Sequenom's CEO Discusses Q4 2013 Results - Earnings Call Transcript

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

Operator

Good afternoon everyone, and welcome to Sequenom Fourth Quarter and Year End 2013 Financial Results Conference Call. All participants will be in a listen-only mode. (Operator Instructions) Please note today’s event is being recorded.

I would now like to turn the conference call over to Mr. Paul Maier. Please go ahead.

Paul V. Maier

Thank you. This is Paul Maier, Chief Financial Officer for Sequenom. Welcome to the Sequenom conference call to discuss operating results for the fourth quarter and full year 2013. Joining me today is Dr. Harry Hixson, Chairman and CEO; Bill Welch, President and Chief Operating Officer; Dr. Dirk van den Boom, Executive Vice President, Research and Development and Chief Technology Officer; and Carolyn Beaver, VP 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, March 21, 2014 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 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 an unanticipated event.

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

Harry F. Hixson Jr.

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

Let me first spend a few minutes on our fourth quarter accomplishments in revenues diagnostic test volume, reimbursement and the FDA filing of our IMPACT Dx system. We reported record revenues of $45.1 million for the fourth quarter. Our diagnostic services revenues which are recorded primarily on a cash basis of accounting grew to $32.7 million in the fourth quarter, compared with $21.1 million in the fourth quarter of 2012.

Revenues in the Sequenom Bioscience business remained stable at $12.4 million. Sequenom’s total revenue for 2013 increased by 81% over 2012. We estimate that we have unrecorded receivables of $46 million to $51 million, which are not reflected in our revenues due to our use of the cash basis of accounting for most of our diagnostic services revenue.

We accessioned more than twice as many commercial diagnostic test samples during 2013 as compared to 2012. We finished 2013 with $148,500 MaterniT21 PLUS high risk commercial samples accessioned. This was an increase of more than 140% over 2012.

Well approximately 93% of the accessions where from U.S. patients. Our international test volumes and revenues continue to show strong growth. We signed additional commercial payer contracts bringing the number of covered lives for our diagnostic services to approximately $113 million including an additional major national payer [indiscernible].

Additionally there are now $21 million lives covered by government programs. We submitted the premarket 510(k) notification to the FDA for the IMPACT Dx system. The in vitro diagnostic for IVD version of our research use only MassARRAY system. This will form the basis for transitioning the bioscience platform for basic research and to clinical diagnostics.

We believe that this will be a significant market opportunity for the bioscience business over the long-term.

Now I would like to spend some time talking about the dynamics of the noninvasive prenatal testing or NIPT market. In the advancements that we have made since introducing the first noninvasive prenatal diagnostic test, in just two years since the launch of MaterniT21 PLUS laboratory developed test.

We’ve provided more than $200,000 high risk expected mothers and their families with valuable, accurate information on key field, chromosomal abnormalities. Clearly our scientific and clinical leadership in the noninvasive prenatal testing market is revolutionizing prenatal care for potentially millions of women around the world.

The adoption of NIPT is significantly changing the rate of invasive procedures for prenatal care. Before we launched the MaterniT21 PLUS test approximately 97% of invasive procedures for high risk pregnancies where negative, but carried a measurable number of complications ranging from infections to miscarriage. Numerous studies have now been published citing a dramatic decrease of up to 50% in invasive diagnostic procedures since the advent of current NIPT. The potential market for NIPT in our growing MaterniT21 PLUS prenatal testing franchise is large.

In the U.S. alone there are approximately 4.3 million births annually of which 750,000 or more are considered at high risk for fetal chromosomal abnormalities. There is a market size comparisons, the number of high risk pregnancies in the U.S. is greater than the annual number of newly diagnosed breast and prostate cancer patients combined.

We believe the U.S. NIPT market is still growing as the technology is being accepted by the broader physician, patient and payer communities. For example despite the cold weather throughout most of the country, we experienced record MaterniT21 PLUS volumes in January. We expect their volumes to continue to grow in 2014.

