Sequenom's Management Presents at JPMorgan 32nd Annual Healthcare Conference (Transcript)

| About: Sequenom, Inc. (SQNM)

Sequenom, Inc. (NASDAQ:SQNM)

JPMorgan 32nd Annual Healthcare Conference

January 16, 2014 5:00 PM ET


William Welch – President and Chief Operating Officer

Paul V. Maier – Chief Financial Officer


Elizabeth Broadhead – JPMorgan Securities LLC

Elizabeth Broadhead

Good afternoon, everyone. Thanks for coming to the 2 O’Clock session. My name is Elizabeth Broadhead and I work in equities at JPMorgan. I’m very pleased to introduce Sequenom. And the breakout will be down the hall in the Olympic Room. And here to present are Bill Welch, President and COO; and Paul Maier, CFO.

William Welch

Thanks, Elizabeth, and thanks JPMorgan for the invitation and opportunity to present today. Paul will help towards the end of the presentation, and joining me are Harry Hixson and Dirk van den Boom for the breakout sessions. So we will be making forward-looking statements including year-end 2013 unaudited results, and I’d refer you to our website for more information on the risk factors.

At Sequenom we’re more than a sequencing company. The quality of science is everything we do. As a brand new slide we put it in I swear with music it’s going great. Quality of science everything we do. If the core content with Sequenom is, is unlocking issues in human genetics. We’re research based. We work in translational and clinical applications.

As you’ve heard from many of the presentations this week, this is an explosion and big deal at genetics diagnostics. We feel we’re well positioned in this area to fulfill new needs and prenatal testing, age-related macular degeneration, and selecting fields in oncology. And today we announced a partnership and a co-promotion with Nicox to help distribute our RetnaGene LDT for progression of age-related macular degeneration. We’ll talk more I’m sure about Nicox in the breakout sessions. We have two business at Sequenom. The historical business in the right is Sequenom Biosciences, which is a business that utilized the MassARRAY multi-top technology for analyzing a number of markers in the mid-plex range. We’ve used an oncology, genomics, and clinical diagnostics.

The other business we founded about four years ago was Sequenom Laboratories and we operate through a CLIA laboratory structure. We have laboratories in Grand Rapids, Michigan, San Diego, and at Research Triangle Park. The core for a number of things we’re doing in Sequenom Laboratories, we’ll get in much more details MaterniT21 PLUS, it’s a first in market noninvasive prenatal test for pregnant women with the increased risk of fetal aneuploidies.

We also market a series of other products in the prenatal arena, as well as macular degeneration. And in the area of prenatal testing, we’re one of the largest U.S. laboratories utilizing next-gen sequencing in a day-to-day use for clinical applications.

I thought to give you some 2013 highlights. It was a very strong year for Sequenom. Revenues were up 81% year-to-year with $162 million expected from the fourth quarter for the year. Sequenom’s revenues for the diagnose went from $47 million, $46.5 to over $120 million year-to-year, accounting for 74% of our total revenues for the company.

And we processed over 185,000 total tests for three laboratories including a 148,500 MaterniT21 PLUS tests. Importantly, we reduced our cash burn from $23 million in the third quarter to $14 million in the forth quarter 2013. We’re working diligently to close national contracts with payors. We end up the year at a 113 voice under contract. We – I know those are false, have a – we have a Blue Cross Blue Shield national contract, and we’re happy that that the year-end we signed a national payor with Aetna Insurance.

It’s a continual process. It will step into 113, there is approximately 165 million lives for commercial lives in the U.S. and we’re well on our way for getting a large chunk of that.

We signed technology partnerships and know-how with two large laboratories, one in Germany and one in France. We gained our CLIA permit for New York at first for San Diego laboratory operations, and also brought up our North Carolina facility during 2014. And towards the end of the year we launched MaterniT21 Enhanced Sequencing series.

The performance of all that can be shown in the slide here. 2010 is about the initiation of Sequenom Laboratories and since then there has been consistent growth. We’ve launched MaterniT21 product in the very end of 2011, and revenues have exploded reaching over to combine the $162 million for 2013.

