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Sequenom, Inc. (NASDAQ:SQNM)

Q2 2010 Earnings Call Transcript

August 5, 2010 4:30 pm ET

Executives

Ian Clements – Senior Director, IR and Corporate Communications

Harry Hixon – CEO and Chairman

Paul Maier – CFO

Ron Lindsay – SVP, R&D

Analysts

Zarak Khurshid – Wedbush Securities

Junaid Husain – Soleil Securities

Pamela Bassett – Cantor Fitzgerald

Bud Leedom – Global Hunter Securities

Kevin Degeeter – Ladenburg Thalmann

Sean Lavin – Lazard Capital Markets

Trey Cobb – Stephens

Kelley Roche – Jefferies & Company

Tony Butler – Barclays Capital

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Sequenom earnings conference call. My name is Candal and I will be your operator for today. At this time, all lines are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) I would now like to turn the conference over to Ian Clements, Senior Director, IR and Corporate Communications. Please proceed.

Ian Clements

Thanks Candal and good afternoon, everybody. With me today are Dr. Harry Hixon, Chief Executive Officer and Chairman of the Board; Mr. Paul Maier, Chief Financial Officer. And for the Q&A session, we will be joined by Dr. Ron Lindsay, Senior Vice President of Research and Development.

Earlier this afternoon Sequenom issued a news release announcing the company's results for the second quarter and first six months of 2010. If you've not received this news release or if you'd like to be added to the company's distribution list, please call investor relations at the company or you can sign up through the IR section of the company's website. Copies of news releases and SEC filings can also be found in the IR section of our website.

Before we begin, I'd like to inform you that this call will include a discussion of Sequenom's current plans and intentions regarding product developments and launches, expectations regarding Sequenom's financial resources and other forward-looking statements. I'd like to emphasize that these remarks are based on the information available to Sequenom today and are subject to various risks and uncertainties, including the risks described in the company's SEC filings. The company's actual results may differ materially from the statements made during today's conference call. And the company undertakes no obligation to update any of these statements.

Before turning over to Harry, from an investor communications perspective, we will be presenting an overview of the company on August the 17th at the Global Hunter inaugural healthcare conference in Newport Beach. A webcast of this presentation will be accessible through the investor relations section of our website. With that said, I will now turn the call over to Harry Hixon. Harry?

Harry Hixon

Thanks, Ian. And my thanks to each one of you for joining us today. During today's call I'd like to spend some time discussing our recent achievements and an overview of our business. Paul will follow with an update on the quarter's financial results released today. I will then conclude with additional highlights from the quarter and focus on key upcoming milestones and events.

The second quarter has again been a busy and productive period for Sequenom. In January of this year we prepared a list of goals that we hoped to achieve in 2010. And we've shown our progress against these goals in each of our public presentations. I'm pleased to report that we've accomplished many of these ahead of schedule. One of our most important goals for the year was to resolve the federal class-action lawsuit and the associated derivative suit.

I'm happy to report that Sequenom has received final court approval for the federal class-action settlement and also for the derivative litigation settlement. Our core genetic analysis business continues to show steady growth and the launch of our next generation MassARRAY Analyzer 4, intended for research use only, has been well received by our customers. During this quarter we placed a total of 11 instruments, of which three were our new MassARRAY Analyzer 4 systems.

In February, Sequenom Center for Molecular Medicine or Sequenom CMM, introduced its first two laboratory developed tests, LDT's based upon circulating cell-free fetal nucleic acids, our proprietary SEQureDx technology platform. Sales of the first of these tests, the SensiGene Fetal RhD Genotyping Test, have been showing steady growth.

The second test, the SensiGene Fetal XY Sex Determination Test, is non-reimbursable and must be paid for by the patient. And as a result, sales have been disappointing. We've decided to discontinue offering this test beginning September 15.

We continue to seek new market acceptance of the SensiGene Cystic Fibrosis Carrier Screening Test. Sequenom CMM has completed a study to investigate the performance of the cystic fibrosis test using an alternate collection methodology, buccal swabs.

