Sequenom's CEO Discusses Q1 2014 Results - Earnings Call Transcript

May. 1.14 | About: Sequenom, Inc. (SQNM)

Sequenom, Inc. (NASDAQ:SQNM)

Q1 2014 Earnings Conference Call

May 1, 2014 5:00 PM ET

Executives

Paul Maier – CFO

Harry Hixson – Chairman and CEO

Bill Welch – President and COO

Dirk van den Boom – EVP, Research and Development and Chief Technology Officer

Analysts

Brian Weinstein – William Blair

Zarak Khurshid – Wedbush Securities

Bryan Brokmeier – Maxim Group

Kevin DeGeeter – Ladenburg

Dave Clair- Piper Jaffray

Bret Jones – Oppenheimer

Operator

Good afternoon and welcome to the Sequenom First Quarter 2014 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) Pease note this event is being recorded.

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

Paul Maier

Thank you, Amy. This is Paul Maier, Chief Financial Officer for Sequenom. Welcome to the Sequenom conference call to discuss operating results for the first quarter of 2014. 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 Scientific 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 begin broadcast live over the web and will be available for replay through Friday, May 16, 2014 on the Investors section of our website at www.sequenon.com/invest.

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 expresses 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 Hixson

Thank you, Paul. Good afternoon and thanks to everyone on the line for joining us on today’s call to discuss Sequenom’s results for the first quarter of 2014. We are pleased to report that we have continued to make significant progress during the first quarter.

Let me first spend a few minutes on our first quarter accomplishments in revenues, diagnostics test volume, reimbursement and then Sequenom bio-scientist. We reported record revenues of $46.3 million for the first quarter, Sequenom’s total revenue for the first quarter of 2014 increased by 20% over the first quarter of 2013. Our diagnostic services revenues which are recorded primarily on a cash basis of accounting grew to $37.1 million in the first quarter of this year compared to $29.1 million in the first quarter of 2013.

We accessioned 12% more commercial diagnostic test samples during the first quarter of 2014 as compared to 2013, despite our continued efforts to reduce Medicaid volume in those states in which we are not being reimbursed.

For the first quarter of 2014, we accessioned nearly 40,000 MaterniT21 PLUS test high risk commercial samples, an increase of 14% over the first quarter of 2013 and up 8% sequentially over the fourth quarter of 2013.

As we previously discussed during the third and fourth quarters of 2013, we significantly reduced the sessions from those Medicaid states that did not have positive coverage decisions or coding in place for noninvasive prenatal testing or NIPT. Another, we have 13 state Medicaid programs paying for our test. We are increasing the volume of Medicaid samples in those states while we continue to reduce the volumes in states that are not reimbursing for our test.

As the percentage of the total MaterniT21 PLUS test accession, Medicaid test increased from 14% in the fourth quarter of 2013 to 16% in the first quarter of 2014. We are continuing to make progress with the other states. We expect that our reimbursement for Medicaid volume will continue to grow as we accept samples in those states which have coverage policies, coding and pricing in place.

While approximately 90% of the accessions were from the US patients, our international test volumes and revenues continue to show strong growth. We believe that the domestic and international NIPT markets are still growing as the technology is being accepted by broader physician, patient and payer communities.

We estimate that we have unrecorded receivables of $42 million to $46 million which are not reflected in our revenues due to our use of the cash basis of accounting for most of our diagnostic services revenues.

We signed additional commercial payer contracts this quarter bringing in the current number of covered lives for our diagnostic services to approximately $118 million. And additionally, there are now 24 million lives covered by government programs. We believe that our efforts design additional contracts and obtain additional Medicaid coverage in the quarter were hampered by the attention required to payers and states to implement the Affordable Care Act and believe that we’ll make further progress in this second quarter.

Revenues in the Sequenom bioscience business remain stable at $9.2 million for the quarter. Consumable revenues grew 9% over the quarter first over the prior year first quarter nearly offsetting the decline of assistance revenues through primarily to a change in the of mix system sales.

In the last 18 months, Sequenom bioscience launched four research-use only or RUO panels focused on the personalized medicine in cancer research market. Combine these RUO panels represent at 7% of the 9% growth in consumable sales in the first quarter of 2014 as compared to the first quarter of 2013.