The Genetic Analysis or the Sequenom Bioscience business is a stable business. It’s a business that we’ve invested into get the technology brought in-house from assembly. We got ISO certification for the Genetic Analysis business. We run it in San Diego both for assembly of the MassARRAY’s and the consumables that we do there, has great growth opportunities. The donor for us is investing in both growth businesses has been a dilemma. So if the current movement were poised for exploring strategic alternatives, that process is going well, and we talk more in the breakout session about that. But we’re bullish on the Biosciences opportunities going forward.

So let’s talk about prenatal testing and what the market opportunity is in this arena for NIPT. Traditionally, prenatal testing for high-risk pregnancies was ultimately determined when your base of procedure amniocentesis or CVS. These procedure required high medical involvement, genetic counseling, and the dilemma is 97% of these procedures are negative with a 1% to 2% complication rate.

So it’s very costly and reduces an additional risks. The solution MaterniT21 PLUS, it was the first noninvasive laboratory developed test to identify pregnancies at risk for fetal chromosome in a place. We launched this product initially in 2011 with T21, it was in the largest clinical study done with women in [indiscernible] University. And in that broad study, we had a number of different markers that came out, they came out through a series of papers. Certainly thereafter we introduced T18 and T13, and then multiple gestation with multiple gestations [indiscernible] triplets in life.

We introduced Y chromosomes followed by sex aneuploidies in the first quarter 2013. We added this last year at the fall of 2013 the enhanced sequencing series, which is for microdeletions – certain microdeletions at clinical utility, as well as trisomie 22 and 16. During the year, the microarrays have been getting quite a bit of research and Dr. Wapner’s paper that was accepted and presented in New England Journal was adopted by the ACOG and SMFM communities as the invasive technology of choice over carrier type for high-risk pregnancies.

We think this is significant, because the technology we use is massively parallel sequencing is emblematic of what the microarrays would do and we always recommend that if we get a positive, we would follow up the microarray. We intend to continue that content and eventually our goal is for noninvasive microarray, obviously we are not there, yet we’re making good progress towards that goal. The market is one of the largest in diagnostics reset memory, and it’s ironic that the market that we look in the top, which is for high-risk pregnancies.

It looks small in this picture. It’s actually larger than both, breast cancer diagnosed and prostate cancers combined in the U.S., which is the largest two oncology marketplace we have. 750,000 to 800,000 high-risk pregnancies annually in the U.S., and if you include the low-risk, it’s about 4.3 million worse in the U.S. It’s a large opportunity. The lowest mark represents the great growth opportunity, but currently it’s not reimbursed, it will take time to continue to develop. We’re very bullish that the high-risk has ample room for continued growth, as well as international opportunities as we bring our technology forward.

We only perform MaterniT21 PLUS in this high-risk group, and that’s defined by the slide here. These are pregnancies with women over 35, or once it have a positive ultrasound, a positive serum, or family history. Essentially, this category would be those who are amnio worthy in traditional passion. So people who would be exploring invasive procedure. And this is the mix, this mix actually very closely nears our original study that we deal with women and infants.

We’ve had great work with the payors. I would say, 2013 was a challenging year. We do know as we’ve gone forward for reimbursement, the question is most often asked and challenged or what is the class for the pregnancies often, it think it’s difficult for over as pregnancies to be reimbursed today, and we only follow the ACOG [indiscernible] guidelines.

This is the slide that focus 0.2 is essentially showing the money slide, which I mentioned up all the amnio worthy pregnancies, the amnio worthy patients that once we test MaterniT21 PLUS 97% of those pregnancies were normal. But in the values that have abnormalities, you can see the 21, 18, and 13, and we’re also mentioning other chromosome aneuploidies I mentioned. These are very important for the life, and I think it’s tremendous that we would change the medical care in the United States and is starting to happen around the world.

