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Sequenom, Inc. (NASDAQ:SQNM)

Q2 2014 Results Earnings Conference Call

July 29, 2014, 5:00 pm ET

Executives

Carolyn Beaver - Chief Financial Officer, Chief Accounting Officer, Vice President

Bill Welch - President, Chief Executive Officer, Chief Operating Officer

Dirk van den Boom - Chief Scientific & Strategy Officer

Analysts

Brandon Couillard - Jefferies

Zarak Khurshid - Wedbush Securities

Bryan Brokmeier - Maxim Group

Bill Quirk - Piper Jaffray

Operator

Good day, everyone and welcome to the Sequenom second quarter earnings conference call. All participants are in listen-only mode. (Operator Instructions).

After today's presentation, there will be an opportunity to ask question. (Operator Instructions). Pease also note that this event is being recorded.

At this time, I would like to turn the conference call over to Mr. Carolyn Beaver, CFO. Ma'am, please go ahead.

Carolyn Beaver

Thank you, and good afternoon. Welcome to the Sequenom conference call to discuss operating results for the second quarter of 2014. Joining me today are Bill Welch, CEO and Dr. Dirk van den Boom, Chief Scientific & Strategy Officer.

This call is also begin broadcast live over the web and will be available for replay through Friday, August 29, 2014 on the Invest section of our website at www.sequenon.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 Bill Welch. Bill?

Bill Welch

Thank you, Carolyn. Good afternoon, and I would like to welcome those on the line for joining us today to discuss Sequenom's second quarter results for 2014.

Today, I will discuss four key developments that occurred during the second quarter and in recent weeks. One, the sale of the bioscience business, two, the financial progress during the second quarter, three, our new laboratory agreement with Quest Laboratories and four, our new additions to our prenatal testing menu, including VisibiliT and the Enhanced Sequencing Series 2 for the MaterniT21 PLUS test.

In the second quarter, we completed the sale of the bioscience business. This sale was a culmination of a process we announced in the fall of 2013 to look for strategic options for the bioscience business in order for us to focus our resources on the growing diagnostic business. We sold the bioscience business to Agena Biosciences on May 30 for a price of $31 million plus potential additional milestones. Agena purchased all the assets of the business, retained the bioscience employees and assumed certain liabilities for the business including the facility lease. We wish our colleagues at Agena Biosciences the best in their new business venture and we look forward to being able to focus Sequenom's resources exclusively on the growing diagnostic testing market.

In June, we obtained the U.S. Food and Drug Administration clearance for the IMPACT Dx Factor V Leiden and Factor II Genotyping Test for use on the IMPACT Dx System. With this clearance, we earned $2 million milestone, which is included in our reported gain on sale.

Turning to results for the second quarter. Sequenom Laboratories accessioned over 50,000 test samples in total and nearly 41,000 MaterniT21 PLUS test samples, both up 7% over the prior year quarter. You will hear more about the financial benefits resulting from this quarterly growth from Carolyn when she discusses our second quarter financials.

We continue to strengthen our payor contracts and agreements and announced in the second quarter our third national payor agreement with Cigna. We now have agreements with three national payers including Aetna, Cigna and a masters business agreement with Blue Cross Blue Shield Association. Based on the number of beneficiaries served by these national commercial payers as well as by the many regional insurance plans, networks and health systems, in which are not contracted, we now have coverage in place for over 140 million commercialized in the U.S.

We also additional 30 million lives now covered by Medicaid programs across 15 states reimbursing for our tests. We continue to work with other payors, networks and health systems for which we are not yet contracted. While we don't expect to gain agreements or contracts with all payors, our goal is to have agreements with as many commercial payors as possible and a working relationship with all payors.

As we discussed in the first quarter, we expect a new molecular diagnostic code for the next sequencing test specific for fetal aneuploidies to be implemented in January of 2015. We expect this new code to be posted on the AMA website in the third quarter. This new code will enable commercial and government payors to identify the unique nature of MaterniT21 PLUS test, which should help facilitate reimbursement process and reduce the time required for third-party payors to process claims. Sequenom Laboratories continues to be the market leader in noninvasive prenatal testing.