We are working on our responses to the remaining questions received from the FDA resulting from our submission of the premarket510(k) notification to the FDA for the IMPACT Dx system. The in-vitro diagnostic of IVD version of our research use only MassARRAY system. This system will form the basis for transitioning the bioscience platform from basic research into clinical diagnostics.

We believe that this will be a significant market opportunity for the bioscience business over the long term. We expect to announce further information on the results of our investigation of strategic alternative for the bioscience business by the end of the second quarter.

While NIPT is a key driver for revenue growth in the short term, Sequenom Laboratories also offers an expanding portfolio with compliment interest for prenatal care. Sequenom Laboratories accessioned a record number of the HerediT Cystic Fibrosis carrier screening test during the first quarter. So the advantages of our broad prenatal product line continued to resonate with physicians.

I would now like to discuss some favorable developments with respect to our NIPT intellectual property. In January of 2014, the European Patent Office of EPO issues patent EP21836983 B1, entitled "Diagnosing Fetal Chromosomal Aneuploidy Using Genomic Sequencing." This patent, which is exclusive licensed to Sequenom, claims novel methods for detecting fetal aneuploidy using sequencing and was the first patent filing made in the EPO directed to this novel method.

This patent was issued in accordance with the European first to file system which rewards a patent to the first person to file a patent implication for an invention.

On April 7, 2014, the US Patent and Trademark Office or PTO, concluded three patent interference proceedings in favor of Sequenom. These patents involve the use of DNA sequencing for noninvasive prenatal testing for Down Syndrome and other chromosomal abnormalities. The PTO ruled that US patent number 8,008,018 and two additional patent applications each licensed to Verinata Health, Incorporated and Luminous subsidiary, lacked sufficient disclosure to meet the written description requirement for the claims in the patent and patent applications.

The PTO entered a judgment cancelling all four of the ‘018 patent claims in the interference and also enter judgments rejecting the claims of the two patent applications. The PTO applications are subject to appeal to the Federal District Courts or to the Court of Appeals for the Federal Circuit

I’m very encouraged by these evolvements. I will now turn the call over to Paul who will discuss the details of our performance in the first quarter. Paul?

Paul Maier

Thanks, Harry. We are pleased with our progress for the first quarter and are continuing our efforts to improve collections for test performed. For the first quarter of 2014, total revenues were $46.3 million, an increase of 20% compared to the first quarter of 2013. Diagnostic services revenues were $37.1 million, up 27% from the same period last year and up 13% sequentially due to the timing of catchup payments. Diagnostic services revenues are recorded primarily on a cash basis.

International revenue accounted for – on the accrual basis contributed 12.5% of diagnostic services revenues in the first quarter of 2014.

The total volume of our test in the first quarter increased 12% over the prior year first 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. As we’ve described last year along with many other laboratories in the diagnostic’s industry Sequenom Laboratories continues to experience delays in receipt of payments, as a result of the coding changes adopted January 1, 2013 by government and third-party payers.

Though many payers continue to request additional information causing 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 have not yet implemented the new codes or in some instances have adopted negative coverage policies resulting in minimal collections from those payers.

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. We now have 13 state Medicaid programs that are reimbursing us for test performed now that they have established codes, coverage and pricing within their systems.

Revenues from government payers increased 104% from $2.3 million in the first quarter of 2013 to $4.7 million during the first quarter of 2014.

Currently, we cannot determine how many states will reimburse for test previously performed for Medicaid beneficiaries, since some states may only reimburse for tests in the future. As Harry mentioned, the mix of Medicaid versus commercial samples for MaterniT21 PLUS increased from 14% in the fourth quarter of 2013 to 16% in the first quarter of 2014 as we began to increase Medicaid volume in the states they are now reimbursing for a test.

Approximately $15.9 million of diagnostic services revenue reported for the first quarter of 2014 are attributable to test performed in the same period. Approximately $21.2 million of diagnostic services revenues reported in the first quarter of 2014 is related to payments collected for test performed in prior periods.

Collections for test performed in prior quarters have been uneven and we expect they will continue to be uneven as we obtain additional coverage policies and payments from state Medicaid programs and commercial payers.

In the first quarter of 2014, we received more than $2 million in catchup payments from certain Medicaid programs for services performed in the first three quarters of 2013. We expect the percentage of claims paid by third-party payers including government payers to improve overtime.