For example, last week we received the largest number of samples that we have ever received. Women are waiting longer before starting a family, so that advance maternal age or AMA is now a primary driver for the high risk pregnancy market. This trend in AMA is also occurring globally, especially in new developed countries. There are over 208 million pregnancies worldwide annually. So clearly the international market is considerable.

While that is still earlier and it remains to be seen how rapidly NIPT will be adapted globally, over 12% of our diagnostics revenue in the fourth quarter originated from partners outside the US. We now have over 15 partners sending samples to Sequenom Laboratories for testing and we have licensed our technology to laboratory partners in France and Germany to perform their own noninvasive prenatal testing in their markets.

We expect to continue to license our technology selectively in 2014 to expand the reach of our testing services to pregnant women worldwide. The use of NIPT in the low risk prenatal care market represents another large and potentially emerging opportunity. The recent New England Journal of Medicine Publication of an NIPT study in the general population is consistent with previous reports, including our own study which we presented at the September 2013 American Congress of Obstetricians and Gynecology or ACOG meeting.

These results demonstrated that there are significantly lower positive rates and higher positive predicted values for the detection of trisomy 21 in standard screening.

Low risk noninvasive prenatal testing is currently not supported by Professional Society Guidelines nor is it being reimbursed by U.S. payers. We believe the developing guidelines for the low risk pregnancies will be the next step for the medical society. Payers will then need to adopt positive coverage policies and agree to reimburse for NIPT in the low risk patient population in order to make this test accessible to the broader population.

Recently we announced our 2014 goal to develop a lower cost NIPT with potentially less content than our MaterniT21 PLUS test. This new test will be useful for select cost sensitive international and domestic markets where broader access to an NIPT is of paramount importance, including the low risk population when coverage guidelines are established. Sequenom Laboratories has sanctioned nearly 37,000 MaterniT21 PLUS test samples in the fourth quarter.

As we previously discussed, during the third and fourth quarters, we significantly reduced accessions for Medicaid states that did not have positive coverage decisions or quoting in place for NIPT. As a percentage of the total MaterniT21 PLUS test accession, Medicaid test declined from 26% in the second quarter to 14% in the fourth. Overall we continue to focus our efforts on obtaining acceptable reimbursement from third-party payers including state Medicaid programs.

We are pleased to report that we now have 12 state Medicaid programs reimbursing for Sequenom Laboratories LBTs and we are continuing to make progress with other states. We expect that our reimbursable Medicaid volume will begin to drill again as we accept samples in those states which have coverage policies, quoting and pricing in place.

While NIPT is a key driver for revenue growth in the short-term, Sequenom Laboratories also offers an expanding portfolio of complementary test for prenatal care. The Heredi-T brand of genetic character screen test includes our cystic fibrosis carrier screen which utilizes the 141 mutations and variance proven to be clinically relevant Johns Hopkins CFTR2 database.

And our SensiGene Fetal RHD Genotyping test, a noninvasive prenatal blood test determine the fetal RHD genotype in our HT negative mothers. This October 2013, we also offered Carrier Screen test for the Ashkenazi Jewish Panel, spinal muscular atrophy and Fragile X lag contract.

HerediT CF test the leading Carrier Screen test for us where we are beginning to see the synergistic and supportive appeal of the expanded carrier screening test within our prenatal testing portfolio. To expand our continual of care, we’ve also recently added the next few laboratory developed test to our portfolio as the test offering through a partnership with CombiMatrix.

Next the use of Chromosomal Microarray analysis testing service that is able to confirm the results of noninvasive prenatal testing to physicians and our patients. We are continuing active negotiations with third-party payers including Blue Cross and Blue Shied affiliates, where approximately 51 other affiliates are contracted based upon the master agreement previously announced. We had executive agreements that cover approximately 113 million lives for our test as of December 31, 2013. We expect to execute multiple additional agreements in the coming month.

Importantly, we are receiving payment either as in-network or out-of- network provider from all of the major national payers. In the fourth quarter we have began to realize the benefits of our 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 efficiency including our laboratory operations, sales marketing and administrative expenses.

