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Sequenom, Inc. (NASDAQ:SQNM)

Q4 2010 Earnings Conference Call

March 8, 2011, 5:00 pm ET

Executives

Paul Maier – CFO

Harry Hixson – Chairman & CEO

Ron Lindsay – EVP, R&D

Analysts

Bill Quirk – Piper Jaffray

Kevin DeGeeter – Ladenburg Thalmann

Junaid Husain – Soleil Securities

Zarak Khurshid – Wedbush Securities

Tony Butler – Barclays Capital

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2010 Sequenom earnings conference call. My name is Keith and I’ll be your operator for today. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator instructions) As a reminder, today’s conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. Paul Maier, Chief Financial Officer. Please proceed, sir.

Paul Maier

Thank you. And good afternoon, everybody. With me today are Dr. Harry Hixson, Chief Executive Officer and Chairman. We will be joined by Dr. Ron Lindsay, Executive Vice President of Research and Development, for the Q&A session.

Earlier this afternoon, Sequenom issued a news release announcing the company’s results for the fourth quarter and full year 2010. If you have not received this news release or if you would 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, which is http:/ir.sequenom.com. Copies of news releases and SEC filings can also be found in the IR section of our website.

Before we begin, I would like to inform you that this call will include a discussion of Sequenom’s and Sequenom Center for Molecular Medicine’s current plans and intentions regarding product development and launches, expectations regarding Sequenom financial resources, and other forward-looking statements.

I would like to emphasize that these remarks are based on the information available to Sequenom today and 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.

For those of you who are interested, we will be presenting an overview of the company at one meeting later this month. On March 17th, we will present at the Barclays Capital Global Healthcare Conference in Miami Beach. A webcast of this presentation will be accessible through the Investor Relations section of our website.

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

Harry Hixson

Thanks, Paul. And my thanks to each of you for joining us today. During today’s call, I’d like to spend some time discussing our recent achievements and give you an overview of our business. Paul will then follow with an update on the quarter and full year financial results that we released today. I will then conclude with some additional highlights from the quarter and then focus on some key upcoming milestones and events for 2011.

I’m delighted with the progress that we made in 2010. We had a very successful year, both in growing and improving the financial profile of our genetic analysis segment and in terms of achieving milestones for our diagnostics segment. Our core genetic analysis business continued to show steady growth, and the launch of our next generation MassARRAY Analyzer 4, which is intended for research use only, has been well received by our customers.

During the quarter, we placed a total of 15 instruments, of which 13 were MassARRAY Analyzer 4 systems. This brings the total number of systems placed in 2010 to 51, of which 27 were MassARRAY 4 analyzers. The fourth quarter showed good growth for the cystic fibrosis carrier screening test that are wholly owned, CLIA-certified and CAP accredited molecular diagnostics laboratory, the Sequenom Center for Molecular Medicine, or Sequenom CMM, offers.

On the test development front, it has been an exciting and productive time for Sequenom CMM, especially in terms of progress towards a non-invasive Trisomy 21 test. Our academic collaborator and major contributor to the field, Professor Dennis Lo, published a groundbreaking large cohort clinical validation study early in 2011. This report, which appeared in the January 2011 edition of the British Medical Journal, utilized circulating cell free fetal DNA isolated from maternal plasma as the analyte and massively parallel shotgun sequencing as the method of detection.

Sequenom CMM site has completed a blinded T21 locked assay study in September 2010 and submitted the results to the peer-reviewed American Journal of Obstetrics and Gynecology, or AJAG. This locked assay study manuscript was accepted by AJOG and was published electronically in February of this year and in the March 2011 Print Edition of AJOG. This paper was selected as a report of major impact and as editor’s choice by AJOG. It was also the subject of an editorial by AJOG.

I’m very pleased with the results from this study, which showed 100% sensitivity that accurately detected 39 out of 39 Trisomy 21 cases and 99.7% specificity. The results showed that massively parallel shotgun sequencing is the viable technology for detecting Trisomy 21. I would like to point out that this study was designed to detect only Trisomy 21. We are pleased with the progress we are now making on the substantially larger LVT clinical validation study, which I will discuss in some detail later in this call.