We’re not just the T21 though company. Sequenom Laboratories has a series of products in the prenatal arena. All of these are LDT laboratory developed tests. We have as I mentioned a product that is a sister product that’s used in macular degeneration that we – that are co-promotion with Nicox on. But I would say that each one of the prenatal tests continue to grow. We have about a 70% U.S sales organization, and we’re tucking in and growing other prenatal tests, including these as we go forward. Holistically, we’re building a diagnostic company moving towards profitability and you can see that the ability of growth for both the CF, carrier screening test, SensiGene and, of course, T21.

The T21 tend to dwarf things given the magnitude and the next slide gives you a sense for how fast this has gone since launch. I know many companies have put a growth slides, it’s a challenge to see a growth slide, it has those kind of expectations, it’s been tremendous.

Our international volume, we pushed in this last year and we’re starting to see great opportunities there. It’s increasing to nearly 7% of our sessions and about a 11% of our revenues in the fourth quarter.

Paul will talk more about some of the reimbursement challenges. But 2013 saw some coding challenges. And in that we have some issue with the certain Medicaids, numerous state Medicaids hadn’t yet goaded various codes. So we had a push, after that became apparent after the second quarter to reduce our Medicaid exposures, and we get a very good job about that going from 24 down to 14% in the fourth quarter. That reduction has slowed down some of our sessions, it’s fine, we’ll add more – get those states on board and bring those volumes back up. But I’ve emphasized to the folks to look at Sequenom, while testing numbers are incredibly important, profitability in terms of all of that, and we’re driving towards profitability in adding volume as it makes the sense. And we’re growing the business in 2014, but we don’t need to take samples for which we’re not getting paid.

And with that, I thought I introduce Paul.

Paul V. Maier

Thank you, Bill. The pie chart depicted on this slide represents the high-risk patient population that we serve and the breakout of the insurance coverage is about just under 70% have private insurance, about 23% are Medicaid side, and the balance have the ability to pay on their own. We’ve all heard recently about the challenges of reimbursement. Sequenom was not exempt from that challenge either in 2013.

However, I’m pleased to report that we’ve made excellent progress especially with the commercial payors. Most of the commercial payors now have implemented the coding changes and our contracting experience has continued to grow as you’ve heard earlier from Bill. And we now have about two-thirds of the commercial market under contract.

As we move forward, we expect their payment cycles to shorten and that will affect our revenue in a very positive way. As Bill mentioned, we also managed the Medicaid volume down about 25% of our samples in the beginning of 2013, came from Medicaid. And ironically in the prior year in 2012, many of the Medicaid states were paying under the prior coding stacking arrangements. And we decided to take certain action in states where we weren’t getting reimbursed, where they haven’t implemented the new codes.

And we cut that down to 14% in the fourth quarter, which – while in the short run, it affected our volumes. Ultimately, it has helped us bring some of the states to the table and we’re in the process of increasing the Medicaid coverage. We now have eight states that are actively reimbursing us. We expect that to improve as we move through 2014.

As many of you know, we do not yet have accrual accounting for the majority of our revenue on the molecular diagnostic side, because it’s been very difficult to estimate when the revenue will come in and at what rate. We decided to breakout the revenue on this bar chart. The dark blue represents the tests that are performed in a given quarter and also paid in that same quarter, that’s been a steadily growing part of the equation. And in the fourth quarter about half of the tests that we performed were actually paid in that quarter.

The light blue shows the impact of the lag in payment and it’s a – we call it a picket fence, it’s very choppy and varies from quarter to quarter. In the second quarter last year, we had a dip and that was really a reflection that went on with the coding change. However, I’m pleased to report that we’re making excellent progress in that.

One of the things that we also didn’t record previously, we still done on our balance sheet as the amount that we expect to recover in accounts receivable for tests that have already been performed. At the end of the year, we had somewhere in the range based on our own estimates between $46 million and $51 million that are not on the balance sheet, we do expect to collect that. And as we have negotiations making progress both in the commercial and the Medicaid side, we expect that profile to improve this year.

I think that we summarized here some of the key accomplishments of the company. We’re all very proud of it. As we ended 2013, we still are a very strong leader. We have the best technology and we have the last time we measured we had approximately 60% market share in the high-risk market. And we’re very pleased with that testimony to the quality of our technology and our performance and our investment in the support systems that will help us maintain that leadership.