Buccal swabs allow the collection of DNA by swabbing the inside of a patient's mouth. It is anticipated that buccal swabs will be available as part of the cystic fibrosis test later this month.

We believe the introduction of this alternate collection methodology will lead to greater penetration of this market. In last week's SEC Form 8-K filing, we disclosed that we received a letter from the U.S. Food and Drug Administration that referenced the marketing of our SEQureDx technology.

We do not believe that the FDA's letter is intended to encompass investigational products that are not commercially available, or tests other than those to evaluate fetal DNA for fetal gene and chromosomal abnormalities, as delineated in the letter. As such, it is our belief that this letter concerns the SensiGene RhD genotyping test. This test was developed and validated and used solely within and by our CLIA-certified and CAP-accredited laboratory, Sequenom CMM.

We believe that this test meets the definition of a laboratory-developed test or LDT. This test is not sold directly to the general public, but rather samples are ordered by a physician, collected, sent to the SCMM laboratory for testing. And the results are reported back to the physician.

We recently sent a response letter to the FDA. We have used our best efforts to comply fully and in good faith with the FDA's laboratory-developed-test policy. And we will continue to work with the FDA to ensure compliance as the FDA's policy evolves.

To that end we look forward to engaging in a discussion with the FDA in the near future.

The development of an LDT for risk of progression of age-related macular degeneration or AMD remains on track. I hope to be able to give you further updates on this test during our next call.

This will be the next test that Sequenom CMM plans to bring to the market. And we plan to launch this test in the first half of 2011. With that update on our operations, I will now ask Paul to address our second quarter and first half of the year financial results. Paul?

Paul Maier

Thanks, Harry and good afternoon everyone. First, I will address the financial results of the second quarter. We reported total revenues for the three months ended June 30 of $11.4 million, as compared to $9.2 million for the second quarter of 2009.

The increase from the prior year was due to higher consumables and system sales. We recognized diagnostic revenue of $444,000 in the second quarter.

Diagnostic revenue for the quarter was derived primarily from two of our marketed SensiGene-branded, laboratory development tests, namely, the Fetal RhD Genotyping Test, launched in February of this year and are Cystic Fibrosis Carrier Screening Test, launched in September of 2009.

Cost of product and services revenue for the second quarter of 2010 was $4.5 million, compared with $3.1 million for the second quarter of 2009. Gross margin was 61% for the second quarter of 2010. This compared with 66% in the second quarter last year.

Gross margin was primarily affected by the inclusion of costs associated with the startup of the diagnostics business and changes in product mix within the genetic analysis business.

Research and development expenses were $10.4 million for the second quarter of 2010, compared with $10.2 million for the same period in the prior year. R&D expenses for the 2010 second quarter primarily consisted of assay development and clinical sample acquisition costs associated with the company's trisomy 21 program.

Selling, general and administrative expenses of $13.7 million for the second quarter of 2010 decreased from $15.1 million for the second quarter of the prior year. This is a result of decreased legal expenses, lower share-based compensation expense and consulting fees.

Total costs and expenses for the quarter were $70.4 million, compared with $29.5 million for the comparable quarter in 2009. For the three months ended June 30, 2010 and 2009, the company recorded $2.7 million and $3.2 million, respectively, of stock-based compensation expense.

As I will discuss in more detail in a moment, this increase in expense and thus net loss was driven in large part by recognition of a charge of $41.8 million for final settlements of litigation stemming from suits filed against the company. Our net loss for the second quarter of 2010 was $59 million or $0.86 per share, compared with a net loss of $20.2 million or $0.33 per share for the same quarter in 2009.

Turning to the year-to-date results, revenue for the six months of 2010 totaled $22 million, compared with $17.9 million for the first six months of 2009. Cost of product and service revenues for the first six months of 2010 was $9.7 million, compared with $6.6 million reported for the first six months of 2009. Gross margin for the first six months of 2010 was 56%, compared to 63% for the first six months of 2009.