We are pleased that last month, we were able to announce two agreements with Quest Diagnostics. We expect to begin processing test for Quest under the test stand on agreement later in this third quarter, enabling us to broaden the distribution of our MaterniT21 PLUS test as well as to provide access to our just announced VisibiliT test. The licensing with Quest enables Quest to utilize our patent portfolio to bring up its own noninvasive prenatal test in exchange for royalties. We are pleased to establish this nationwide partnership with Quest, the world's leading provider of diagnostic information services. Quest's decision to entering these agreements with us provides further validation of the strength of our technology and our scientific leadership. We believe this partnership provides us an additional distribution channel, which enhances our competitive position in the marketplace.

Today we announced we entered into a license agreement with Mayo Medical Laboratories. Mayo will also have access to our NIPT intellectual property portfolio for the purpose of developing and validating its own laboratory developed test. We now have entered into six licenses agreements globally. We appreciate the goal noninvasive prenatal testing market is large and is best served by Sequenom Laboratories as well as by our licensed partners. We plan to continue to partner our technology with leading laboratories around the world to broaden access to noninvasive prenatal testing.

Last week, Sequenom Laboratories announced that it has completed the development of VisibiliT, a laboratory developed test which provides a risk score for common fetal chromosome aneuploidies that are normally evaluated with conventional prenatal screening serum screens. The results of the clinical evaluation study of the VisibiliT test were shared at the 18th International Conference on Prenatal Diagnosis and Therapy or ISPD in Brisbane, Australia earlier this month. The performance of the VisibiliT test was determined by a clinical evaluation study of over 1,000 low and high-risk samples and demonstrated a greater than 99% sensitivity and 99.9% specificity for trisomies 21 and 18. This performance has been maintained over subsequent validation studies, which in total now exceed more than 100 trisomy 21 and 30 trisomy 18 samples.

Sequenom Laboratories is the first test service provider to offer two distinct noninvasive prenatal testing options, enabling greater testing access and flexibility for providers and patients. Sequenom Laboratories plans to launch the VisibiliT test internationally in August this year through our growing base of international logistics and laboratory partners. The VisibiliT test will be selectively rolled out in the United States initially on a cash basis. We plan to work with physicians and payors in the U.S. and we will be ready for broader distribution and utilization when coverage policies are adopted. The VisibiliT test allows us to meet growing demands and provide additional choices to better serve the broader prenatal testing community.

We initiated our Enhanced Sequencing Series or ESS in October 2013, which added five microdeletions as well as trisomies 16 and 22 to the MaterniT21 PLUS test. In the presentation at the ISPD conference in Brisbane, we detailed our experience reporting on 22q11 deletions or DiGeorge syndrome in the first 50,000 samples since the ESS launch. In this presentation, we demonstrated a sensitivity above 99.9% for this rare microdeletion, providing enhanced assurance to physicians when we report on its presence.

Based on our positive experience with ESS, we also announced last week that we began reporting on the presence of three additional clinically relevant microdeletions as part of the Enhanced Sequencing Series 2. These new microdeletions include 11q deletion, Jacobsen syndrome, 8q deletion, Langer-Giedion syndrome and 4p deletion Wolf-Hirschhorn syndrome. The company is poised to capitalize on the new commercial agreements, scientific advances and new product launches.

I will now turn the call over to Carolyn who will discuss the details of our results for the second quarter. Carolyn?

Carolyn Beaver

Thanks, Bill. As Bill mentioned, we completed the sale of the bioscience business during the second quarter. As a result, that business has been treated as a discontinued operation and the related financial statement accounts have been excluded from our previously reported amounts. Our reported revenues, for example, now only include our diagnostic business.

For the second quarter of 2014, total revenues were $39.8 million, an increase of 62% compared to $24.5 million reported for the second quarter of 2013. On a sequential basis, revenues improved over 7% compared to the first quarter of this year. Revenue from international clients including royalties grew to $4.9 million in the second quarter, compared to $2.9 million in the second quarter of 2013. This revenue is recorded on the accrual basis.