We expect that these efforts combined with our efforts to improve reimbursement including collecting revenues for Sequenom laboratory test already performed will lead to profitability. As we previously announced, we will continue to review strategic alternatives for our Sequenom Bioscience business. We expect to provide an update on that process in the next quarter. We recently two launched two additional research use only oncology panels, UltraSeek and OncoFocus, for the MassARRAY System.

UltraSeek incorporates a ground-breaking, ultrasensitive, detection technology that have been evaluated as part of an early access program early in the year. We believe both of these panels will be enabling in translational and clinical research study.

I’ll now turn the call over to Paul, who will discuss the details of our performance in the fourth quarter and the year. Paul?

Paul V. Maier

Thanks Harry. We are pleased with our progress for the fourth quarter and are continuing our efforts to improve collections for test performed. For the fourth quarter of 2013 total revenues were $45.1 million, an increase of 34% compared to the fourth quarter of 2012. Diagnostic services revenue were $32.7 million, up 55% from the same period last year and down 2% sequentially due to the timing of catchup payments. Diagnostic services revenues are recorded primarily on a cash basis.

The total volume of our test in the fourth quarter increased 38% over the prior year fourth quarter. As Harry mentioned we’ve reduced the mix of medicate versus commercial samples for MaterniT21 PLUS from 26% in the second quarter to 14% in the fourth quarter.

Strong growth in the HerediT test for Cystic Fibrosis carrier screen also contributed to the growth in total test. Our revenues are impacted by the number and type of test bills, the number of tests which are reimbursed by third party payers and patients and the rate paid per test.

The number of test billed has increased consistent with the increase in the number of accessions.

As we described in our second quarter call along with many other laboratories in the diagnostic industry, Sequenom laboratories continues to experienced delays in receipt of payments, as a result of the coding changes adopted January 1, 2013 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 many state Medicaid plans, managed Medicaid programs and Medicare still have not implemented the new codes or in some instances have adopted negative coverage policies resulting in minimal collections for those payers in 2013. Following the coding change, we were not receiving Medicare reimbursement for Sequenom Laboratories’ RetnaGene AMD laboratory developed test.

We have entered into an agreement with Nicox for the promotion rights to the Sequenom Laboratories’ RetnaGene AMD test, which they will offer on a private pay basis. This test compliments the Nicox growing retinal franchise, and Nicox is better positioned to fully capitalize long-term on the AMD testing opportunity.

We continue to work with most of the major state Medicaid agencies to seek coverage for Sequenom Laboratories’ test. Several major state Medicaid agencies have now established codes, coverage and pricing for our test. Although, we did not receive any significant payments in the fourth quarter. 12 state Medicaid programs have now began to reimburses in 2014 for test previously performed now that they have established codes, coverage and pricing within there systems.

Current we cannot determine how many states will reimbursed for test previously performed for Medicaid beneficiaries, since some states may only reimburse for tests in the future.

During each quarter of 2013, including the fourth quarter we continue to improve our collections and revenue recorded for services performed in the current period. Revenues for testing service performed during the fourth quarter increase by $1.2 million compared to the third quarter and revenue for testing services performed in prior quarters decreased by $1.8 million compared to the third quarter.

Collections for test performed in prior quarters have been uneven and we expect that will continue to be uneven as we obtain additional coverage polices and payments from state Medicaid and commercial payers. With the new codes, many payers require additional information to ensure that test meets their coverage guidelines for high-risk patients, these requests have slowed the payment cycle. We believe the payers will not reimburse for low-risk patients until the medical societies publish guidelines for use in the low risk market.

We sometimes are required to appeal a denial before a 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 $3.8 million in the fourth quarter from one payer for test performed in prior quarters. We expect the percentages of claims paid by third-party payers to improve overtime.

We’re continually pleased with the level of reimbursement for claims which are paid. The average rate received per MaterniT21 PLUS test reimbursed declined modestly by about 12% during 2013 to approximately $1200 per test, as a result of competitive pricing pressures, additional contracting and the effect of the coding change.