Total costs and expenses for the first six months of 2010 were $97.9 million, versus $55.9 million for the comparable period in 2009. For the six months ended June 30, 2010 and 2009, the company recorded $5.1 million and $6.2 million, respectively, of stock-based compensation expense. Net loss for the first six months of 2010 was $76 million or $1.17 per share, compared with $37.7 million or $0.62 per share for the comparable period in 2009.

As of June 30, 2010, Sequenom had total cash, cash equivalents and short-term marketable securities of $67.7 million. Before returning the call back over to Harry, I would like to comment on the $41.8 million charge we took on litigation settlement expense during the second quarter of 2010. In connection with the court-approved settlement in May, 2010, we recorded a litigation settlement charge of approximately $40.3 million related to the common stock issuable in the federal class-action lawsuit.

We anticipate that this settlement will be comprised of approximately 6.8 million shares. In addition, we recognized a charge of $1.5 million related to the company's portion of the litigation settlement of the derivative lawsuit approved by the court in July 2010.

Depending on changes on the fair market value of our stock, we will be required to recognize further adjustments to the equity settlement related to the federal class-action lawsuit, until the shares are issued to the plaintiff's class. We have approximately $39.4 million accrued in or included in accrued litigation settlement related to the class-action lawsuit, associated with that remaining common stock that is issuable to the plaintiff's class. And we anticipate that will be approximately 6.4 million shares.

If this were backed out of our P&L statement, our loss and our loss per-share calculation, non-GAAP, would change to reflect a loss of approximately $17.3 million and a loss per share of $0.25 for the second quarter of 2010. You can find a reconciliation of these non-GAAP financial measures on the IR section of our website, IR.Sequenom.com. With that said, I would like to turn the call back over to Harry. Harry?

Harry Hixon

Thanks, Paul. Our primary focus during the remainder of 2010 will continue to be the development of the T21 test. In May of this year we announced that we had selected a sequencing-based approach for the T21 assay. Significant progress has been made in the development of assay. Sequenom CMM researchers recently initiated the final stage of internal validation – verification to finalize the assay protocol.

They plan on analyzing approximately 450 blinded samples obtained from pregnant women at increased risk for fetal trisomy 21. This internal verification study is anticipated to be completed by the end of the third quarter. After this study is successfully completed, a larger pivotal validation study will be undertaken.

This validation study depends upon a number of the ongoing sample collection activities. These activities are progressing well. And we anticipate having collected sufficient T21 high-risk samples for Sequenom CMM to complete the validation studies without delay.

Our San Diego CLIA lab is nearing completion. And we anticipate the lab will be operational early in the fourth quarter this year. I look forward to the expansion of our CLIA laboratory network both for the purposes of running clinical studies and also to meet the anticipated future demand for our molecular diagnostic tests. With that summary of our business and financial update, I would now like to open the call up to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Zarak Khurshid with Wedbush Securities. Please proceed

Zarak Khurshid – Wedbush Securities

I guess first, can you help us understand the – how the R&D expense will evolve over the next four quarters or so with sample acquisition kind of trailing off but then maybe a ramp-up in expenses associated with some of these other studies?

Paul Maier

I will take that one. While we don't provide any guidance on R&D expense and certainly you, if you look historically over the past year or so, you will see some cyclicality and some volatility in the expense from quarter to quarter. We do anticipate that we will continue to collect and acquire clinical samples as we move forward with the T21 test and to satisfy the needs of a PMA submission. So those will be ongoing in the future, even beyond us running the clinical studies later this year – beginning later this year.

So that is a significant line item there. So we will have some variation from quarter to quarter, but I think that the – unless we have additional tests on the horizon and other strategic investments. I think the pattern of our run rate in R&D investments will be in a similar range to what we've seen in recent quarters.

Zarak Khurshid – Wedbush Securities

Okay. That's helpful. And then, just to clarify, in talking about these samples and studies, where does the sample acquisition associated with the Brown University collaborators stand and are those the samples that you are talking about with respect to the clinical study expected to start potentially by year end?

Harry Hixon

Well, those sample collections – all of our studies are on track and we will be using – we plan to use all of these samples in some portion of our validation or verification studies.