We’ve processed more than 200,000 commercial samples in the last two years since launch. And we are encouraged by the repeat ordering from our physician base both in the specialist side and in the OB/GYN community. We have committed to the investment in all of the infrastructure pieces that help us provide the highest touch service to our customers, the physicians, and their patients. We have over 2,000 draw site, so that has closed order of magnitude to some of the major lab companies that are out there. And we have announced several distribution agreements, the most recent one this week was the Mayo Clinic arrangement. And we’re very pleased that their adoption of using us is their supplier.

Every year in the beginning of the year, the past several years, we’ve established a set of key goals that we communicate in the beginning of the year. And I’m pleased that the majority of major goals that we established last year for 2013, we’ve made good progress. And in the Sequenom Bioscience or Genetic Analysis business, we did achieve our ISO certification and we filed our 510(k) for our instrument with the FDA, and we expect that to rollout this year. And we’ve continued to rollout in addition some additional panels that will allow our content to expand our customer base into the clinical space and especially with the 510(k) approval that will open up some new market opportunities to broaden our reach.

On the Sequenom Laboratory side, I think that we’re very pleased with the accomplishments. Our goal was 150,000 tests. We essentially achieve that goal even despite the fact that we cutback on the Medicaid samples in the second half of the year. The two national contracts that we achieve including the recent announcement of about Aetna have really given us a significant share of the commercial market, where we now have predictability on the reimbursement levels and on the performance of those health plans and payor systems.

We have 113 million lives under coverage. We expect that to expand again in the first quarter of this year as we reach an optimal level of [indiscernible] coverage. The accrual accounting we achieved about a 11% of our fourth quarter revenue based on our latest estimates. And this year, we expect to make some more progress as we established the history of the payment system.

Our CLIA lab in North Carolina is up and running and about a third of our samples are now being processed through there. Since it is the lower cost side, we intend to manage the growth of our samples, so that a greater proportion will be processed in that location.

The financial highlights of the year, even though for year-end, they are not yet audited. We’re very pleased we had an 80% growth in revenue – record revenues for the company over $162 million. And as you can see the largest portion of that is from our laboratory business. One of the benefits of the growing revenue, even though most of that light blue revenue comes from cash, and it doesn’t reflect the $46 million to $51 million, that’s not on our balance sheet. It has allowed our cash receipts to grow, our revenue to grow, and so our cash burn has been coming down significantly from the second quarter.

And the $14 million cash burn in the fourth quarter is the lowest we’ve had in many quarters. And we expect that trend will continue in 2014, and we are very proud of what we’ve accomplished this past 12 months. As we moved into 2014, we’ve really distilled the major objectives of the corporation into two very simple and easy to understand targets. The first and the primary is to achieve quarterly break-even and positive cash flow in the fourth quarter of this year. And we’re very confident that we’ve taken the steps that we needed to both grow the revenue, to trim our costs, and to improve the efficiencies in the organization as we focus on execution and getting to cash flow independent.

The second major initiative that we have been working on behind the scenes very quietly for several years, we now are very pleased to point out that we have established a goal of a new NIPT test that we would develop this year and we would add to our menu. That is a low cost test using an alternate platform and we are exploring several different platforms and several different technologies to achieve that. And the goal is for that to be accomplished by year end.

In the short to intermediate term, we will focus on expanding the international marketplace with an alternative product, and ultimately we will address the U.S. market. And that will take sometime as we publish clinical data on the low-risk market as we work with the medical societies in the positions to get coverage. And at guidelines and then ultimately the most important is to get over the hurdle of the payors, so that they would understand the economics of that and implement coverage policy.

That takes a while, but over the next two or three years, we expect to see market growth there. We still have quite a ways to go to achieve full penetration of the high-risk market, the 750,000 to 800,000 patients. And with our leadership and our market share and all of the investments we’ve made to support that, we look forward to continuing to build our volumes, both domestically and internationally.

With that thank you all for your participation and we’re going to appreciate the opportunity to present here at the JPMorgan conference.

Question-and-Answer Session

[No Q&A session for this event]

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