As of December 31, 2013, uncollected amounts outstanding for test delivered which were not recognized as revenue upon delivery of the test result, because of the accrual revenue recognition criteria were not meet 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. These receivables are as a result of the long collection process caused by payers’ request for additional information and their initial denials 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. Additionally we seek to sign additional contracts with payers, which should eventually improve the timing of payments and we will 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 in states which are not yet providing coverage to improve our availability to generate profitable test volume.

With every quarter, we are gaining experience in the collection 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 including royalties grew to $4.1 million in the fourth quarter or 12.5% of diagnostic services revenue, compared to $3.8 million in the third quarter of 2013. This revenue is recorded on an accrual basis because of the private pay arrangement. The improvement in the gross margin during the fourth quarter of 2013 to 40.6%, compared to the fourth quarter of 2012 gross margin of 36.6% is primarily attributable to higher collections and to the efficiencies gained by improved economies of scale resulting in lower cost for test.

Selling and marketing expenses decreased to $11.9 million for the fourth quarter of 2013 from $14.9 million for the fourth quarter of 2012, resulting primarily from lower personnel costs following the restructuring, which occurred in August of 2013.

Research and development expenses of $9.3 million for the fourth quarter of 2013, were lower than in the prior year and prior quarter due to the completion of the validation of the additional laboratory location in the second quarter and as the result of our restructuring in the third quarter.

Net loss for the fourth quarter of 2013 was $18.9 million or $0.16 per share. These amounts compared to a net loss of $32.8 million, or $0.29 per share for the same period in 2012. For the full year 2013 the Company recorded record revenues of $162.4 million, an increase of 81%, from revenues of $89.7 million for 2012. Revenues for 2013 from the Sequenom Laboratories operating segment grew 157% while revenues from the Bioscience operating segment remained stable for 2013, compared to the prior year.

Net loss for 2013 was $107.4 million or $0.93 per share as compared to net loss of $117 million or $1.03 per share for 2012, reflecting an increase in diagnostics revenue offset by increases in cost to support our operations, particularly due to the cost of test for which we have not yet been paid, increased patent litigation expense and restructuring expense. As a result of the restructuring activities in the third quarter of 2013, we reduced the run rate of our operating expenses by approximately $13 million on an annual basis, which began to take effect in the fourth quarter of 2013.

Net cash used in operating activities was $10.6 million for the fourth quarter of 2013 and improvement compared to prior quarters. The cash burn of $13.6 million for the quarter compares very favorably to the cash burn of $43.5 million for the second quarter and $23.1 million for the third quarter this past year. This sequential reduction as a result of improved collections timing and payments on our efforts to control cost. The Company used cash for capital investments of $1 million and used $2 million for debt repayment during the fourth quarter of 2013.

We expect our cash burn to fluctuate on a quarterly basis, however we believe that we will meet our goal of being cash flow positive for the fourth quarter of 2014. As of December 31, 2013, total cash, cash equivalents and marketable securities were $71.3 million.

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

Harry F. Hixson Jr.

Thank Paul. To summarize our results for the quarter and the year, we have continued to lead the industry and the number of NIPT test performed and reimbursement received. We continue to work with payers both commercial and government to gain coverage and reimbursement for our test and have made significant progress towards that goal. The MaterniT21 PLUS test with extended content, which we released in 2013, currently provides the most comprehensive information available in the NIPT market, and has been received very positively by the market.

Sequenom Laboratories is expanding its market reach with broader prenatal portfolio through collaboration agreements and development efforts. The Company has established its primary, financial and R&D objectives for 2014 to include. First, achieve breakeven and positive cash flow for the fourth quarter of 2014. And second, expand the NIPT menu with the development of a low cost test on an alternative platform by year end, which we expect will facilitate international access and potential entry into the low risk market.

We estimate that we have a 60% market share in the high-risk non-invasive prenatal testing market in the U.S. Sequenom Laboratories is continuing its efforts to expand its capabilities to serve that large market through enhanced content. We expect that the development of the low cost test will enable Sequenom Laboratories to serve an even broader market, if and when testing in the low risk market becomes a standard of care.