With the new codes, many payers require additional information to ensure the test meets their coverage guidelines for high-risk patients. These requests have slowed the payment cycle.

We continue to be pleased with the level of reimbursement for claims which are paid although the average rate received during the quarter declined primarily due to the impact of lower per test Medicaid payments, the impact of co-pays and deductibles in the first quarter and pricing pressures.

Uncollected amounts outstanding for test delivered that were not recognized as revenue upon delivery of the test result, because of the accrual revenue recognition criteria were not met, are estimated to range from approximately $42 million to $46 million as of March 31, 2014.

These estimates are net of estimated write-downs and adjustments and actual revenue will depend upon their reimbursement ultimately to be received for outstanding claims. Due to our current method of cash based revenue accounting, these estimates of potential accounts receivable do not appear on our consolidated balance sheet.

We expect that our collections will improve in the future as we worked to gain agreement for more payers to pay claims without requiring additional information. Additionally we aimed to sign additional contracts with payers, which should eventually improving 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 commercials versus Medicaid volume and states that are not yet providing coverage to improve our ability to generate profitable test volume.

Today, is the one-year anniversary of bringing our billing process in house [ph]. 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 our costs and revenues to the period in which services are provided.

We expect to begin using accrual accounting in the second quarter for a limited number of payers where we have established sufficient payment history. While the actual impact will depend on the volume of test and the amount of reimbursement received in the second quarter, we expect that the impact on second quarter results will be modest. We believe that it is important for us to begin this transition to a full accounting and we will provide more details on our actual results following the second quarter.

The American Medical Association or AMA editorial panel met in February to consider adding a section of codes for next generation sequencing test or genome-specific procedures, GSP with a specific code for fetal aneuploidy.

Sequenom Laboratories has been notified and it has been announced publicly that its CPT code application and request was accepted by the AMA, that the specific code has not been announced but is expected to be posted on the AMA website on or before June 1, 2014 and is scheduled for implementation by January 1, 2015.

We expect this new code to facilitate the reimbursement process and reduce the time required for third-party payers to process claims for payment. Diagnostics revenue from international clients including royalties accrued to $4.6 million in the first quarter of 12.4% of diagnostic services revenues compared to $0.8 million in the first 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 first quarter of 2014 to 38.6% compared to the first quarter of 2013 gross margin of 27.5% is primarily attributable to higher collections, increased test volumes and the efficiencies gained by improved economies of scale resulting in lower cost for test.

The 2 basis point decline in gross margin from fourth quarter of 2013 gross margin of 40.6% is due to the decline in revenue for the bioscience business in the first quarter compared to the fourth quarter of 2013.

Selling and marketing expenses decreased to $11.8 million for the first quarter of 2013 from $13.7 million for the first quarter of 2013 and $11.9 million for the fourth quarter of 2013 resulting from cost reduction efforts primarily lower personnel costs following the restructuring which occurred in August of 2013.

Research and development expenses of $8.2 million for the first quarter of 2014, were lower than in the first quarter of the prior year due to the completed validation of the North Carolina laboratory location in the second quarter of 2013 and the results of our restructuring in the third quarter.

R&D expenses were also lower than the $9.3 million incurred in the fourth quarter of 2013 as a result of lower personnel related costs and clinical sample acquisition costs.

During the first quarter, an additional restructuring charge of $0.9 million was recorded in connection with changes and assumptions regarding the expected sublease income to receive for a facility the company vacated in the third quarter of 2013.

Net loss for the first quarter of 2014 was $15.7 million or $0.13 per share. Adjusted net loss for the first quarter of 2014 was $14.7 million of $0.13 per share. These amounts compared to a net loss of $29.4 million or $0.26 per share for the same period in 2013.

Net cash used in operating activities was $13.2 million for the first quarter of 2014 compared to $10.6 million for the fourth quarter of 2013 and $19.7 million in the same period in the prior year. The cash growth for the first quarter of 2014 was $15.5 million compared to $13.6 million in the fourth quarter of 2013 and $25.6 million in the same period of the prior year.

Annual royalty payments of $4.8 million and semi-annual debt service payments of $3.3 million were made in the first quarter of 2014. The company also used cash for capital investment of $0.4 million and debt repayments of $1.9 million during the first quarter of 2014.