At the beginning of 2011, we announced the addition of Bill Welch to the senior management team as Senior Vice President for Diagnostics. I’m excited that Bill has joined us to lead our commercial diagnostic efforts. His experience will be instrumental and putting in place a robust launch plan and completion of building a season team to execute the commercialization plans for Trisomy 21 and the age-related macular degeneration LDTs. Bill’s addition to the company rounds out our senior leadership team and should position us for success.

I also want to take this opportunity to report on the SEC investigation that has been ongoing for nearly two years but now looks like it might be getting ready to wrap up, at least with respect to the company. As you know, since the investigation began, we have been cooperating fully with the SEC and we intend to continue to do so.

Just yesterday we were notified by the SEC staff that they are considering recommending that the Commission bring a civil injunction action against us, alleging that we violated certain anti-fraud and books and records provisions for the exchange act and related rules. Now that we have received this Wells notice, we will negotiate an injective resolution with the staff, which will then be submitted to the SEC for approval. We understand that this approval may take six to eight weeks, but it may take longer. We look forward to reaching an appropriate resolution and putting this matter behind us.

With that update on our operations, I will now ask Paul to address our fourth quarter and full year financial results. Paul?

Paul Maier

Thanks, Harry. First, I will address the financial results of the fourth quarter. We reported total revenues for the three months ended December 31st of $13.8 million as compared to $10.8 million for the same quarter of 2009. The increase from the prior year was due to higher consumables and systems sales in the genetic analysis business and the addition of revenues from sales of Sequenom CMM laboratory-developed tests.

We recognized diagnostic revenue of $1.2 million in the fourth quarter. Diagnostic revenue for the quarter was derived from Sequenom CMM’s two marketed, SensiGene-branded laboratory-developed tests, namely the fetal Rhesus D genotyping test launched as a testing service to physicians in February of 2010 and the cystic fibrosis carrier screening test launched as a testing service to physicians in September of 2009. In both 2009 and 2010, diagnostic revenue has been recognized on a cash basis due to the limited number of contracts or agreements we have with third party payers and our limited collection experience.

Gross margin was 62% for the fourth quarter of 2010. That’s compared with 50% in the fourth quarter last year. Gross margin was primarily affected by the improved margins and changes in product mix in the genetic analysis business as well as improved margins associated with the ramp-up of the diagnostics business at the Sequenom Center for Molecular Medicine.

Research and development expenses were $10.5 million for the fourth quarter of 2010 compared with $10.0 million for the same period in the prior year. The R&D expense increase for the 2010 fourth quarter consisted primarily of Sequenom Center for Molecular Medicine’s assay development and the company’s clinical sample acquisition costs associated with the Trisomy 21 program.

Selling, general and administrative expenses of $13.7 million for the fourth quarter of 2010 increased from $12.9 million for the fourth quarter of the prior year. The increase was primarily due to an increase in higher share-based compensation expense and salary expenses. Total costs and expenses for the quarter were $35.9 million compared with $28.4 million for the comparable quarter of 2009. For the three months ended December 31, 2010 and 2009, the company recorded $2.8 million and $2.7 million respectively of stock-based compensation expense.

As I will discuss in more detail in a moment, this increase in expenses and thus net loss included recognition of a non-cash charge of $6.5 million related to the appreciation in value of the shares that were issued in the settlement of the class action litigation, which was settled in 2010. Our net loss for the fourth quarter of 2010 was $22.0 million or $0.27 per share compared with a net loss of $18.4 million or $0.30 per share for the same quarter in 2009.

Turning now to the full year-to-date results. Total revenue for 2010 was $47.5 million compared with $37.9 million, a 25% increase over 2009. Gross margin for 2010 was 60% compared to 62% for 2009. The decrease in margin year-over-year was driven by improved margins in the company’s genetic analysis business, offset by increased full year costs of the startup of Sequenom Center for Molecular Medicine diagnostic laboratory business.

