It's been supported by guidelines. I think long-term tests in this arena maybe not quite as high content, would be valuable. We don’t yet have studies from anybody on a large scale.

Clearly, when you move into a lower risk or a lower incidence rate, you want to make sure that your false positive rate is no higher than you find in any other population otherwise you put women at risk of having a follow-on amnio that they would not normally otherwise have required. So I think both us and the societies want to see those data. I think as some of you may know, we have already presented at a conference our first data on the low-risk population. Study of at least 1000 patients and we will continue to add to that. I think a question for all of us, is also in terms of the potential cost to everybody, insurers and everybody else, if we move to the low-risk, what is the right kind of test. And I don’t think everybody has agreed upon that yet, so it's early days.

William Quirk - Piper Jaffray

So what you are suggesting, Ron, is perhaps a two-tiered strategy where you have more full feature test, so to speak, for the high-risk population and perhaps a more basic but less featured process...

Ronald Lindsay

Oh, I would say for a high-risk population and for those that would request it, to have a bifurcated test. And we certainly are the leader currently in terms of content and we plan to continue to make our current test an additional content over the years, and we will be led by the physician community as to what is the right thing to do. I think on a more broad, on a more global basis, a test that perhaps only reports 21, 18, and 13 at a different value equation for all healthcare systems is likely.

William Welch

So if I could -- and I think we believe the technology, as Ron said, can work in a general population. A good question about potential false positives, what would that look like in that. And then the other potential would be what's the medical, clinical offset and cost to the systems. It's tempting to talk about how big the market is because it's enormous. But the challenge that we are going through right now, I can't speak to our competitors, is we are looking to a surety for payment. So I think as we move through the first year, we changed healthcare in terms of treatments. This year it’s about coverage guidelines and payments, and certainly insurers have put out positive payments or coverage guidelines in the high-risk. To the extent someone is doing low-risk pregnancies, I can tell you that we don’t do that and we get questions quite often when we do our resolution on billing, they don’t want to pay for it.

So while one would be tempted to go to that, I think you need to be cautious as to as you go, make sure you have the various systems in mind. We are moving to continue to grow share. We have about, we believe about 60% market share on a test value basis for the U.S. in the high-risk. But I would just caution, I don’t think it's solely about share, it's now about continuing to get the payment, those kind of things on top. And I think next year will be an evolution in next [ph] volume and also pricing. So I think it's continued to roll, so to speak, over time.

William Quirk - Piper Jaffray

Understood. And I want to hold the reimbursement side of this just for a minute. I would love to sneak in a few more questions if I may, around the, is what I am looking at potentially creating a second product for the average risk market. And as Sequenom are doing their own work and what that might look like, no doubt you have run some strategies around cost benefits to payer, and so where do you think the price point has to go for this to make sense.

Ronald Lindsay

Well, I wouldn’t call it on the price point but we are very actively working on alternative technologies to be able to do a test on a global basis that would be extraordinarily competitive versus sequencing as we do it today. And I would say that we are well on our way to being confident that we can do that. Something that we will probably begin to talk about in the middle of next year. But about the pressures from our suppliers, reagent cost and other things that all of us in this arena face today, we have to get those into a different arena before there can be a talk about a price point. But I think we are very confident that we will be moving to alternative platforms in the next couple of years.

William Quirk - Piper Jaffray

Very good. Any questions from the audience? No. Shifting over to the reimbursement side of the equation here. Bill, you brought it up in your last comment. Help us think a little bit about the company's stated goals of going from 90 million contracted lives to 120 million by the end of the year. Obviously there has been an awful lot of favorable medical policy decisions that have come out. Of course the hard work kind of starts then right in terms of putting those contracts in place. And so help us think about how you are tracking to that, what's necessary, any and all details would be very welcome.

William Welch

Yes. So each year we put out goals and they are internal goals. You need to have this aspirational things as you see them and our goal this year was 150,000 MaterniT21 PLUS tests, amongst out goals. And the other was on contracts, 120 million lives under contract. We still think those are achievable this year. And it applies to contracts, at the third quarter we had 90 million lives under contract. So what a contract mean? A contract is where we have all the coding, the pricing, the payment terms. There is a lab accreditation process in terms of who we are, that’s on a file [indiscernible], actually quite large documents. And they take a while to orchestrate and implement through various payers, depends on the payer type.