Excluding the annual royalty and semi-annual debt service payments, the cash burn for the first quarter of 2014 would have been $7.4 million. The improvement in quarterly cash burn excluding the semi-annual and annual payments compared to the fourth quarter of 2013 is the result of improved collections and our efforts to control cost. We expect our cash burn to fluctuate on a quarterly basis. Our goal continues to be to achieve positive cash flow for the fourth quarter of 2014.

As of March 31, 2014, total cash, cash equivalents and marketable securities were $56.3 million.

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

Harry Hixson

Thanks, Paul. To summarize our results for the quarter, we continue to lead the industry and the number of NIPT test performed for the US market and the reimbursement received. We continue to work with payers both commercial and government to gain coverage and reimbursement for our test that we have made significant progress.

The MateriniT21 PLUS test with extended content, which was released in October 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. As we outlined at the beginning of the year, the Company has established its primary, financial and R&D objectives for 2014 to include, one, achieve breakeven and positive cash flow for the fourth quarter of 2014, and two, 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 market access and potential future entry into the low risk market.

With our estimated 60% market share in the high-risk noninvasive prenatal testing market in the US based upon our market study in the middle of 2013, Sequenom Laboratories is continuing its efforts to expand its capabilities to serve this large market through enhanced content.

We expect that the development of the lower cost test will enable Sequenom Laboraties to serve an even broader market, if and when testing in the lower risk market becomes a standard of care.

We expect to have further announcement about our progress on this initiative during the second half of 2014. We believe that the market opportunity for the high-risk pregnancy market continues to be significant with even greater opportunities in the future as we begin to enter the lower risk market as reimbursement opportunities develop.

We believe that payers will not reimbursement for lower risk patients until the medical societies publish guidelines for use in the lower risk market. We believe we will be well positioned to serve both of these markets, with tests that effectively address the needs of the market.

As previously announced, I will be retiring as Chief Executive Officer, but remaining as Chairman of the Board of Directors effective at our annual meeting on June 10. Bill Welch will become the Chief Executive Officer. Paul Maier is also retiring at that time and Carolyn Beaver will become the Chief Financial Officer.

I’m confident in our leadership team and expect that the management transition will be smooth.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Brian Weinstein at William Blair. One moment please.

Brian Weinstein – William Blair

Hello?

Operator

Please go ahead with your question.

Brian Weinstein – William Blair

Thank you. Thanks for taking the question, guys. With respect to the patent that you guys got overseas, my assumption is that you guys are planning on asserting that at some point here shortly. Have I missed anything? Have you asserted that against anybody at this point?

Harry Hixson

We have not at this time.

Brian Weinstein – William Blair

Okay. And then I’m curious about what you’re seeing as far as – what your patient max out of pocket is at this point? We’re hearing about some share shifts that are going on as some of the other companies are lowering their patient out of pocket maximums.

Are you aware of this and are you seeing any share shift as a result?

Bill Welch

Yes. Brian, this is Bill. I can’t really comment on that. Our policies haven’t changed and as we get more and more contracts we just simply follow the policies of the payers and what they do.

In terms of out of network situations, I’m not aware of any shift as we talked about in our – and hearing with Paul that are unit volume continues to go up and it simply went down from our mind as we managed down some of the Medicaid. And that’s where management back up, we see continued growth.

So I’m not really clear to some things you’re talking about, but there is a little bit of chatter on regional basis by some of the players who are trying to maybe play catchup, it’s hard to say.

Brian Weinstein – William Blair

Okay. And then my last question, do you have any idea where do you think penetration is at this point for the market as a whole when we think about the high risk market here domestically based off of your market research? Thanks, guys.

Paul Maier

Yes, it’s a great question, Brian. We did market research at fall of last year and those are really snapshots not movies. And we likely would do another round of market research. But I would just say though, I think the high risk US market is still very much large. There’re 750 to 1 million opportunities in high risk areas. And as we go forward with strategic, getting people who do coverage and payment, that’s where our efforts are focused.

They’re probably even bigger ones as we go forward that’s still working towards coverage guidelines and such both in Medicaid and some select, let’s say, hospital IPAs and other plans. So this will be a continued step function growth we think in units and then the revenues come from as we get each one of these various payers to pay on a timely basis.