Total costs and expenses for 2010 were $168.5 million versus $108.6 million for 2009. For the year ended December 31, 2010 and 2009, the company recorded $11.5 million and $13.3 million respectively of stock-based compensation expense. Net loss for 2010 was $120.8 million or $1.69 per share compared with $71.0 million or $1.16 per share for 2009.

As of December 31, 2010, Sequenom had total cash, cash equivalents and short-term marketable securities of $135.5 million. Net cash used in operating activities was $42.6 million and total cash burn was $48.2 million in 2010 compared to $48.7 million and $60.2 million respectively in 2009.

Before turning the call back over to Harry, I would like to remind everyone about the non-cash charges we recorded on the litigation settlement expense in 2010. For the year ended December 31, 2010, net litigation expense was $55.4 million, of which $6.5 million was incurred in the fourth quarter. No such expenses were incurred in 2009. The charge of $6.5 million was related to the revaluation of our settlement for approximately $6.4 million shares remaining issuable to the members of the plaintiff’s class to a fair value of $8.03 per share as of December 31, 2010.

We have issued all of the shares associated with this settlement, and thus we expect no further additional adjustments to the equity-based portion of the settlement. For the fourth quarter, if this $6.5 million charge was backed out of the P&L statement, our loss and loss per share calculation non-GAAP would change to reflect the loss of approximately $15.5 million and a loss per share of $0.19.

For the year ended December 31, 2010, the same calculation would reflect a non-GAAP loss of $65.5 million and a loss per share of $0.91. You can find a reconciliation of these non-GAAP financial measures on the IR section of our website at ir.sequenom.com.

With that said, I’d like to turn the call back over to Harry. Harry?

Harry Hixson

Thanks, Paul. As I mentioned earlier, Sequenom CMM scientists have been busy on the various development aspects of the Trisomy 12 and AMD laboratory developed tests. Based on the results of the Trisomy 21 study that have been conducted to date, we have confidence in the performance of the T21 test, both on the Illumina GAIIx and the HiSeq 2000 sequences. Compared to the earlier GAIIx, the latter instrument the HiSeq 2000 launched by Illumina early in 2010 for its greater sample throughput.

Sequenom CMM site has completed equivalency studies comparing GAIIx and the HiSeq 2000 platforms in December 2010. This step was an essential part of the development path prior to embarking on the important LDT clinical validation study using the HiSeq 2000. In the ongoing larger blinded clinical validation study, Sequenom CMM is using the clinical samples that have been prospectively collected under the auspices of the principal investigators at the Women & Infants Hospital of Rhode Island under an Institutional Review Board approved protocol. We anticipate that the total number of samples in this study will be approximately 2,000, of which at least 200 will be T21 positive samples.

As defined in the original goal of the Women & Infants study, we expect that these 200 or more T21 cases will be more or less evenly divided between first and second trimester of pregnancies. While the primary focus and statistical power of this clinical validation is to detect Trisomy 21. The principal investigators may also choose under the study protocol to include T13 and T18 samples as a further test of our methodology.

Sequenom CMM is on track to complete the clinical validation study by the end of the second quarter of 2011 and plans to launch the SensiGene Trisomy T21 LDT as the testing service to physicians after the publication of the validation study results by our academic collaborators, which is currently expected to occur in late 2011 or early 2012.

In January 2011, we had our first meeting with the FDA to discuss the necessary preclinical and clinical studies that we would be required to support a pre-market approval application for an in vitro diagnostics device or IVD or Trisomy 21. We are unable to comment on the meeting’s detailed discussions. We have the number of actions resulting from the meeting, and we plan to continue our constructed dialogue with the FDA. We expect to have additional meetings and communications with the FDA in the future. We are targeting to file a PMA application to the FDA late in 2012 or early 2013.