Zarak Khurshid – Wedbush Securities

So I guess I was just curious, when are the Brown University samples going – when are they going to open the freezer and start processing those samples?

Harry Hixon

This is Ron Lindsay who's our head of R&D.

Ron Lindsay

Hi. Basically, we presented our timeline, I think in May, on the last call. And we are on track to follow that timeline in terms of the small study that Harry mentioned in his opening remarks. And we will continue into the validation study using the other sample sets pretty much on track. So there's no change there and we've got the samples we need to complete these studies.

Zarak Khurshid – Wedbush Securities

Understood. Thanks for taking the questions.

Harry Hixon

Thanks, Zarak.

Operator

Your next question comes from the line of Junaid Husain with Soleil Securities.

Junaid Husain – Soleil Securities

Relative to the 450-patient sample study that will be completed in the third quarter, a few questions for you. Are you expecting to disseminate the results of this study in – under a publication or a presentation? Or should we just expect to see it in a press release?

Ron Lindsay

No. We've also mentioned that once that study is complete, which we plan to concentrate certainly on the technical aspects of the test rather than the clinical aspects. We will present that and publish it, hopefully submitting by the end of the year with publication early in 2011, we hope.

Junaid Husain – Soleil Securities

And can you tell me, is that going to be a blinded study?

Ron Lindsay

Yes.

Harry Hixon

Yes.

Junaid Husain – Soleil Securities

And how many T21-positives are you hoping to find?

Ron Lindsay

To the extent that it is blinded, we don't know. So that's what we've targeted somewhere a sufficient number to give us good technical feedback on how the test is working.

Junaid Husain – Soleil Securities

And then, do you know what that mix of first trimester and second trimester?

Ron Lindsay

No. But, it will be a mix.

Junaid Husain – Soleil Securities

Got it. And then I know that a lot of us are waiting for Dr. Lo's paper. I know there's not too much you can tell us about his data, but can you tell us whether or not he has made the submission? Which journal it has gone to? And when you think that it might publish?

Ron Lindsay

No. We are very sensitive. Dr. Lo is an academic who has his own agenda and timing of things. Given this is a pretty high-profile study, he is pretty sensitive. I think as many of you on the call probably know, to the possibility that dissemination of his publication prior to acceptance kind of contravenes some of the publication rules. So we are being generally very quiet about that.

Junaid Husain – Soleil Securities

Got it. Thanks so much, guys.

Ron Lindsay

Thank you.

Harry Hixon

Well, Junaid.

Operator

Your next question comes from the line of Pamela Bassett with Cantor Fitzgerald. Please proceed.

Pamela Bassett – Cantor Fitzgerald

Thank you. Just a follow-up to the question about publication of the validation studies. Are you talking about publishing the 450-clinical-sample study or the larger one? In Q1.

Ron Lindsay

Well, both. So the 450, which is our internal, I would say, verification study of all the small experiments we've been doing, is in progress as we've said. And when that is complete, we will submit that for publication. While we don't know the number of T21's, it's blinded; there will be insufficient in there for statistical power. That's just the name of the game. It is more of a technical-based thing just to make sure that all the t's are crossed, i's are dotted before we go into the validation study.

And the validation study, just to be very clear, the samples are blinded to us entirely. They will be sent to us anonymized and the results from our – SCMM will be sent back to the academic investigators, who will then unblind that in combination with the outcome data in terms of amni or CVS for all of those included in the study. And they will publish the paper when they are ready to do so. So there will be two publications out of this, two big experiments.

Pamela Bassett – Cantor Fitzgerald

So the 450 clinical sample study would – I mean, the fact that you are embarking on this implies that the design of the test is already locked down.

Ron Lindsay

In essence, this is to ensure that the parameters that are in the locked assay are adequate to then go into the validation study. So if we should find something that is substantially a problem in terms of the locked assay, then we would modify on that basis. But the expectation is that we have tweaked all the appropriate parts of this very complex test. And this is the – if you like, the trial run before we embark on the very large and expensive sample bank.