We signed a national agreement with the largest association in the U.S. in working through their affiliates for contracting, and that’s going well. As well as many other payers work through that process. There is no guarantee we will get to 120 but as you see it, there is a potential agreement, there is guidelines [ph], the discussions, the accreditation, and finally the loading in in the system. You know we see that’s certainly possible and if it doesn’t happen by year-end I would expect it happens sometime early. So if due to the entire process on those that we are not contracted with, we work to that in networking and get paid. And so I think we did mention in our third quarter call that we are being paid by all the national carriers and it’s good [ph] to get paid more timely and such. So I think it's going as we thought it would go.

William Quirk - Piper Jaffray

And if we think about the contracts that you have currently signed, the 90 million covered lives as of the third quarter. Can you talk just a little bit about, I guess the breadth of those contracts. So what I mean by that is, have we seen payers that decide, say okay, well, we are going to contract with say, Sequenom and Verinata, what not, Ariosa and Natera. Or are we generally seeing much like the medial policy decisions which tend to cover all four that the contracts actually eventually reflect all four as well.

William Welch

So there is a variety of payers out there. It's a fragmented system and there are a number of that have accumulated [ph] in terms of the big, large national carriers but even that had various state plans. And so it's [indiscernible] necessary there is one size fits all, it's a rainbow, so to speak. We do have some exclusives but I would say that’s more rarer than normal. And from a payer standpoint, they normally just make a coverage and the doctors write the orders and then they pay and adjudicate. So they like not to be implementing care but just they are paying for care. And so the one agreement that we have with the largest national association, it looks like they have selected whole genome approach to date. Doesn’t mean they couldn’t change, but it appears that they have from a national -- picked more of a whole genome approach. I understand that they are not a -- and we are the only ones that have that. They could change it over time. But I think I am not aware of -- our competition is that some of them because our competition more or less has distribution agreements with the large reference labs and those references likely just add to their existing contracts. But in terms of our competitors having their own contracts, I am not aware if they have their own individual contracts, they may.

William Quirk - Piper Jaffray

Understood. And so a question for Paul. If we think about the ongoing transition of lives under contract, how should we think about that relative to accrual accounting? Obviously you have been largely cash to date. I assume that we are no longer thinking about a drop-dead day when we are switching the entire business over to accrual, but is it perhaps going to be once we get kind of more traditional consistency of payments etcetera.

Paul Maier

Well, I think you make a good point. What we need to do for the accounting profession is to demonstrate a predictability of payment and that is only demonstrated by looking backwards at history, and that would generally mean several quarters. And I think that we were optimistic as we began the year that we would have it come in waves, it wouldn’t be all in one fell swoop. But as we had contract experience on an individual basis, we would see those being predictable and being able to accrue on that basis. And right now because of the coding changes that occurred in the beginning of the year, had really slowed down the process. And while we know that eventually we will get all that sorted out and the commercial payers are starting to clean up some of the backlogs and enter into dialogs with us, we are not quite there yet.

So I do expect that it's hard to pinpoint when we will get there, but I expect it will be on a contract by contract basis. But fortunately, because we invested in having our own in-house filling system, we now have better quality data, we are better able to follow up with the payers more timely. And while we are not pleased with the lag and the delay, in the last quarter when we announced our third quarter results, we did give an indication of the receivables that we believe are out there, even though they are not on our balance sheet it's a significant amount. And we expect that each quarter will continue to report out what the status is of the reimbursement on the older claims and then reimbursement on the more current claim.

And I know many of our competitors are probably having the same challenges and we hear from the molecular diagnostic space about how everybody has been impacted by this. Medicaid of course is a lot slower than the commercial side. We do expect some movement there but it will just take longer, and so we are trying to set realistic expectations about that.

William Quirk - Piper Jaffray

I would say that’s a great segue, Paul, because I do want to ask about how progression with Medicaid, to your point, all these coding changes have been problematic for, just about everybody in this space and Medicaid has probably been the biggest offender to date, Illinois in particular. I know at one point I don’t think gave a single dollar for a lot of these molecular products, not just your own but others. And so what's the update with Medicaid? We now have the final coding changes relative to more tests [ph] in place, I understand obviously they don’t specifically pertain to NIPT, but nevertheless there does appear to be some semblance of a little bit better organization or at least settling than we have seen certainly over the spring and the summer. I would love to hear your thoughts there.

William Welch

Yes. This CPT coding change, we all I think in the industry saw it coming. Clearly, it wasn’t implemented as well as we would like by the government payers. The commercial payers, as Paul just mentioned, have been slow, but they have the ability to adopt easier with their IT systems. The various Medicare carriers just adopted recently what was initiated in the beginning of this year for the codes that were tier 1 identified. It's unclear to me, I don’t know if they had actually priced all those in various carriers. So it's very complicated. Medicaids then refer to their local Medicare carrier to make it more complicated. What we are doing about this? We had a field-based team as well as an internal team that works directly with payers.