Finally, the development of Sequenom CMM’s LDT for risk of patients developing age-related macular degeneration or AMD is progressing well. Sequenom CMM has completed both an internal verification and an in-silico validation study. The manuscript is detailing the results from the validation study has been submitted for publication, we expect that Sequenom CMM will be positioned to bring the AMD, LDT to market by mid-2011.

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

Certainly. (Operator instructions) Our first question is from the line of Bill Quirk with Piper Jaffray. Please proceed.

Bill Quirk – Piper Jaffray

Great. Thank you. Good afternoon, everybody. Harry, quick question for you. I guess just to start off here, in terms of your discussions with the FDA, I certainly noticed that you were reiterating a timeframe here in terms of launching the T21 assays in LDT. So, is it safe to assume at this point that FDA hasn’t raised any concerns or anything like that in terms of launching this product as an LDT?

Harry Hixson

I think it’s safe to say that they have not raised any concerns. Their comments have been that the FDA regulates manufacturers and they don’t regulate laboratories.

Bill Quirk – Piper Jaffray

Very good. Secondly, in terms of the comments around collecting data around T13 and T18, Harry, is this something that – you mentioned that the investigators I guess as that their purview. And so is it safe to assume the company I guess has naturally developed assays to detect both of these aneuploidies? And I guess can you help us think a little bit about that? Would you expect to report out data from this? Is this something we would see in a future publication, etc.? Thank you.

Ron Lindsay

Sure. This is Ron Lindsay. I’ll answer that question. In terms of using the sequencing method that we use in principle, it should apply to both Trisomy 13 and 18. And we and others are certainly looking at that. I think the obvious issue right now focusing on T21 is to have a sample which gives sufficient power to give us statistic analysis. So that’s been our focus, and I think as you all at this time, for both our validation study and future studies, that will include sort of well over 80, and in one case up to 200 samples or even higher. The issue with 13 and 18 at least in the short-term is to acquire sufficient samples where you can understand the precision of the test, and I would say that none of us are quite yet in that position. But certainly, our plans for an LDT once we’ve looked at the data from perhaps some of these other Trisomies is that we would certainly be in a position to report that out as part of a report, but obviously without that precision in the first instance of a large statistically powered study.

Bill Quirk – Piper Jaffray

Okay. Understood. And then just one last follow-up and I’ll jump back into the queue. So, should we read into that, I guess, that you clearly develop the T13 and T18 assays internally? And I assume that at some point you validated those such that when we go into the clinical validation study, obviously you are locked from that standpoint, obviously recognizing that the number of T13 and T18 will almost certainly not reach statistical significance, but that will be tough effectively on a blinded basis or where it would have already had the assays I guess –

Ron Lindsay

Let me reiterate. The current clinical validation study we are in progress with has been focusing on precision around T21. It was powered to do that with over 200 samples, at least 100 in the first trimester, 100 in the second trimester of T21 confirmed by amnio or CVS. For 13 and 18, we don’t know what the principal investigators may put into the study, but it’s certainly in the protocol and we will see the results. I guess what you could say is 13 and 18 is works-in-progress as far as we are concerned.

Bill Quirk – Piper Jaffray

All right. Very good. Thanks for the color, Ron.

Operator

Your next question is from the line of Kevin DeGeeter with Ladenburg Thalmann. Please proceed.

Kevin DeGeeter – Ladenburg Thalmann

Hi, thanks for the question. Congratulations on the results. Maybe just kind of following up once again on 13 and 18, maybe you can just sort of walk us through kind of what additional steps will need to happen sort of between sample collection and analysis? I mean, does that require any different or additional data from the sequencing run or is it principally an (inaudible) step? And maybe I realize it’s still work-in-progress, but give us a better feel.

Ron Lindsay

Yes. I think we have made it clear that we want to be a company that’s driven by data that’s statistically powered to give the appropriate results. I think as many of you who may understand sequencing, in principle, that detecting an extra copy of a chromosome such as T21 is technically feasible. There are some issues that are maybe a little specific in terms of the base content of chromosomes vary and some are more GC rich than others, and there are some collections that may have to be made to 13 and 18 to accommodate that bias. So that’s why we are looking into that, and I think other people in the field would certainly understand that.