Pamela Bassett – Cantor Fitzgerald

And what platform is being used?

Ron Lindsay

I think we are working with our Lumina platform, as we've said to everybody at this point.

Pamela Bassett – Cantor Fitzgerald

Okay. So that's final, that confirms there is not…

Ron Lindsay

In terms of the validation study, that is what will be used for the verification study. That's correct, yes.

Pamela Bassett – Cantor Fitzgerald

Okay. And does the MassARRAY play any role in processing the samples, or not?

Ron Lindsay

Yes. I think as we have indicated in our sort of general outline of this test, we will be incorporating the MassARRAY in terms of doing a quantification of the amount of fetal nucleic acid in the sample prior to doing the sequencing. And this basically is a – if you like, a quality control component of the test at the moment to ensure that samples have not in any way been compromised prior to being prepared for sequencing.

Pamela Bassett – Cantor Fitzgerald

And this is blinded, so is there a third party involved, another medical center, or is it Brown?

Ron Lindsay

No. This is not Brown. The third party – the answer is yes. Off the top of my head, I don't know who the person who's unlocking the blinding – perhaps Ian is familiar with that.

Ian Clements

Yes.

Ron Lindsay

But we can get that information.

Pamela Bassett – Cantor Fitzgerald

Okay. So peer-reviewed journal publications for both of these studies?

Ron Lindsay

Correct.

Pamela Bassett – Cantor Fitzgerald

Verification and validation?

Ron Lindsay

Correct.

Pamela Bassett – Cantor Fitzgerald

And should we expect some top line kind of look at the data this fall in a press release or do you have to retain everything until it gets published?

Ron Lindsay

We prefer to have this come out in a publication. I think for the 450 our anticipation is again, I said this is not clinically focused, it's technically focused. We anticipate the time from submission to publication in a technical journal, as opposed to a clinical journal, should not be very long. We will prepare most of the manuscript in advance of having the data. And we will plug it in as we get it, so the submission and review time we don't think will be very long. We prefer to talk about data once it has been peer-reviewed.

Pamela Bassett – Cantor Fitzgerald

So again, for both of them not until – for that one, not until Q1 '11?

Ron Lindsay

That's the estimation, yes. Possibly it could be even longer than that, but I hope that we won't be delayed longer than that.

Pamela Bassett – Cantor Fitzgerald

Okay. And switching – if I can ask one more question about AMD, can you talk about the launch plans and how that is progressing?

Ron Lindsay

Okay. We haven't actually finalized the launch plan, per se. But we are on track for completing our verification studies internally, formatting the assay, et cetera and our plan is to launch that in the first half of next year. The final details of how we will launch it we are still working on.

Pamela Bassett – Cantor Fitzgerald

Okay. Thanks very much.

Harry Hixon

Thank you.

Ron Lindsay

Thank you.

Operator

Your next question comes from the line of Bud Leedom with Global Hunter Securities. Please proceed.

Bud Leedom – Global Hunter Securities

Hi. Good afternoon and thanks for taking my questions. Just a couple of things, first off, on the gender test, was that strictly a reimbursement issue or were there some ethical push-back issues that you experienced with that?

Harry Hixon

No. It's a straight business decision – reimbursement and lack of market uptake.

Bud Leedom – Global Hunter Securities

Okay. Okay. And then also, Paul, just as a matter of housekeeping, on the – was there a shift of expense from G&A to sales and marketing that took place in the second quarter?

Paul Maier

No. We're consistent in terms of what we categorize in each of those buckets from quarter to quarter or period to period.

Bud Leedom – Global Hunter Securities

Okay. Just reconciling the first few and the second one, it just seemed like there was a shift into sales and marketing from G&A, but I will recheck that there. And in terms of sales and marketing, can you maybe talk about some of the things that are taking place recently in terms of new ads? And what the focus is going to be with the LDT's that you have and potentially towards the balance?

Harry Hixon

Well, we did use a one-time, direct-to-consumer advertisement in the USA Today special edition, but we pointed out very carefully that even though it was an awareness for consumers, that the test had to be ordered by a physician and it was not available as a direct-to-consumer test.