Revenues from the Sequenom Laboratories are recorded primarily on a cash basis. In the second quarter, Sequenom Laboratories began using accrual accounting for several third-party payors. Revenue increased by $1.9 million as a result of adopting accrual accounting for those payors during the quarter. This is based upon accrued revenue of $5.7 million for those payors, compared to $3.8 million in cash received during the quarter from those payors for tests performed during the quarter.

In total, over 26% of our revenue in the second quarter is accounted for on accrual basis of accounting. We expect that the transition to accrual accounting will occur slowly as we develop the ability to estimate the amount that will be paid by each payor. In the meantime, all costs associated with providing an increased volume of tests are recognized during the current quarter while most of the revenues are not recognized until the period in which cash is collected.

Total cost of revenues increased to $22.5 million for the second quarter of 2014, compared to $20.6 million for the prior year period. Cost of revenues increased primarily due to the increase in Sequenom Laboratories test volumes, as well as cost to support increased testing capacity. The North Carolina side was included in the cost of revenues for only one month of the second quarter of 2013.

Gross margin for the second quarter was 44% as compared to 16% for the second quarter last year and 39% for the first quarter of 2014. This improvement is attributable mostly to the improved collection for accessions compared to the prior year period, increased revenue related to the use of accrual accounting for certain payors and to improved efficiencies in processing patient samples. We expect gross margin to improve in the future as we continue our efforts to gain reimbursement and improve efficiencies in our operations.

Total operating expenses for the quarter were $30.6 million as compared to $33.1 million for the second quarter of 2013. Completion of the validation of the North Carolina laboratory site in June 2013 moved the laboratory cost out of R&D and into cost of revenues. Total operating expenses were up sequentially from $28.7 million for the first quarter of 2014 due to increased legal expenses associated with patent litigation, and $1.4 million in non-cash charges related primarily to modification of equity awards in connection with the retirement of our former Chief Executive Officer.

Selling and marketing expenses decreased to $7.9 million for the second quarter of 2014 from $10 million in the prior year's second quarter, resulting from lower labor and related costs. Research and development expenses at $7.1 million for the second quarter of 2014 were down from $10.9 million in the second quarter of the prior year, which included completion of the validation of the laboratory site in North Carolina. General and administrative expenses for the second quarter of 2014 was $14.6 million compared to $12.2 million for the second quarter of 2013. The increase is due to legal expenses associated with patent litigation and the $1.4 million in non-cash charges related to the modification of equity awards. Total litigation expense in the second quarter of 2014amounted to $5.3 million.

We are continuing to focus on controlling our expenses and expect our operating expenses to remain relatively stable from the second quarter through the remainder of the year. However, legal expenses may fluctuate as we proceed with our intellectual property litigation, which could have a negative effect on our operating expenses. We do not expect non-cash charges related to equity modifications to recur. During the quarter, we recorded an additional restructuring charge of $1 million in connection with changes in assumptions regarding the expected sublease income to be received for a facility the company exited in the third quarter of 2013.

The company received proceeds of $33 million upon the sale of the bioscience business including the milestone payment of $2 million as Bill mentioned earlier and funds held in escrow. As a result of the sale of the bioscience segment, the company recorded a gain on the sale of discontinued operations of $23.8 million less tax expense of $9.6 million. There should be no cash impact from the tax expense related to the sale because we expect to apply the tax benefit from our operating losses during the year. We expect to record a tax benefit in about the same amount as the tax expense allocated to the gain on sale for 2014. The loss from continuing operations in the second quarter reflects the portion of the tax benefit allocated to the second quarter. We expect that the remaining $2.5 million of tax benefit will be recorded in the remainder of the year.

Net earnings of the second quarter were $4.7 million or $0.04 per share as a result of the sale of the bioscience business and improvements in the diagnostic business, compared to a net loss of $31 million in the second quarter of 2013 or a net loss of $0.27 per share.