Brian Weinstein – William Blair

Yes, [indiscernible] thanks.

Operator

The next question comes from Zarak Khurshid at Wedbush Securities.

Zarak Khurshid – Wedbush Securities

Hi, good afternoon, guys. Thanks for taking the questions. Can you talk a little bit about micro deletions and how that feature is resonating in the marketplace?

Harry Hixson

So I’ll take a bit of that and Dirk may afterwards talk more about the process. But it’s been an area of focus for us and people who had ordered MaterniT21 PLUS have the option and the majority do choose to look for micro deletions. We have essentially four right now who had tried some MaterniT22 and tried some [indiscernible].

We report concurrently as additional findings which means when we see them, we’re confident they are there, but we don’t report out negatives. And as we go forward, we’ll be looking to try to tighten that down if we want to get to both false – or positives and negatives.

I think the evolution of micro deletions as you see what’s going on with microarrays, it’s very positive and we think the NIPT technology can take up most of the ones you might be able to get through an invasive technology and the question is accuracy and we continue to focus on that. And I don’t know Dirk, if you want to –

Dirk van den Boom

Maybe a little bit. I think the response we get to introducing the micro deletions are extremely positive. We make sure and how we develop this now we reported out as Bill said that because these are rare that you’ve maintained an extremely good specificity.

And we have done that. We are now have reported hard enough that we can start collecting some feedbacks and looking at how we’re doing. And in various cases, like [indiscernible] actually have additional findings which we reported were confirmed with some ultrasound findings and other findings and helped in assessing this.

So I think overall this is a very positive involvement and the leverage is the fact that we have a whole genome assay.

Harry Hixson

I might add that we announced – I think it was October that the – what we called the extended content series and that means we’re continuing to look for and we’ll add additional micro deletions. And the ones we are looking for are clearly the ones we have no medical interventional knowledge in terms of helping of patients for education and dealing with children after they’re born.

So I expect some time this year we’ll grow at another series of micro deletions for our test.

Zarak Khurshid – Wedbush Securities

Great, thanks for that. And then I’m just curious, what fraction of your MaterniT21 business is coming directly from OBGYN? And if you could help us understand how uptake of NIPT by OBGYN group out there, how that may or may not impact your business going forward? Thanks.

Harry Hixson

Yes. We have those business update we’ve talked about this year from a recent memory from the MFM’s community specialist to the OBGYN. I would say both are strong consumer’s orders for our technology. But as you think of high risk, there is a higher mix for the maternal fetal medicine specialist.

But we get both groups and I think of the folks that normally order, we tiered in terms of OBGYNs, the high volumes, the one that deal with the most pregnancies and the MFMs. We have a high share, very high share of those folks who reorder and have ordered our test.

Zarak Khurshid – Wedbush Securities

Got it. I wondered – I was wondering if you could just talk about what the risk is if it’s kind of the broader OBGYN communities starts to order the test and how – so maybe keep the patients in the practice rather than referring to the MFM. I mean, is that a concern of yours?

Dirk van den Boom

I don’t think the basic OB-GYN wants to deal with high risk pregnancies, if they want to get that out of their hands and then they have some people with their experience and familiar with dealing with these kinds of pregnancies.

Paul Maier

And we face that essentially launched in the early days, now we’re two years – the question would be how well with the MFMs deal with something that they could get a good chunk through invasive procedures, would they give it up? The answer is they want the right answers to the patient at that time and these OB-GYNs working teams with on the high-risk pregnancies with our MFMs and so we see them being very collaborative and we’ve seen that this has been a doctor (broad).

The question is, if you think of low risk, that market, in our mind has not been tamped at all, it’s still very open and will evolve and in that area, it may not be to give all the various content to an average of risk position that you would give in a high risk group.

Brian Weinstein – William Blair

Okay, thanks.

Operator

Our next question comes from Bryan Brokmeier – Maxim Group.

Bryan Brokmeier – Maxim Group

Hi, thanks for taking the questions. Paul and Carolyn, your R&D expenses are down pretty significantly and most of that reduction is within your bioscience division or are there reductions in your diagnostic business as well?