Bud Leedom – Global Hunter Securities

Okay. And could you discuss any possible new adds to the sales force?

Harry Hixon

No, I don't have anything to say on that topic today.

Bud Leedom – Global Hunter Securities

Okay. Just finally, maybe a long-range question. Obviously the costs of sequencing continue to come down. Based on that trajectory that we are seeing and we expect to see once a test is formally launched for T21, do you have any updates on what we might see in terms of ASPs for that test? Or gross margins? Anything that you add might be helpful there.

Harry Hixon

I think we agree with you that the cost of sequencing is going down, but as far as any of the others, I don't think we are prepared to comment at this time.

Bud Leedom – Global Hunter Securities

Okay. Thanks very much.

Harry Hixon

You’re welcome.

Operator

Your next question comes from the line of Kevin Degeeter with Ladenburg Thalmann. Please proceed.

Kevin Degeeter – Ladenburg Thalmann

Good afternoon. Thanks for taking my questions. Just to be clear here, so we are all on the same page, what is the go decision for the Down's test? Is it successful completion of the 450-patient internal, I mean, is it – so the larger validation study, as you mentioned, is going to be blinded, quite possibly until the time of publication. How much – what information do you really need to decide to pull the trigger on the commercial side to launch the test? Is it in fact publication of the larger study or is it some other factor?

Harry Hixon

Well, we have an agreement with our academic collaborators that we won't introduce the test until after the results of the large-scale validation tests have been published. And so we will abide by that agreement.

Kevin Degeeter – Ladenburg Thalmann

And just given – and I don't want to beat this to death, but I know a number of investors are sort of interested in the timeline aspect of this. Given the variability that we are all at this point acutely aware with regard to publication schedules of data, how much preparation can Sequenom make with regard to T21 prior to actually seeing the data in print? Because you're not going to have a tremendous amount of visibility on what the timing of that is going to be.

Harry Hixon

Well, we will plan for success and we are already – as we've said, we are – we've basically finished the construction of our CLIA lab here in San Diego. That's the site we are going to use for the T21 launch. We are going to – we will get ready for a launch. And we will assume that the validation study, the large-scale validation study, that those results will be similar to what we have seen with our 450 internal verification study and some of the reports that other people have shown in the literature. So we are planning for success, but we will wait till the journal article is published.

Kevin Degeeter – Ladenburg Thalmann

Okay. Terrific. That's helpful and one last question, if I may. Can you just give us maybe a little bit more color on – with regard to the market launch of the sex-determination test, in terms of what if the pre-launch marketing and intelligence suggests that somehow with – obviously, it was at variance with what your experience in the market was? In other words, which piece of the puzzle just didn't line up the way you'd hoped at the time of launch?

Harry Hixon

Well, first I have to point out that it really didn't cost us very much for the Fetal XY because it actually is a component of the rhesus D test. And we had some marketing surveys internally that said that certain higher-income groups might be willing to spend a modest amount of money to know the sex of their child earlier than they would by ultrasound or any other determination. And we thought since it basically was a freebie in terms of R&D development costs, that we would put it on the market and just see how it did. As I said, the results were disappointing and we decided to discontinue.

Kevin Degeeter – Ladenburg Thalmann

Terrific. Thanks so much.

Harry Hixon

Sure.

Operator

Your next question comes from the line of Sean Lavin with Lazard. Please proceed.

Sean Lavin – Lazard Capital Markets

Thank you for taking my question and congratulations on beginning your Down syndrome study.

Harry Hixon

Thank you, Sean.

Sean Lavin – Lazard Capital Markets

The first one, the study that you began in June, are you using a 2, 4, or 8 plex method for that?

Ron Lindsay

We are using a 4 plex method. And I think we've made that clear in our timeline, that's the format we are likely to use.

Sean Lavin – Lazard Capital Markets

Okay. And then recently one of our competitors published a note with some of Dr. Lo's data. And we were wondering how similar your test methods are to his methods and if there's any areas you think you may have improved your test versus the version he used.