We have got individuals targets solely on Medicaid. And in that program you are talking to folks at the various state level from a coverage, the coding, IT and payment. We turned a number of those around and we are starting to get paid. There is much more work to be done. And as it applies to NIPT and MaterniT21 PLUS, amongst many if not all the diagnostics aren't tied in that tier 1, there is no specific code and so we are forced to use which is called a miscellaneous code. It's a number not identified to any technology at all. So from a state level when they see this number, they don’t know it's our test. And so what we need to do is work with that state, let them know how to cross-reference it back to us and to our technology, and the price that they would fill. So that’s the work we are doing right now.

It's going to be a big effort through next year. As you might imagine, we are trying to target from a plateau, which one is the biggest one shall we go after, and work your way down. And the states know this is an issue. So it's not like they are not receptive of this conversation, it just happens to work through their systems.

William Quirk - Piper Jaffray

Have they indicated whether or not they will pay for tests that have already been delivered? Somewhat akin to the, Medicare historically very very good at.

Paul Maier

You know they don’t make public statements about that. We do anticipate in some cases the states will do that. But we have to go through the individual dialog and negotiation before we know the real answer, and we will try to update the market as we put these agreements in place. It's amazing because there are so many unique situations and some of these of course have economic issues that go beyond just molecular diagnostics. But as Bill said, we have significant resources focused on this and it's just a matter of time.

William Quirk - Piper Jaffray

Question from the audience on reimbursement or anything else. Okay. Last NIPT question for me and I do want to shift very very quickly to the biosciences business. Pricing trends under contract, have you been generally happy with where these are settling out when you enter into a contract with a payer? Has there been any pressure there just given some of the competitive dynamics?

William Welch

I think every payer is different and every contract we have signed has been a good agreement for us, based on volume, profitability and the like, and how would they have their own offsets internally for what they are currently doing for amnio and other things. Paul, any other...?

Paul Maier

Yes, I think that there is such a wide range of reimbursement. We still have some larger contracts in our scope. So until we have those in place it's hard to give a blanket answer. Where we are right now is we are pleased with the overall level of reimbursement, we are not so pleased with how timely we get paid. But there is no doubt that having competitors out there has shifted the dynamic slightly. However, we try to focus our dialog with the commercial payers on the quality of our test, on its performance, on the clinical data. And in all of those areas we believe that we have the superior, highest quality product. We have supplemented that with our investment in rapid turnaround time and high touch customer support and that’s important to some of the payers. And I do believe on the basis of where we have been reimbursed thus far, these are profitable tests for us, and our goal is really to move up the reimbursement so it's more timely and to make sure we get paid on all tests. And that was behind our decision earlier in the third quarter when we focused on scaling back on certain Medicaid states where it didn’t look like we were going to get paid. With the commercial payers, once they have put their coverage policies in place we know we will get paid, it's just a question of how long it will take.

William Quirk - Piper Jaffray

Understood. And in a last minute, just a quick question, update rather on the bioscience business. Kind of where are we in the strategic process here? How should investors think about the asset in terms of how close it is to profitability etcetera?

William Welch

It's a good question. First of all the bioscience business does contribute to profitability. And we don’t allocate all overhead to it but it does contribute, it does show up positive cash flow. And we have two business segments that each take a significant amount of investment to realize the growth potential and we came to the conclusion this year that even though it was the original business the company was founded on, in order to achieve the growth we just didn’t have the bandwidth or the funds to make those R&D investments. We have made them over the last few years. We have our 510(k) application submitted to the FDA which will broaden the base into the clinical lap space for the instrumentation. And so we see it has a bright future. We put a process in place and we are going through that process. We have talked to a number of interested companies. I don’t think we will be saying anything until we get closer to the finish line and we have some sort of agreement. But we felt that that business will be much more productive in the hands of a larger company that can leverage its investment and infrastructure just like we made the investment in our molecular diagnostic business. Some of the larger companies out there that address that space would have kept the leverage, and then if they make the R&D investments they will have a better distribution arrangement to get the benefit of that long term.

William Quirk - Piper Jaffray

Understood. With that I am afraid we have run out of time. So Bill, Paul, Ron, thank you very much.

Ronald Lindsay

Thank you, Bill.

William Welch

Thank you.

Question-and-Answer Session

[No Q&A session for this event]

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