Paul Maier

Well, it’s primarily diagnostics and it depends which period you’re comparing it to; a year ago and the first quarter of 2013, we were still showing the startup cost if you will of the North Carolina facility and R&D expense and after that went live in the middle of the year, that went into the cost of goods.

So, on a year to year comparison, it’s not exactly apples to apples but if you look at the fourth quarter of last year, we are down from that and we will continue to examine our cost structure in all areas, R&D, sales and marketing and G&A to look for efficiencies and – because I think we’ve been clear all along that in 2014 we will manage our operating expenses to be lower than they were on a quarterly basis in 2013.

And we also of course have several initiatives to focus on cost reduction in our cost of goods. So the company is very focused on achieving its overall goal of getting to positive cash flow in the fourth quarter and break even in our P&L.

Bryan Brokmeier – Maxim Group

Okay, you commented in – about the heredity, cystic fibrosis test that you start a record number of samples, are you seeing that growth starting to accelerate, are you seeing new physicians starting to order that test or is it a lot of the same physicians you’ve dealt with in the past?

Paul Maier

I think Bill might be better prepared to respond to that.

Bill Welch

Yes, so the – our carrier screening products are usually focused on the OB-GYN call point by our sales force and as you know, we call them both OBs, GYNs as well as internal kidney medicine specialist; and so we’re seeing continued growth as we call on OB-GYNs and it’s a great overall portfolio call if you try to be the – essentially the company that answers questions for those physicians.

It’s consistent and the market is quite large for this and we think we’ve got a superior test, so I would think of some consistent but sequential growth as we continue to push that out.

Bryan Brokmeier – Maxim Group

And do you have any plans built to start selling this internationally as well or is the focus mostly here in the U.S. at this point.

Bill Welch

For the carrier screening that is U.S. at this point.

Bryan Brokmeier – Maxim Group

Okay, thanks a lot.

Operator

Our next question comes from Kevin DeGeeter of Ladenburg.

Kevin DeGeeter – Ladenburg

Hey good evening guys or good afternoon and first off I just want to send my thanks to Harry and Paul for their leadership over the last several years.

And something you could help us better understand the potential impact of CPT Coding, particularly do you, at this point, envision the likely outcome being a single code or do you see a scenario where there’s different codes that will be available for high risk and low risk that may have very different levels of content around them.

Bill Welch

So, we announced the code that we expect to be public in terms of how to describe the code and it will be effective in January of next year as it get loaded in the system would be a Tier 1 CPT code.

I don’t have the description of that but I would anticipate it to be more in terms of what we do as a process for the Next Generation Sequencing and that would be a code that would be used for anyone who would do Next Gen sequencing-like tests, so I don’t anticipate that would be limited based on how a physician would use, usually they don’t do that but I just don’t have color yet to be able to describe that publicly.

So think we should stay tuned, now the information would – should come out in the next few months and in terms of the coding process, I think that would take us well going forward in terms of how we then would build both commercial but as importantly the state payers because they refer these codes directly and have – it’s tough for them to adjust for miscellaneous codes and the like, so when they see this new code I think we would get even better uptick from a variety of government-type payers.

Kevin DeGeeter – Ladenburg

Okay, great. And then just on a slightly different note, I realize at this point that you’re not prepared to talk about the specific new platform, the [indiscernible] cost max [ph] that’s into little risk in international markets but in general, how should we think about the rollout of that product, specifically, do you anticipate their being – given medical meeting where you’re going to want to rollout, you know, given specifications, large publications, just what are the metrics that we should look to late in the year to you know help drive the adoption of new platform, whatever it may be?

Bill Welch

Well, I’d like to comment on the popular [indiscernible] interview once on that but in terms of the rollout, I think, as we view this would be – we use this term – I use this term, evolutionary versus revolutionary, I think it will roll out – let’s call it, in a controlled fashion, partly controlled by us because as we think about things there’s a variety of folks that may want to access to NIPT but we need to make sure that they will pay for NIPT as we see this.

And so internationally, we’ll be rolling it out probably at the first step and then domestically, some incremental occasions and that’s as it gets broader for some of the payers that might adopt it for low risk, we’d be going in that direction.

So, I would just say, stay tuned to this whole process and we’ll be able to give you a little more color in terms of the overall commercialization of it.