Kevin DeGeeter – Ladenburg Thalmann

Okay. Now that’s helpful. And maybe just two more quick questions if I may. How should we think about the platform aspect of an ultimate PMA submission, specifically whether or not as a sequencing company, for example, like Illumina will submit design controls through the FDA? Is that a gaining factor or is there a process whereby you are comfortable you can submit a PMA perhaps on a HiSeq without that platform going through a design control?

Harry Hixson

That clearly was part of our discussions with the FDA. Obviously, those discussions, particularly on that aspect, are highly sensitive and proprietary. We believe that we have – we have understand the pathway going forward plus to use the HiSeq 2000 in a PMA application.

Kevin DeGeeter – Ladenburg Thalmann

Okay. Fair enough. That’s helpful. And maybe if I can sneak in one more, can you just give us a little bit of sense of where the step-up in revenue from the diagnostics sales was coming from? Is it more cystic fibrosis? Are we getting a little more traction with RhD? And maybe kind of put that in context for us as we look forward to 2011.

Paul Maier

Well, this is Paul Maier. The increase in revenue is coming from cystic fibrosis test, but part of the nature of the cash accounting that we are doing is that there is a lag from the time we deliver the test results till we collect, and of course we only share what cash actually comes in the door. So each quarter you’ve seen a ramp up. However, I think underlying that, we are pleased that we are seeing growth on a quarterly basis of the CF test results. And going forward, we’ll try to be a little more fulsome in our results. And one of the things that I would mention is that in the financial results for 2010, while on the diagnostic revenue side we only showed the cash that came in the door, we are recognizing the costs of those and so it probably depresses our gross margin a little bit in the short-term. And at some point in the future, our goal is to change an accrual method of accounting, but we have to have sufficient history in order to validate that as a methodology.

Kevin DeGeeter – Ladenburg Thalmann

Is it fair to say that transition may happen in 2011 to an accrual?

Paul Maier

That would be our goal, and we’ll just have to wait and see till we get to the point where we’re comfortable that we have all the data that we need.

Kevin DeGeeter – Ladenburg Thalmann

Okay. Terrific. Thanks for taking my questions.

Operator

Your next question is from the line of Junaid Husain with Soleil Securities. Please proceed.

Junaid Husain – Soleil Securities

Hi, good afternoon, guys.

Harry Hixson

Hi, good afternoon.

Junaid Husain – Soleil Securities

Ron, could you help put this week’s Nature Medicine paper into perspective? Is this the (inaudible) of paper? As competing tests go for Down's syndrome, could you perhaps compare and contrast the different methodologies and approaches to Trisomy 21 diagnostics?

Ron Lindsay

Sure. Maybe just for a little bit of a reminder to many of you, when we started as a management team about 18 months ago, Sequenom was working on methylation as a potential approach to the Trisomy test. And about that time we became aware of, at least from a cost perspective, that next generation sequencing was also a viable approach. So we’ve had those two in a sort of a two-horse race. And at least in terms of technical achievement, the sequencing pulled ahead when we announced about a year ago we were going to go forward on that vein. I think in terms of the specifics of the Nature paper, we are licensees of a major patent in this arena from Dr. Lo and colleagues, which was issued on August 9, 2005. And it’s like a patent number. Its number United States Patent 6927028, which has very broad claims in this field. So we think we are totally covered in this arena. So – I mean, that’s perhaps the answer you might be looking for?

Junaid Husain – Soleil Securities

Yes, it is. Thanks. And then, Ron, there is a FDA Molecular and Genetics Panel Meeting that’s taking place today and tomorrow in DC. I recognize that this meeting is more focused on the direct-to-consumer marketing of genetic tests. So perhaps not directly related to Sequenom per se, but is there anything that we should be paying attention to here?