With that summary of our business and goals for 2014, we would now like to open up the call to questions. Operator, please open the line.

Question-and-Answer-Session

Operator

(Operator Instructions) And our first question comes from Brian Weinstein from William Blair. Please go ahead with your question.

Unidentified Analyst

Hi, guys good afternoon. This is actually Matt in for Brian. Just wondering if you expand on our comments a little bit about, what you’re seeing in the high risk market thinking about penetration, ramp in competition and sort of under the guide of that is, I didn’t curiously at least mention a test volume expectation in 2014, so what about the dynamics also your thoughts on providing test volume guidance, thanks?

William Welch

Sure Matt, this is Bill. One thing we are trying to temper in during Harry’s and Paul’s discussion is volumes are important and we said, we saw increasing volumes in January and actually just had a record in last week. The name of the game this year primarily is not necessarily counting volumes, it’s about getting to our ultimate goal which is cash flow breakeven by the fourth quarter. So, historically putting various scenarios on unit growth and we’ve choose not to do that to give a broader goal, which is to get to financial position I think in the year that puts that control around destiny from a cash flow standpoint probability. So we see the market still growing.

Unidentified Analyst

Okay, thanks and that actually turn to see my next question which is about the other strategical which was developing a low cost test alternative platform. I just wondering what, is there any color you can provide on what sort of trial, you might have to do on that alternative platform or what steps or timeframe, we would get for that alternative platform, and is that considered in the $13 million OpEx decrease, $13 million run rate decrease, any expenses there, thanks?

Dirk van den Boom

Well, this is Dirk. These are multiple of question. I’ll try to pick them of, I think to address maybe the first part of your question, we have said that in all pervious calls, we always had an alternative technology program and what you see this year is that obviously in that program we had multiple successes, which we are considering could be very good options for a lower cost test for the market segment we are talking about. And we are very confident in that, I think it’s too early to talk about how that exactly looks like in terms of what we want to disclose publicly. But we will follow the same principles we have done in the past. We are running clinical samples we will produce adequate data and then we’ll be in a position to talk about just to address the procedures we have.

Harry F. Hixson Jr.

And I’m just to add that as we have the largest clinical, we think both data base and others to be able to bring out the test once we get to the point which path we want to do, so it’s not like we have to go out and do a big study to go grab samples, we’ve already had a number of samples from studies done. So, we think that we can execute fairly readily.

Unidentified Analyst

Okay, thanks guys.

Operator

Our next question comes from Zarak Khurshid from Wedbush Securities. Please go ahead with your question.

Zarak Khurshid – Wedbush Securities, Inc.

Hey, there guys, good afternoon. Thanks for taking the questions. I guess question for Paul first, if you back out that catch-up payment in Q4 looks like NIPT sales went down actually versus Q3. Is that an accurate way to think about it and if not can you just explain what’s happening there? We thought that collection efficiency was generally getting better towards year-end? Thanks.

Harry F. Hixson Jr.

Well, there are several phenomena going on. That’s why we have begun to separate the amount received in each quarter to payments relating to tests performed in the quarter and then payments related to tests performed in prior periods. And so what you see if you track the trends is about half of the revenue we reported in the fourth quarter related to tests that we preformed in that quater and the prior period revenue or cash receipt is what’s more volatile and varies from period to period. So as we continue to collect the old payments that are due and to have more contracts in place and to shorten up the collection cycle, we expect that this trend will continue and so what we will see going forward is revenue growth on a steady basis and the day sales outstanding continuing to come down.

Unfortunately we all won’t have very good visibility until we’re able to convert to accrual accounting on all of our revenues and that’s why we began in the third quarter to try to provide more transparency and more detail in our disclosures about the segments of revenue and where they are coming from. We also remember in the fourth quarter we intentionally reduced the volume of tests coming from the Medicaid states. And so we did expect that since we had a slightly lower volume of tests that were performed in the fourth quarter that we would see the impact of that and that was motivated of course by making sure that the test that we perform are paid and that each tests that we do is a profitable test.