Kevin DeGeeter – Ladenburg

And then just lastly for me, you know can you help just walk us through what’s going to happen between – I’m just trying to get my mind around this strategic review for the biosciences piece of it, I mean, it’s interesting that you put sort of a hard end date of by the end of the second quarter, I’m just trying to understand a little – the thinking behind your putting a specific date, I guess if you have a buyer we would know about it today, just help me walk on to better understand the decision to put a hard end to the process.

Bill Welch

Well, we’re not going to announce anything about it until there’s a signed deal and it’s a done deal. Kind of that’s in a nutshell.

Kevin DeGeeter – Ladenburg

Okay, fair enough. Thanks a lot.

Bill Welch

Okay.

Operator

Our next question comes from Bill Quirk at Piper Jaffray.

Dave Clair– Piper Jaffray

Hi, good afternoon everybody, it’s actually Dave Clair in for Bill. So, first question for me, I’m just wondering on the preliminary CPT code, do you expect to have a dollar amount attached to this by June 1 as well?

Paul Maier

No, the code will be visible, we believe sometime June this year and the process goes forward after that, it gets loaded as I understand January of next year and that would be the code, its descriptor and its ability to be loaded in the entire CPT system; so anyone could access that in the system.

The pricing most likely would go through a cross-lock process that we always do for new codes and so I don’t think there’ll be an assignment of value by CMS certainly to this just because this is not a Medicare type test but the great news about the code is that it will be available, we’ve already worked to establish pricing for us overtime so we think it will be hopefully easy process to connect that code and our contracts and our current pricing and such.

So it should – again, I’d say stay tuned for that because this is fairly new but in June we should get a little more color in terms of descriptor and how that works.

Dave Clair– Piper Jaffray

Okay, thank you. And then on micro-dilutions, can you give us an idea, I guess, are you getting incremental revenue for this add-on test?

Harry Hixson

We currently offer that test as part of the portfolio for your MaterniT21 plus and we think that MaterniT21plus what it’s becoming is a – closer to as we get forward more research otherwise a virtual micro-array; so we offer all these things in terms of sex chromosome (inaudible) 21-18-13, it’s a very broad portfolio, all of that is the value of what we have.

You know, overtime, as the code comes out, it’s possible we can add additional code for more content but right now there is all that – that we present is what MaterniT21 plus is.

Dave Clair– Piper Jaffray

Okay.

Harry Hixson

A high risk for pregnancies.

Dave Clair– Piper Jaffray

Okay and then, in your prepared remarks, you mentioned some pricing pressures, is there any way you could quantify what type of pricing pressure you’re experiencing on MaterniT21/

Harry Hixson

No, I think when – in our remarks, we indicated that we had a mix of reimbursement experience in the first quarter where we did get some payments for Medicaid test that have been done in prior periods, they tend to be a little lower than our normal commercial reimbursement level, and the fact is we do have several competitors out there and we expect that overtime, while we’re very pleased with the level that we’re getting reimbursed, that there will be changes on any individual payer and it’s all – it all goes into the mix.

And each quarter, we’ll have a different experience depending on who pays us and whether we get paid for some older tests that were build and whether they’re under contract or even whether they were test performed for payer prior to entering into the contract, so there’s quite a different array and a range of payments for any individual test. And so each quarter, the mix changes depending on who’s in the basket.

Dave Clair– Piper Jaffray

Okay, thank you.

Harry Hixson

But last year, I would say – one of the thing last year, we experienced a very high level of reimbursement and the average reimbursement for test that were reimbursed came down modestly during the year despite having multiple competitors and our overall average reimbursement level was still excellent.

Dave Clair– Piper Jaffray

Okay, thank you.

Operator

Our next question is from Zarak Khurshid of Wedbush Securities.

Zarak Khurshid – Wedbush Securities

Thanks for taking the follow up, who is your fiercest competitor currently? Thank you.

Harry Hixson

The payers, I think. Like for us, the payers.

Paul Maier

Right.

Zarak Khurshid – Wedbush Securities

I guess maybe more specifically, if you lost any share? Who was that too typically?

Paul Maier

(inaudible) We did a share analysis in the fall and that one we showed that we’re in the high risk where just people are paying for – we were ahead over 60% market share; our units are strong and the market continues to expand.