Ron Lindsay

I’m not totally up to speed with it, but I think your assessment about that is correct as far as I understand. It’s more of the issue of what to do with sort of individuals and the public who would like their genome done and how that would be regulated or looked at by the FDA.

Junaid Husain – Soleil Securities

Got you. And then last question for you, just looking over the horizon, I’m not sure how much you can talk on the reimbursement front for T21. But do you have any thoughts on the American Medical Association’s CPT Editorial Panel is looking to develop a new coding system for molecular diagnostic tests? I know it’s probably early going with these changes, but is there anything that you think we should be watching here as they make these changes?

Ron Lindsay

Well, we are aware of that effort. And I think we look with some favor on that because the tests that we have or that we’re developing are not well covered by the use of CPT codes. But that’s the only thing that’s in place at this point. I would like to point out that Bill Welch and his group have initiated efforts to identify appropriate consultants to help us with our reimbursement strategy. We have been waiting until we had a published paper in a peer reviewed journal before we approach any of the third-party payers. We wanted to have an unimpeachable source of results our test is likely to produce. So we are now embarking on the initial part of our reimbursement strategy.

Junaid Husain – Soleil Securities

Got you. Got you. Great. Thanks so much, guys. That’s all I’ve got.

Ron Lindsay

You’re welcome.

Operator

Your next question is from the line of Zarak Khurshid with Wedbush Securities. Please proceed.

Zarak Khurshid – Wedbush Securities

Good afternoon. Thanks for taking my question, guys. I was wondering if you could provide some color on the assay costs, including maybe labor and QC steps.

Harry Hixson

Okay. We’ve said publicly that – today the cost of sequencing reagents alone is probably around $200. And this is very known optimized in terms of supply agreements just for research purposes. And probably the – from sample acquisition through to sequencing the cost that they are probably in the region of $350 to $400. So all total, perhaps around $500 to $600 costs. That is totally not optimized at this stage. And before we launch, we’ll make inwards to that. And one of our goals over the next 18 months or so prior to filing a PMA certainly is that we will make improvements to the upfront processes and that hopefully will bring that cost down significantly.

Zarak Khurshid – Wedbush Securities

Great. And then I had a follow-up question regarding the R&D spend going forward. Could you just give us a sense for how that may be trending over the next year?

Paul Maier

Well, let me just say that the R&D expense, as you have noticed from looking at our 2010 results, grew while some of our expenses fell during that period. We still have an ongoing plan to, of course, complete our validation study and launch the T21 laboratory developed test after the publication is out. And going forward, we will then move toward the PMA activities. And because we are still in the process of dialoging with the FDA, we haven’t really concluded yet exactly what that will entail.

But I think overall you can see by looking at the last couple of years that we managed our cash burn. And I think the best guidance I could give you overall is that as we go forward, when we raised our funds at the end of 2010, our goal was to have sufficient cash to fund operations through the end of 2012 or the beginning of ’13 so that we could fund the commercial activities of launching the AMD and T21 tests, as well as the completion of the validation study as well as the completion of the PMA and the submission of that. So generally we have – we believe we have sufficient funds to move us through that process, which should be completed near the end of 2012 or beginning of 2013. I think that’s as specific as we can get since we’re not really engaged in providing detailed guidance. Hopefully that helped address your question.

Zarak Khurshid – Wedbush Securities

Yes. That’s very helpful, Paul. Thank you. And then going back to the T13 and T18 discussion, just to clarify, so at the LDT launch, will customers be seeing any of that information on the report?

Harry Hixson

I think that’s depending on the outcome and results from the validation study, which are somewhat soft [ph], I think we will analyze that carefully with the PIs and look at the data and sort of see where it takes us in terms of whether we’re confident we can report that as part of the launched LDT.

Zarak Khurshid – Wedbush Securities

Thank you.

Operator

(Operator instructions) And your next question is from the line of Tony Butler with Barclays Capital. Please proceed.