Cash burn related to continuing operations for the second quarter of 2014 declined to $4.1 million compared to $41.5 million in the same period of 2013 and $18.4 million in the first quarter of 2014. The improvement is the result of stronger collections, expense reductions and timing of payments. Cash burn in the first quarter of 2014 included two cash payments that did not repeat in the second quarter, our annual royalty payments of $4.8 million and semiannual debt service payments of $3.3 million. The cash burn related to continuing operations for the first quarter, excluding those payment was $10.3 million. Again, the bioscience business has been excluded from the amount I just mentioned for all periods.

We estimated and recorded diagnostic accounts receivable to be $36 million to $40 million as of June 30, 2014. This range has decreased by approximately $6 million as a result of the adoption of accrual accounting for certain payors, resulting in recorded receivables of approximately $1.9 million and collections during the second quarter.

For the first half of 2014, the company reported revenues of $76.8 million, an increase of 43% from revenues of $53.6 million for the first half of 2013. Gross margin for the first half of 2014 improved to 41% as compared to gross margin of 22% for the first half of 2013 due to the increase in collections for tests performed.

Loss from continuing operations before income taxes for the first half of 2014 was $31.8 million as compared to $60.4 million for the same period in 2013. Net loss for the first half of 2014 was $11.2 million or $0.10 per share as compared to net loss of $60.4 million or $0.52 per share for the same period in 2013, reflecting the growth in revenue from the MaterniT21 PLUS test and the sale of the bioscience business segment in 2014.

Total stock-based compensation expense was $6.5 million for the first half of 2014, up from $5 million as compared to the first half of 2013. The increase is primarily the non-cash charge as a result of the modification of equity awards as I mentioned earlier.

The company also used cash for capital investments of $0.6 million and for debt repayment of $1.9 million during the second quarter of 2014. As of June 30, 2014, total cash, cash equivalents and marketable securities were $82 million. The operating cash flow in the second quarter exceeded our past performance. We believe our cash burn will continue to improve in the second half of 2014 as we continue to improve our collection processes and focus our cost goals. There will be variability in our cash flows between the quarters. As I mentioned before, debt service and certain royalty payments occur in the first and third quarters of each year which affect that quarter's cash flow.

We expect to continue to make progress on a year-over-year basis as we work toward our goal of reaching breakeven and becoming cash flow positive in the fourth quarter. However, our ability to achieve this goal is dependent on a number of factors including the amount incurred for legal expense which may vary from our expectations.

I will now turn the call back over to Bill for his closing remarks.

Bill Welch

Thanks, Carolyn. The following is a summary of the current status of our patent litigation. As previously disclosed on April 7, 2014, the U.S. Patent and Trademark Office, 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 U.S. patent number 8008018 and one additional patent application, each licensed to Verinata Health, Incorporated, lacks sufficient disclosure to meet the written description requirement for the claims in the patent and the patent applications. The PTO entered a judgment canceling all four of the 018 patent claims and the interference and also entered judgments rejecting the claims of the patent application. The PTO rulings are now subject of an appeal to the U.S. District Court for the Northern District of California Federal District Court. We are continuing to defend our intellectual property position and currently expect the trial on the litigation with Verinata to begin in February 2015.

In closing, we are pleased that we completed the sale of the bioscience business. We look forward to continuing to continuing to add to our payors as well as new initiatives and agreement which we believe will help us expand our ability to best serve the global and growing noninvasive prenatal testing market. Our new NIPT partnerships with Quest and Mayo Laboratories will further support the distribution of our MaterniT21 PLUS laboratory developed test as well as broaden access to our NIPT intellectual property pool.

With the introduction of VisibiliT, we believe we are well positioned to provide access to NIPT and the general pregnancy population as it develops. We continue to distinguish ourselves as a leader in noninvasive prenatal testing. Our scientific and clinical leadership, fast turnaround time, low no call rate and high quality customer service represent significant advantages for physicians, patients and payors.

With that summary, we would now like to take your questions. Operator, please open the line.

Question-and-Answer Session

Operator

(Operator Instructions). Our first question comes from Brandon Couillard from Jefferies. Please go ahead with your question.

Brandon Couillard - Jefferies

Thanks. Good afternoon.