So, I – we haven’t done that again, well we should do that soon but I would say we’d – I would be – we’d be very surprised we’re not the dominant one – number one player as to the number – who’s two, three or four, I think those things can vary and I can’t really give you color on that. I know we had some of that time but we didn’t reveal the second in that market research.

Dirk van den Boom

Well the other thing is can you talk about the – just the higher risk market, it’s our understanding that at least two of the three other players are taking low risk samples. So how do you account for – they have – they speak publicly about their volumes but they don’t give you a split between high risk and low risk and it’s our understanding that at least two of them are taking low risk samples either directly or through their partners, their lab partners.

So, it’s difficult to measure that but we continue to focus on the high risk segment that’s where the reimbursement is established and where we can expect to get paid. We know for sure that the payers are very alert to the possibilities that a sample might come from the low risk patient and they challenge us strong on the patients that are clearly high risks so we know that they’re doing that.

Paul Maier

And I will just point Dirk, I think this is the big market and if you try to temper things, well, we do internally and I know certainly unit counting and growth is all important; our part of goal is profitability. So we sometimes were taking units down just to make sure we get them paid and bring them back up.

And the high risk still is a very big marketplace and as we said, we anticipate going forward with our Next Generation to be able to serve the needs at the – what’s called low risk marketplace, materializes with reimbursement not just materializes in kind but materializes for payment and what we anticipate is to be one of the leaders in that area.

Zarak Khurshid – Wedbush Securities

Got it and last one if I may, as things move towards average risk, what’s your sense for pricing and what the payers will be comfortable over time paying for this average risk?

Paul Maier

I think the first step is not pricing but it’s coverage and clinical utility and need and so I think this is something that I’d look to the medical groups and guidelines to give color in terms of what it is, how it’s to be used and the presentation.

Out of that it will be much more clear in terms of the cost and features and benefits that test would may need to do and then it will come down to individual plans in terms of how they view that in offset to what they currently do or otherwise.

So I just – again, I think it’s too early to say just because this market hasn’t developed, it’s likely not going to be the full depth of a product that we offer, MaterniT21 plus which is as it continues to grow, it looks much more like a virtual micro-array from a blood test.

So I do think it’s a two-test to marketplace and the pricing would be different.

Dirk van den Boom

Yes, I think that this is – you’re going to have two kinds of test in the marketplace, you’re going to have one that’s less expensive, lower reimbursement and with reporting out much skinnier results and then you’re going to have certain group primarily the high risk so that physicians are going all the information they can get and the pricing for that will be quite different.

Zarak Khurshid – Wedbush Securities

So, at the low end and the average risk setting is 500 too much? Is…

Dirk van den Boom

We would count on pricing.

Zarak Khurshid – Wedbush Securities

Okay, thanks.

Operator

Our next question is from Bret Jones with Oppenheimer.

Bret Jones – Oppenheimer

Good evening and thanks for taking the question. I just want to touch on the uncollectable – uncollected amounts outstanding, it looks like that was drawn down by about 4 million to 5 million and if I’m just doing the math unless I’m missing something, obviously you collected 21 million in the quarter, so it would imply – you should have – you would have a deferral about 17 million to 16 million and if I’m looking at the test, even using simplified pricing, it looks like you should deferred somewhere in the neighborhood of 24 million in the mid – so I’m just curious as to why the uncollected amount dropped to more in the 42 to 46 this quarter?

Paul Maier

Well, there was a mix of two phenomena; one, we collected on some of those receivables – phantom receivables that existed at the yearend and what we do every quarter is we take a look at our assessment of what’s been built, what we expect to collect in the future and we adjusted accordingly and we’ve been pretty conservative each quarter and because it’s not as precise, we put a range out there.

And so, it’s a little bit of a mix of both. So I’m not quite sure it says anything other than we are making good progress in collecting and our revenue is going up and the fact that our test volume is continuing to grow even despite the dampening of accepting test from certain states, I think we’re pretty pleased that this is an indication of a positive direction.

Bret Jones – Oppenheimer

All right, thank you.

Operator

Mr. Hixson, would you like to make any closing remarks?

Harry Hixson

No, I just like to thank everyone for joining on today’s call and your continued interest in Sequenom and 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 858-202-9028.

Thank you very much and goodbye.

Operator

The conference is now concluded, thank you for attending today’s presentation. You may now disconnect.

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