Tony Butler – Barclays Capital

Thanks very much. One, is there any other data sets that would come out between now and the time of the publication? Is there any thought around issuing some – the top line data set from the validation study? And then to follow up on that, with respect to the timing for PMA submission, will next year be devoted to then therefore lowering the cost of goods? Is that primary focus for 2012 outside of the overall LDT launch? And I have one additional follow-up. Thanks.

Harry Hixson

Okay. There were several questions there. You want –?

Ron Lindsay

I think the first one is – would we provide any top line information off of the Women and Infants study? I don’t think so. This – our principal investigators intend this to be a practice changing publication. And I don’t think we want to do anything to prejudice the acceptance of that manuscript in the appropriate high-level journal. So I think the answer is no, we would not.

Harry Hixson

And the question relating to processes and improvements in the cost of goods of the T21 tests, you are exactly right. We intend to spend a lot – and already are doing quite a bit of effort on the various steps in the process that we have elucidated at various investor presentations. But part of the so-called process of sample, perhaps all through DNA extraction, library prep, etc., we are looking at automated methods for those that we will think will both in terms of cost be very helpful, but also in terms of potential human error. We’d like to eliminate those by automating as much as possible. So, a big effort when we launched the LDT and certainly by the PMA we’d like to look at as much of that benefit as possible.

Tony Butler – Barclays Capital

Thank you. And last question, Harry, with respect to the Wells notice, do you feel comfortable that your response – and I realize it’s only been a day or so, but do you feel comfortable that your response will be sufficiently robust to minimize the civil action by the staff?

Harry Hixson

Well, first, I really can’t – I don’t want to speculate on that. I do want to emphasize that we have been fully – took part of the bend over backwards cooperative with both the SEC and the Department of Justice. And I think we have – we received indications back from both of those agencies verbally that they appreciate the nature of our cooperation. But other than the impact of that, I don’t think we can speculate on the nature of how this will come out.

Tony Butler – Barclays Capital

Thanks a lot.

Harry Hixson

So it’s a civil injunction action, and basically they invited us to come and approach them to talk about the terms.

Tony Butler – Barclays Capital

Appreciate it.

Harry Hixson

But we’re happy that this is coming to an end, to say the least.

Operator

We have a follow-up from the line of Bill Quirk with Piper Jaffray. Please proceed.

Bill Quirk – Piper Jaffray

Thanks much. Couple of quick follow-ups. Given the ongoing changes around reimbursement approaches in terms of (inaudible) backing, etc., and also concerning the fairly recent hiring of William Welch, how should we be thinking kind of big picture about overall pricing of the assay? Is this somewhat subject to change given that several of the items here are in flux? How should we be thinking about this? Thank you.

Harry Hixson

Well, first, we have not decided on pricing. But I think we’ve said many times in the past publicly, I think, even on these calls that the closer the performance of our test is to amniocentesis, the closer we will price it to amniocentesis procedures. If the information we have is that amniocentesis procedures in the United States vary from $1,500 to $3,000. And we have that as a back-on information, but we have not decided on pricing yet.

Bill Quirk – Piper Jaffray

Okay, got it. And then secondly, Paul, just thinking a little bit about the accounting for diagnostics. You guys have talked in the past about shifting from cash to accrual accounting in roughly one year after you launch the product. Is that pretty consistent in terms of how we should be thinking about this going forward? The reason I ask is that is not to nitpick, of course, you launched cystic fibrosis in September of ’09 and we’re a year beyond that. You’re still doing cash recognition. Thanks.

Paul Maier

Well, our goal of course would be adopt accrual accounting whenever it’s appropriate. And we’ve said generally we would assume a year’s worth of history should be sufficient. But the plain old decision we will make in conjunction with our independent accountants to make sure that we have a predictable methodology that needs all the accounting rules and regulations for revenue recognition. And so, at whatever point that is, we will announce it and that will be reflected in our financials. And as you might imagine, in a startup mode, I think we’re being very conservative to make sure we’re absolutely comfortable with what the trends are and that we can make predictions on the basis of what percent will get reimbursed. So we are treading cautiously in this area, but once we make the switch, we’ll be confident that we have a good sound database.