Zarak Khurshid – Wedbush Securities, Inc.

Got it. That’s very helpful. Thank you. And then, in terms of Medicaid and the progress there, of the states that are now paying can you characterize how that looks as a percent of the list price or the average price for last year?

Harry F. Hixson Jr.

Well, I don’t think we want to get into that level of detail since we’re still working with a number of these states. We’re very sensitive to that, don’t want to bias our discussions with them and in establishing a fee that we would be comfortable with providing continuing test service. But overall I would say we’re quite pleased with where the Medicaid average reimbursement level is and it does vary considerably from state to state, but overall that number that I covered in terms of our average reimbursement per test where we get paid that includes the Medicaid as well as commercial payer. So we’ve always been pleased with the overall average realizing that there will be a broad range of reimbursement levels on an individual contract or in this case state basis.

Zarak Khurshid – Wedbush Securities, Inc.

Sounds good. And then last one, just on that theme with Medicaid and the potential for catch-up payment. Can you just maybe give us some insight into how you think Medicaid maybe approaching catch-up and are there any precedence in other areas of diagnostics where companies saw meaningful catch-up payments from tests performed in prior periods within the Medicaid? Thanks.

Harry F. Hixson Jr.

Well, I think that while there may be some precedence, I wouldn’t necessarily hang my hat on those, because first of all, these coding changes that we went through caused a number of states to kind of rethink where different categories of molecular tests fit in and I don’t think one size fits all here. We have been pleased. In some cases we expect that we will get reimbursed for tests that are already performed. And if you go back to the prior year we actually received greater reimbursement from Medicaid in 2012 on an absolute dollar basis than we did in 2013.

And it’s really a case-by-case basis whether they will go retroactively or whether they will only consider going forward basis for the reimbursement. So each discussion is unique and stands on its own. But I think overall we feel very positive that a number of key states are coming around and we’re focusing of course on the larger volume states where the patient populations are and we expect to make progress during the year and we’ll report on that as we go forward.

Zarak Khurshid – Wedbush Securities, Inc.

Great. Thank you.

Operator

Our next question comes from Bryan Brokmeier from Maxim Group. Please go ahead with your question.

Bryan Brokmeier – Maxim Group

Hi. Thanks for taking the questions. You’ve stated that 50% of Blue Cross Blue Shield affiliates are contracted. Is that 50% of the 38 affiliates or 50% of the $100 million covered lives?

Harry F. Hixson Jr.

Good question. That’s of the affiliates.

Bryan Brokmeier – Maxim Group

The affiliates, okay. And that was as of December 31?

Harry F. Hixson Jr.

Yes.

Bryan Brokmeier – Maxim Group

And that’s a good accomplishment on its own, but were there any significant affiliate contract signed in the fourth quarter that maybe you should think could be a catalyst for additional Blue Cross Blue Shield affiliates the same contracts in the near-term?

Harry F. Hixson Jr.

Bryan, we’re in discussions with those other affiliates. I expect we’ll sign more. Some of them are harder than others from pre-existing broader issues outside of NIPT whatever. So on those we have discussions and we talk about the appreciation. I think one thing we just point out is that we’re getting paid by – whether in or out of note by all major payers and this is about contracting, increasing throughput in terms of the less friction, less automation, less issues that take place. But I expect one will continue to get paid, but certainly I don’t think we’ll get all the balloons [ph]. I think that’s the goal, but I don’t expect we get them all. Definitely we have to get them all to be fine from a payment standpoint.

Bryan Brokmeier – Maxim Group

Okay. And you said in your prepared remarks that 14% of your volume comes from Medicaid. You talked about a number of state Medicaid programs that are paying in some other – through the managed care contracts that you’re being paid from state program. What percent of that 14% of your volume is reimbursing right now that’s included in all those contracts you talked about the state programs?

Harry F. Hixson Jr.