Bill Welch

Hi, Brandon.

Brandon Couillard - Jefferies

Carolyn, can you give us what the international business was accounted for as a percentage of MateriT21 volumes in the second quarter?

Carolyn Beaver

I don't have that as a percentage of volume, as I mentioned the percentage of revenues, but I don't have the volume percentage in front of me. As you know, it is based on an accrual basis. So the volumes are pretty consistent.

Bill Welch

Yes. We don't break out volumes. We break out price at this time.

Carolyn Beaver

Right, by revenue.

Bill Welch

Exactly.

Brandon Couillard - Jefferies

Okay, and as we think about the launch of VisibiliT in that market in the third quarter, what are your gross margin expectations for that test? How does that compare to the high risk test and how do you ensure that you don't cannibalize the current offering? And then just broadly, how do we think about the early ramp expectations for that test and the market opportunity in the more lower cost, I guess, normal setting?

Bill Welch

So, Brandon, this is Bill. Those are obviously key questions for us and part of this is where it is going. We do know that there is a growing demand internationally for this two test model. One that mirrors more a general population screening for NIPT and then of course the full value that we bring. We have a variety of labs, partners in Europe and other locations around the world that are set up to take advantage of this. It is hard to say in terms of what the volumes will be, but suffice to say we think it will be sufficient and we will see the end of the, I expect, really the fourth quarter since we are starting the third quarter now, as we train and such. So it is probably more of a fourth quarter higher end.

In terms of how we think of it, the list price we communicate was $790 for the VisibiliT test, which is less obviously, than the list price for MaterniT21 PLUS test and we see VisibiliT stay in what is in terms of the content of 21, 18 risk score and the MaterniT21 PLUS provides the more comprehensive information that you might normally glean from annual like value.

Brandon Couillard - Jefferies

Super, and then last one, Carolyn, any chance you can give us the mix of tests run between the San Diego and North Carolina facility in the second quarter? And how should we think about that developing as we go through the balance of the year?

Carolyn Beaver

So we don't provide that detail in terms of the two facilities. That's something that we do balance internally based upon our needs. So that's not a detain that we have been providing. Though overall, what you can think about is that we continue to work on efficiencies in our cost structure in both locations and that we do continue to share improvements and make sure that we are achieving the cost objective that we have for both locations.

Brandon Couillard - Jefferies

All right. I will hop back in the queue. Thank you.

Operator

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

Zarak Khurshid - Wedbush Securities

Good afternoon, guys. Thanks for taking the questions. Just curious on the average reimbursement per test. How is that looking these days?

Carolyn Beaver

So the average reimbursement per test, at the end of the fourth quarter, we disclosed that it was $1,200 per test. We haven't updated that in our disclosure, but overall we would say that's trending consistent in terms of, in 2013, we said that it had declined about 10% during the year. I think that's consistent in terms of that kind of trend. So it's pretty consistent from that perspective.

Zarak Khurshid - Wedbush Securities

Just so I understand that trend, so think it declined another 10% in 2014?

Carolyn Beaver

On the order of about that in terms of the tests that were paid for, yes.

Zarak Khurshid - Wedbush Securities

Got it. How does the Medicaid side of the business factor into that? And if you could just comment on Medicaid reimbursement or pricing currently?

Bill Welch

I think, Zarak, it's a broad distribution and it's a distribution within the Medicaid, the commercial and now that we have a whole series of potential partners that are lab partners, either bill for themselves or having their own jurisdiction. So it's a broad distribution is the best way to describe it. Anything else, we get paid from patients, as well as provider as well as payors. I would say, the Medicaid, there is some places where the price is very strong and others where it's challenge, but overall the margins are good for us in the Medicaid populations and those are the states, 15 that we --

Carolyn Beaver

15 states that we are getting reimbursed and we are continuing to work with other states to get reimbursed by more states.

Bill Welch

We think the big opportunity for Medicaid will be, as this new code gets unloaded in January of next year, then the Medicaid and some commercial payors can have better clarity in terms of the code, because we, of course, still use the miscellaneous code that was proposed by the coding change that happened at the beginning of last year.