Bill Quirk – Piper Jaffray

Very good. Thanks for taking the follow-up, guys.

Operator

You have another follow-up from the line of Zarak Khurshid with Wedbush Securities. Please proceed.

Zarak Khurshid – Wedbush Securities

Thanks as well for the follow-up. So is there any reason to think that the result of the next data, the validation data will be better than the results from the AJOG paper?

Harry Hixson

There’s not a lot of room for improvement there. 199.7, just to give you cause for pause, I have to say.

Zarak Khurshid – Wedbush Securities

Yes. Well, is that enough [ph]?

Harry Hixson

In the same range is obviously what we’re hoping for. It’s a bigger study. I only think we expect approximately the same performance.

Zarak Khurshid – Wedbush Securities

Okay. And then on the no-call kind of quality control steps, how should we be thinking about the trend there over time?

Harry Hixson

That’s an important question. Don’t forget, both our paper and Dr. Lo’s were researched and he’s looking to building a process. And in both studies, there were certain exclusion criteria that will be standard in the industry. Quantity insufficient as the sample comes in and doesn’t meet criteria, then there is no point running an assay. We also excluded things and sort of Dr. Lo for quality control purposes in a situation where we had one sample and in many cases we didn’t have a backup. In commercial practice, we will run this test for about two blood draws from a patient. So if anything goes wrong in either DNA extraction, laboratory preparation etc., we can go back immediately and reflex to the other sample that we already have on hand and deal with that. And we think that will take care of many of the samples in this arena that might have been called – I think mis-called and no-call, to my mind, I think this is just samples that you didn’t process. And so I think that will greatly reduce the numbers that people tend to call no-calls.

Zarak Khurshid – Wedbush Securities

Sounds good. Thanks.

Operator

You have another follow-up from the line of Kevin DeGeeter with Ladenburg Thalmann. Please proceed.

Kevin DeGeeter – Ladenburg Thalmann

Hey, maybe just two more quick questions on 13 and 18. I mean, from a COGS standpoint, without getting and recognizing that we’re still kind of early days, should we think about the addition of 13 and 18 as being material to COGS or is sort of de minimis?

Harry Hixson

De minimis is the answer. No impact at all.

Ron Lindsay

There’s really no impact at all.

Harry Hixson

It’s no additional reagents at the same run basically all the way through from start to finish. A little bit of IT additions. That’s all.

Kevin DeGeeter – Ladenburg Thalmann

And how should we think about kind of – I guess with 21, we always kind of had some benchmarks to think about in terms of the performance threshold the company was trying to achieve and thought was clinically relevant. What do you think a clinically relevant performance threshold for 13 and 18 ought to look like?

Ron Lindsay

There are no physicians in the room. So I think that caveat. But clearly one of the points that one should make clear that – with T21 fetuses, ultrasound is not a very accurate tool in terms of quite a lot of T21 to be missed. And therefore, unfortunately with 13 and 18 where there are gross abnormalities with the fetus, they are much more easily detected on ultrasound. And as many of you probably know, many of these fetuses are either spontaneously miscarried or high percentage – 95% that are born, I believe, die within a week or so. So we think from – if you like T21 in terms of need, it’s a bigger issue. And we’ll see what we get with 13 and 18.

Kevin DeGeeter – Ladenburg Thalmann

Okay. Terrific. Thanks for the extra clarity.

Operator

There are no other questions at this time. So I’d like to turn the call over to Dr. Harry Hixson for closing remarks.

Harry Hixson

Okay. Well, thank you to everyone for calling in and thank you for your questions. We always learn a lot from your questions. In closing, I’d like to thank you all for joining us today and your continued interest in Sequenom. I look forward to continue to update you on our progress that we’re making here at Sequenom at upcoming conferences and on future calls. And thank you very much and good bye to everyone.

Operator

Ladies and gentlemen, that concludes today’s conference. Thank you for joining us. You may now disconnect. Have a great day.

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