Ron Lindsay

There are certainly some nuances to methodology. I think we've obviously – and we've said this – we are more focused on elements of the test that will reduce the cost of goods, so there are some little things in there that we've been playing around with. And obviously in terms of our bioinformatic capabilities we've been looking at a variety of approaches to analyzing data. But in essence the test is very much based on the same format as Dr. Lo, with some internal tweaks that might be more suitable in the long term for a commercial operation in terms of things we plan to do.

Harry Hixon

I think it's fair to say that the one thing that we have focused on from the beginning here is that this – we expect this to be a commercial test that will have substantial volume and that we need to have very careful sample handling, sample identification. We are looking at various ways to automate steps, to eliminate the possibility of human error. So in that sense it is somewhat different than Dr. Lo's work, but I think on balance we would expect the results to be very, very close.

Sean Lavin – Lazard Capital Markets

Do you know if he had a DNA quantification method in his study?

Ron Lindsay

I am not certain. I believe he did, but it was not what we are using, no.

Sean Lavin – Lazard Capital Markets

All right. And then my last question has to do with the FDA. And obviously they have become I guess more diligent in their look at diagnostics. Do you continue to believe that you will launch the Down's test as a CLIA test?

Harry Hixon

That is our current plan. But as we have said for quite some time, our virtual plan was to launch as an LDT in the CLIA lab environment, but that we wanted to go forward and do the appropriate clinical studies and file for pre-market approval with the FDA, that's still our plan.

We expect that we will have some significant discussions with the FDA between now and the end of the year. I'm not sure about the timing of that. But we will be good citizens. We will abide by the FDA's rules and guidelines. But we currently believe that they would permit us to launch an LDT test for T21.

Sean Lavin – Lazard Capital Markets

All right. Thank you very much.

Operator

Your next question comes from the line of Trey Cobb with Stephens. Please proceed.

Trey Cobb – Stephens

Good afternoon and thanks for taking my question. Just kind of as a follow-up to the question before me, I guess maybe if you could walk us through how your strategy though would change if the T21 test – if the FDA changes the classification to a PMA.

Harry Hixon

Well, I think first we would have a substantial discussion with the FDA about what would be required for the PMA. And we have a very – we have been collecting samples for quite a long time. It's a very valuable sample collection. And we would hope that our discussion with the FDA would be such that we would be able to use that sample collection as part of a PMA filing. But until we have further discussions or discussions with the FDA, I don't think we should speculate further.

Trey Cobb – Stephens

Okay. Thanks.

Operator

Your next question comes from the line of Kelley Roche with Jefferies & Company. Please proceed.

Kelley Roche – Jefferies & Company

Hi guys. Thanks very much for taking my questions, this afternoon. First, could you sort of walk us through the share count? I know that Paul addressed it earlier in his comments, but if you could kind of give your expectations for share count through the rest of the year on a – and a quarter by quarter basis as well, that would be appreciated.

Paul Maier

Well, currently we have approximately 74 million shares outstanding and that does not include approximately 6.4 million shares that we expect will be issued to the plaintiff's class. Unfortunately, we don't know the timing on when those will be issued, because we are not in control of that. There is a process that the shareholders in the class have to go through to validate that. And there is a third party that handles that. And once they have figured out and determined what the distribution of those shares will be, then they will advise us and we will tell our transfer agent and the shares will be issued.

So I just don't know the timing of that, but otherwise, I would think that the current share count plus that incremental amount is what you should think of in terms of going forward.

Kelley Roche – Jefferies & Company

Okay. Great. That was very helpful. Then secondly, looking at the genetic analysis business. How is it going there? Are you feeling any help from the NIH? Do you think it's going to be a better second half of 2010, looking at that business?

Paul Maier

Well, while we don't provide any guidance, I think we are encouraged by the uptake of our GA business this year. Certainly we've seen good growth over the prior year. And it is in a pretty good rhythm now. So our sense is it will continue on that basis to show growth over the prior year.