Zarak Khurshid - Wedbush Securities

Understood. Thanks for that color there. And then last one and I will jump back in the queue. Can you just describe the genesis of the Mayo deal and potentially how meaningful is the sample volume there currently? And would Mayo and Quest be potential early adopters of VisibiliT as well throughout those channels? Thanks.

Bill Welch

Okay, a couple of question. We announced some time ago this year a Mayo test send out agreement. So Mayo has access to MaterniT21 PLUS as a test. We perform the test, but they send us the samples, we report back to Mayo. And that's been going quite well. And this next announcement we made today was, Mayo had a desire to, at some point in time, bring up its own NIPT test and has a desire to utilize our patent for that. So I think that from that standpoint, it was similar to the Quest arrangement. The reason we are comfortable, obviously, with both is that they are both leading providers, ability to understand and bring out their own next generation sequencing test and understand this platform. And so I think we are positively inclined for them and we had a growing opportunity for these folks. We have announced four of these outside the U.S. I think it's a continuation of that program.

Zarak Khurshid - Wedbush Securities

Got it, and VisibiliT.

Bill Welch

VisibiliT with Quest, obviously they have access to that, should they desire to do test send out for that. And Mayo, we would have to modify, I am sure our team will do that, so they have access to VisibiliT. But as you know, VisibiliT is not available in the U.S. or internationally yet. We just made the announcement of the technology and the data and that's going to be rolling out sometime in August. So we have some time for that.

Zarak Khurshid - Wedbush Securities

Got it. Thanks, Bill.

Bill Welch

Thanks, Zarak.

Operator

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

Bryan Brokmeier - Maxim Group

Hi, good afternoon. You are putting on more content than your competitors. Does that resonate with physicians when the sales force is meeting with them? Or what sort of comments, positive and negative, you get back from physicians?

Dirk van den Boom

Hi, Bryan, this is Dirk.

Bryan Brokmeier - Maxim Group

Hi, Dirk.

Dirk van den Boom

We have gotten very positive feedback for the launch of what we call the Enhanced Sequencing Series 1. And so, ESS 2 kind of is a consequence of that. We were very early in the market with these kind of content and we had a lot of discussions with physicians. We have the ability to, for a hospital to opt out. So we get a measure for what the reception of it is and the vast majority actually do not opt out. So they think this content is useful. And I think it's important.

At the last conference in Brisbane to now see on the on the first, over 50,000 samples that are positive predicted values a very good. That's something physicians wanted to see. Something which is not easy to generate because it's a low incidence. So you can't do these very big validation studies, but now that we have enough cases, it shows that when we report on these microdeletions, we usually are correct and that is helpful in terms of using other information from ultrasound and what have you to really provide the best information back. So I think it's very useful.

Bill Welch

And I think the other part of this is, it shows the power of the technology we are employing. We are doing deep sequence on whole of genotype sequencing for this extended content. And I think it is different than others who do it on a more targeted approach which is probably a little difficult to keep up with the content as you go forward.

Bryan Brokmeier - Maxim Group

Okay, and I think Carolyn, I understand that the decision to accrue revenue is based on having enough of a reimbursement history for each individual payor. So the number of covered lives that you added one year ago would be a good baseline for how many covered by it should shift to accrual accounting in future quarters? So looking back, you added about 16 million from the second quarter to third quarter. Is that a good way to think about maybe a minimum or an approximate number of lives that would be moving to accrual accounting?

Carolyn Beaver

That's a good question. Unfortunately, it is more complicated than that, in terms of the requirement, because it is not just the number of contracts but it's also the performance of the contracts. And so we have started and it is this flowchart with a net impact of 1.9 million for the quarter and I think going forward, each quarter we continue to evaluate the performance of payors and we will see how they performed based upon the contracted terms of the frequency and speed of their payment. And then each quarter, we will plan to add additional payors as we have sufficient (inaudible). So it will be low. So I wouldn't include a large ramp up for payors in one particular period. It will be gradual.

Bryan Brokmeier - Maxim Group

Okay. Thanks a lot.