We haven’t disclosed that, but I think directionally the reason we shrunk it from where the market is about 25%, 26% of high risk patients are Medicaid patients. We shrunk it intentionally to be more reflective of where we expect to get reimbursed. But we probably will not get into that level of granularity of the Medicaid test that are performed, what percent of that is reimbursed, but ultimately the goal is to have a business model where we get reimbursed for every test we perform and we will be doing some fine tuning along the way to improve our probability of success.

Bryan Brokmeier – Maxim Group

Okay. And Harry you talked a bit about the NextView in the agreement you have with CombiMatrix. Can you talk a little bit about opportunities that you see for the NextView and sort of any benefits that you’re seeing so far since you signed the contracts back in those September?

Harry F. Hixson

Yeah, I think I’ll let Bill answer that.

William Welch

Yeah, so Brian we think NextView and CombiMatrix is a great partnership, it’s very synergetic to our core business. So, when you’ve always said even at launch that we think our test should be followed up with special deposits with more information and our technology is much more akin to Microarray from a sequencing base. The NextView Microarray concept is invasive procedure should confirm the things we see with MaterniT21 PLUS. And so as we launched that just at the end of towards of last year when we get positives we would have an opportunity to bring that forward for doctors and hospital systems if they don’t already have a invasive procedure methodology to use it with NextView. It’s early. We see it taking place, but you know just remind of the overall ampoule and thesis, 97 or some of those are negative. So 3% to 4% to 5% could be a NextView opportunity, but when you have this opportunity you should get the right results.

Bryan Brokmeier – Maxim Group

Okay, great. Thanks a lot.

William Welch

Yep.

Operator

(Operator Instructions) And our next question comes from Bill Quirk from Piper Jaffray. Please go ahead with your question.

David C. Clair – Piper Jaffray & Co.

Hi guys, it’s actually Dave Clair in for Bill today. I was just curious you know given the progress that you guys are seeing in terms of signing contracts. How should we think about the transition to accrual accounting as the year progress?

Harry F. Hixson Jr.

Well, that’s an excellent question and I believe that we are in much better position this year than we were last, now that the conversion to the new codes has been in place with the commercial payers. And what we are doing is building with the contracts in place on a contract-by-contract basis and payer-by-payer basis building a history of predictability.

And when we have several months of good data that appears that the trend is solid and we can convince the accountants that we’re comfortable and making those projections going forward, we will convert. So I don’t think it will be all in one fell through, but I think it will be – each quarter we’ll review our contracting situation and hopefully some portion, we can covert. But I do feel during 2014 well it’s hard to pinpoint what percent of revenue will be on accrual accounting. I do believe that as the year progresses, we will see a growth in that percentage and that will have been by the end of the year we will have been in the market for three years. And I think that will be in a much better position to answer that question with more granularity, but expect to see some improvement as the year goes on.

David C. Clair – Piper Jaffray & Co.

Okay, thanks for that and then for the ASP you guys - you said you saw a 12% decline in 2013. How are you thinking about pricing going forward? Is it something that you expect to be fairly stable down at this $1,200 level?

Paul V. Maier

Well, that number represents a broad range of reimbursement and as we look at each contract on a per case basis deciding whether we into an agreement and the Medicaid volume affects. So we expect that it will change overtime, but we’re quite pleased with where it is right now. And we are realistic we understand that the competition has a broad array of pricing but we thing that our – we believe that our test is highest quality test and then our laboratory performance is top in the field.

And I think that while the average selling price may change over time, the more important indicator of our success is the revenue that we record, the cash we collect. And so collection on the percentage of test is in our business model is very important not just the average per test. But based on the true margin not the reported margin, this is a very attractive business and we are very pleased with the direction that is heading and we still get reimbursed at very nice levels. And we will try to update the market every quarter as we go forward.

David C. Clair – Piper Jaffray & Co.

Okay and then just last one on the average risk opportunity, how should we think about that, is it just a question of you guys developing kind of the lower price cuts and then early 2015, is kind of the way to look at launching into the average risk population?

Harry F. Hixson Jr.