Kelley Roche – Jefferies & Company

Okay. Then one last question, it looks like the cash burn this quarter was close to – or the loss was around $17 million, excluding the settlement charge. Is that a good amount maybe going forward for the rest of the year? And how long do you guys think you can keep your cash balance in check until you might need to think about raising some kind of money at the end of the year or next year?

Paul Maier

Okay. Well, first of all, again, we don't give specific guidance, but we did say at the time when we raised our money in the second quarter that we anticipated we would need to raise more funds prior to the launch of the T21 test and that hasn't changed.

We actually ended the quarter of June 30 in a very strong cash position. Our cash burn went down in the second quarter, but that was more related to timing. So with $67.7 million, that represents approximately a year's cash burn going forward. And so we still do anticipate that at some point in the next 12 months we will probably be accessing the capital markets again.

Kelley Roche – Jefferies & Company

Okay. So that may be $17 million? So somewhere there?

Paul Maier

Well, there are a lot of non-cash items. And so the actual use of cash was about $9 million in the second quarter. So that was down quite a bit from the first quarter. And we do expect that it will fluctuate on a quarter to quarter basis based on the timing of certain expenses which we may accrue on a different schedule than when we actually have to pay them.

Kelley Roche – Jefferies & Company

Okay. Thanks very much.

Operator

(Operator Instructions) And your next question comes from the line of Tony Butler with Barclays Capital.

Tony Butler – Barclays Capital

Thanks very much. Is it possible to dissect in the 450-patient study? Is there a specific specificity and/or sensitivity that needs to be achieved in order to consider that you need to move forward with a large-scale validation test? And I guess, moreover, would you actually publish a negative result if you didn't think that a threshold, whatever it may be a false negatives or false positives, would you actually publish a negative result or would you actually issue a press release? Because I'm trying to think of – even though I wouldn't necessarily expect this, but I'm trying to think of the other side of the equation. Thanks.

Ron Lindsay

Yes. You know, just to be clear, this is a technical experiment rather than a validation study. And we don't anticipate – we've tried to make sure everything lines up here and – but the nature of the study is maybe there will be some things jump out that we haven't expected. So we haven't set a threshold. I think we've said in the past that a low-90s sensitivity specificity would be something we would not be excited about but might find useful.

Mid-90s would be something that we'd be modestly excited about, so – and a high 90s would certainly be the kind of data we are looking for. So I think we are going to publish whatever we find. There's always – I think we've said recently that our anticipation is the technical risk here is low, but in a relatively small study with an even smaller percentage of clinical samples that will be T21's, the risk is more human error I think than technical error, so that's – if that happens we will publish it and explain it as it is. So I think we will not necessarily – unless something dramatically goes wrong, that we find – proceed with the validation study.

Tony Butler – Barclays Capital

I appreciate that, but I'm really worried about just that sample size and, again, human error being a component and/or maybe DNA not being present because it was too early in the first trimester or some other permutation, and you end up with only a very, very small sample of T21 positives. In other words, it's a head scratcher. You don't know exactly what you have and whether you've really validated the sample. So I'm just – I'm concerned about 450. And I guess an earlier question was related to that, what would you anticipate to be T21 positive, all things being equal?

Ron Lindsay

Well, you know, the cumulative small experiments we've done internally give us a lot of confidence as to where we are. We've done pilot studies that now include quite a number of T21's. I'm not going to specify what that is. I think we anticipate within this 450 there will be a good number of T21's. It will not be statistically significant for an intended use and things like that over the long term, but I think it will be adequate to get where we want.

Tony Butler – Barclays Capital

Thank you very much.

Operator

And there are no further questions. This concludes the question-and-answer portion of the call. I'd now like to turn the call back over to Ian Clements for closing remarks.

Harry Hixon

This is Harry Hixon. But, in closing, I would like to thank each of you for joining us today. Thank you also for your questions. I think they help us think about our business going forward and we would like to thank you for your continued interest in Sequenom. And I look forward to continuing to update you on the progress we're making here at Sequenom at upcoming conferences and on future calls. Thanks again.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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Source: Sequenom, Inc. Q2 2010 Earnings Call Transcript
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