Bill Welch

Thanks, Bryan.

Operator

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

Bill Quirk - Piper Jaffray

Great. Thanks, everybody. First question for me is, just thinking about the reimbursement situation for VisibiliT, is there any way to read into the progress that you have made on the MaterniT21 and extrapolate that into the second product?

Bill Welch

I will start off, and maybe Dirk can add some flavor to this. But we brought out VisibiliT, I think the key component of that is, we feel the content for a general population will screen type test utilizing NIPT, the content should be a 21 risk and an 18 risk, which really mirror what people use today in the current serum screening concept on a broad basis. So we feel like we locked to the content and now it's about the process internally. We validated VisibiliT with our current infrastructure, taking advantage of a number of components. Maybe Dirk, if you can talk more about that?

Dirk van den Boom

Yes. The difference between the two is content, and we talked about that bifurcation of having a high content and a lower content assay. And the desire we had here is to meet a cost structure which is more suitable for the general population and leveraging the infrastructure we have and we optimized our processes significantly and optimized their bioinformatics specifically to focus on trisomy 21 and trisomy 18.

Bill Welch

And I think I think as we go forward, especially as we just start to generate the volumes we are looking for, it has a significant way to decrease cost of over time. So we are trying to roll this out judiciously. One, especially for the U.S., there is no coverage situation. So there is no established way for payors to pay. So we are going to be very cautious as we bring it forward, even though we know that the people would love to use this on a broad basis.

Bill Quirk - Piper Jaffray

And I guess in terms of what I trying to get at was, given the relationship that you have established with some of the payors in the past couple of years with MaterniT21, is there any way those existing relationships to perhaps, speed up the overall lives in the coverage, for example, for VisibiliT?

Bill Welch

Well, I think, Bill, that's a great question. We feel like we have got very good relationships with a variety of payors. We continue to do so. And we do that through our volume, our clinical content and the way we perceive a business. So they can trust what we are saying is what we are doing. We have a number of contracts, but from those contracts, generally speaking, they are reimbursing for, let's say, a testing procedure, other things for which they have coverage policies in place. And at this juncture, VisibiliT would not, I guess, we could have a add to it, but there is no coverage policy. So from that standpoint, I am not sure what they would do from a payment. I think it's going to start early and go forward, but it's hard to say. Next year, there is a lot of demand. Its how the guidelines, the communities, physicians and otherwise, come forward. And as they do come forward, I am assuming that we could add these pretty easily to our existing contracts.

Bill Quirk - Piper Jaffray

Okay, got it, and then, next for me is just considering the deal that you have done with Quest, with Mayo, as well as some other labs, are those structured such that, I guess, what I am trying to get at is, given the number of legal suits that you are involved with right now, is there any implication on those contracts or the assumed royalty rate, should you lose one or -- yes, so I guess that's what I am trying to get at.

Bill Welch

Well, it's a very interesting question and the part of this is somewhat legal. So let's just talk high level commercial as that we have a number of patents and patent pending and technology like that that goes with this. And so the players you are talking about look at what we have, look at our filings and otherwise and employ that and feel that that they need to have this technology and want to utilize our patents. And so that's what this is about, the licensing our patents. I suppose if, I don't think we will lose, imagine one, we have a broad set that goes in that. So we feel good about that. It's also about knowing that the NIPT market globally is so large that having just to labs in the U.S., it would be naïve to say that we can handle all the volumes around the world. And we initiated this process, gosh, I think early on, Dirk, with our LifeCodexx and other things. So this is really just an extension of the program we have had. We will be the high quality test provider and we are enabling a variety of folks that utilize an intellectual property to be able to bring up their own test.

Bill Quirk - Piper Jaffray

Okay, got it. Thanks, guys.

Operator

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

Carolyn Beaver

Thank you for joining us on today's call and for your continued interest in Sequenom. If you have any further questions about today's results or need additional information, please feel free to contact our Investor Relations Department at 858-202-9028. Thank you.

Operator

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

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Source: Sequenom's (SQNM) CEO Bill Welch on Q2 2014 Results - Earnings Call Transcript

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