Well, I’ll answer part of that and I’ll ask Bill to answer too. I think the real key here is when will the payers government and private reimburse for test performed in what we call the lower risk segment. They are already have coverage, this advisory coverage decisions for the high risk market. So there is a process there we don’t know how long is going to take. But I’m sure there is a huge demand there, but the question is whose is going to pay for it, if and when will they start paying for it and what price will they pay for it. Currently most of those samples are being done by serum screen at a very low price. The payers maybe in the high risk market our test basically is the replacement for amniocentesis or other invasive procedures which were pretty expensive.

The use of NIPT local cost NIPT test in the low risk market is going to be a step-up in cost for the payers and are they willing to do that and what phase will they do it? So Bill if you want to add any thing?

William Welch

Just to emphasis, it’s a big market both domestically and internationally, low risk, if you want to see general and broader international market places. So it just gives you a sense for folks, this is a very big market, and it’s not going to be, I don’t think one size to sell around the globe, we have technology that were trying to enable a variety of folks to bring this technology to the local regions. And the U.S. called this little risk marketplace, our cost would be how much content, how much counseling? And what’s the right vehicle and those will be worked out both by providers and by patients and demand and utilization mostly by the payers and acceptance.

We believe in our NIPT technology, so these falls positive albeit low in the various publications and such, I think as we go forward, we know that ours also will be well, but those it’s less about that. It’s more about broader evolutionary adoption. So I view this is a long-term growth engine, but don’t think of it so much like NIPT was revolutionary that it replaces a chuck of [indiscernible], it’s so straight forward I think the people can grasp that.

And then as we think about the high risk we provide a lot of content that people appreciate, so much so we can case studies that have identified anecdotally oncology type things that for patients and for physician, so we do see a deeper richer content for high risk and then maybe something simpler for international and this low risk group.

David C. Clair – Piper Jaffray & Co.

Okay, thank you.

Operator

And we have a follow-up question from Zarak from Wedbush Securities. Please go ahead with your question.

Zarak Khurshid – Wedbush Securities, Inc.

Hi, there, thanks for taking the follow-up. So it sounds like the international business is coming in nicely. Can you breakout the split there between royalties on such performed by the licensees and then versus the samples they actually send to the lab?

Harry F. Hixson Jr.

We haven’t done that Zarak, yet and I think the way to think about it as we put more life and season plate and as the royalty revenues grow when it becomes material we’ll probably break it out in the future. But right now, I think it’s – we put it in that one category, and we are pleased with the revenue that we are receiving. And the other thing to point out we do accrue that revenue and we do break that disclosure out and it’s been growing each quarter, so we have been very pleased with that.

Zarak Khurshid – Wedbush Securities, Inc.

Got it. And just a final one on that, so how would you characterize the penetration in the high risk market in Europe? Thanks.

Harry F. Hixson Jr.

In Europe? I’m sorry is there…

Zarak Khurshid – Wedbush Securities, Inc.

Yes, the question was the high risk market penetration in Europe?

Harry F. Hixson Jr.

Europe internationally its so early for this technology, we are seeing volumes that are good for us, but I think we are just happy into the beginning stages that where this may play out, and how much penetration it may take place. In various countries actually define things differently based on how they in their own countries do prenatal care, so the U.S. is a structure, this high risk otherwise, some European countries see it the same way and some actually see it slightly different. So I just think if you think of NIPT, then Europe or NIPT globally, it’s still very nascent.

Zarak Khurshid – Wedbush Securities, Inc.

Okay, great, thank you.

Operator

And ladies and gentlemen, at this time I am showing no additional questions. I would like to turn the conference call back over to management for any closing remarks.

Harry F. Hixson Jr.

Well, I’d like to thank everyone for joining us on today’s call and for your questions and for your continuing interest in Sequenom. If you have any further questions about today’s results or need additional information, feel free to contact our Investor Relations department at area code 858-202-9028. Thank you very much and goodbye.

Operator

Ladies and gentlemen, that does conclude today’s conference call. We thank you for attending. You may now disconnect your telephone lines.

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