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Executive

Harry Hixson – Chairman and CEO

Paul Maier – CFO

Ron Lindsay – Executive Vice President of Research and Development

Analyst

Tony Butler – Barclays Capital

Dave – Piper Jaffray

Vernon Duane – Jefferies

Kevin DeGeeter – Ladenburg Thalmann

Junaid Husain – Soleil Securities

Scott Gleason – Stephens

Zarak Khurshid – Wedbush Securities

John Wood – Jefferies

Sequenom Inc. (SQNM) Q1 2011 Earnings Call May 5, 2011 5:00 PM ET

Operator

Good day ladies and gentlemen, and welcome to the Q1 2011 Sequenom Inc. earnings conference call. My name is Steve and I will be your operator for today. At this time, all participants are in a listen-only mode. (Operator Instructions) As reminder, this conference is being recorded for replay purposes. I'd now like to turn the conference over to your host for today Ms. Marcy Graham, Senior Director Investor Relations.

Marcy Graham

Thank you. Welcome to the Sequenom conference call to discuss operating results for the first quarter 2011. Joining me today is Dr. Harry Hixson, Chairman and CEO and Paul Maier, CFO. Executive Vice President of Research and Development Ron Lindsay will join us later for the Q&A portion of the call. This call is also being broadcast live over the web and will available for replay through Thursday May 13th, 2011 on the investor section of our website at www.sequenom.com.

Before we begin, please note that this call will include a discussion of Sequenom's current plans and intentions regarding product development and launches 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 statements. For information about the risk and uncertainties that Sequenom faces, please refer to the risk factors section set forth in the latest Sequenom Form 10-K, and most recent Form 10-Q filed with the SEC as well as any subsequent filings filed with the SEC.

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 unanticipated events.

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

Harry Hixson

Thank you, Marcy. Good afternoon everyone and thank you for joining us to discuss the results for the first quarter of 2011. I'm pleased with our performance during the first quarter. As we continue to make solid progress on our goals and initiatives while meeting our or exceeding our operational expectations. We grew our revenues effectively controlled our expenses and improved our margins, resulting in a 25% reduction in net losses for the quarter, as compared to the same period in 2010.

On our last earnings call in March, we announced that the collection of samples had been completed for the independent multi-center observational women and infants clinical validation study to evaluate the performance of the Trisomy 21 or T21, laboratory developed tests for LDT, and that we were on track to complete the study by the end of the second quarter.

Today, we announced that Sequenom center for molecular medicine has completed testing on the samples from this clinical validation study well before the end of the second quarter and ahead of schedule. The principle investigators of the coordinating center at women and infants hospital, who are responsible for study design and management of samples and analysis are preparing a manuscript covering the results of this study and will submit it for publication upon its completion. We expect to announce the results of the study following publication and yet to be determined peer reviewed journal, which is expected sometime later this year.

I'm very pleased with the progress we have made in reaching another important milestone on our path to providing a non-invasive prenatal test for T21. We continue to pursue our goal of offering this LDT commercially, and we are executing on our plans to expand our associated organizational capabilities and facilities infrastructure. We are increasing our hiring efforts in preparation for the eventual launch of T21LDT, putting additional resources in place by adding additional clinical laboratory specialists, diagnostic marketing support, and field sales professionals.

We are also working to further develop and solidify our relationships with key suppliers, partners and vendors. Although the completion of testing of the clinical validation study is one of the more exciting advancements in recent weeks it's just one of several notable recent developments. This week, we entered into licensing agreements with the Chinese University of HongKong, for exclusive worldwide rights except for Hong Kong, to intellectual property covered by patent applications or prenatal diagnostics, prognostics and analysis for research and commercial purposes.

Among the other rights, these license agreements cover intellectual property relating to fetal whole genome sequencing, and size-based genomic analysis of fetal nucleic acids, thus broadening Sequenom intellectual property in the field of massively parallel sequencing.

This is another positive step forward, as we build upon our long standing relationship with the University and our long time collaborator, Dr. Dennis Low. Dr. Low published a ground breaking large co-heart clinical validation T21 study that appeared in the January edition of the British Medical Journal. This study utilized circulating cell free fetal DNA isolated from maternal plasma as we analyze and massively parallel shotgun sequencing a as a method of analysis.

Lastly, we made one other announcement late last week. The acceptance of a manuscript from Sequenom CMM entitled clinical validation of a genetic model to estimate the risk of developing choroidal neovascular age related macular degeneration for publication in the June issue of Human Genomics.

We are excited about the acceptance of this peered reviewed study for publication, which coincides with the May 9th commercial launch of retina gene AMD, the laboratory developed test to assess the risk of developing the wet form of age related macular degeneration or AMD, the common eye disorder of the elderly that can lead to blindness.

This test is the first of its kind based solely on genetic markers to assess the risk of developing wet AMD. The Retina gene LDT, which incorporates a comprehensive set of genetic markers was tested in a model to validate the clinical performance of the test. Providing the first commercial clinical validation performed on a large collection of samples from case and control patients with clinically diagnosed choroidal neovascular AMD.

With that update on our operations, Paul will now discuss the details of our performance in the first quarter. Paul?

Paul Maier

Thanks Harry. During the first quarter, we continued to meet our operational expectations and achieved our performance goals. Growing revenue and effectively managing our expenses through the period. Total revenues for the first quarter of 2011 were $13.5 million, an increase of 27%, from the $10.6 million reported for the first quarter of 2010. This improvement reflects the increased revenues related primarily to the mix of MassARRAY system configurations sold during the current period, which resulted in a higher average selling price.

Our genetic analysis business continued to grow on a year-over-year basis, as we placed the total of 13 MassARRAY analyzer force systems during the quarter. We also had an increase in sales volume in our diagnostics business recognizing 1.7 million in diagnostic revenues in the first quarter up from 204,000 for the same period in 2010. This improvement was attributed primarily to the increased sales volume of Sequenom center for molecular medicine SensiGene Cystic Fibrosis carrier screening laboratory developed tests.

Currently we recognized diagnostic revenues upon cash collection as payment as received. Pending approval by our auditors later this year, we are planning to move from a cash basis to accrual accounting for the CF and recess D laboratory developed test. Thus we are accurately matching revenues and costs to the period in which the underlying services were provided.

Gross margin for first quarter of 2011 was 63%, of revenue as compared to gross margin of 50%, for the first quarter of 2010. Gross margin continued to improve in our genetics analysis segment primarily due to product mix including higher average selling prices for our MassARRAY 4 system. Gross margin on diagnostic tests fluctuate based on test volumes, cash collected during the period, reimbursement levels, and investments in laboratory operations and overhead.

Total operating expenses for the first quarter of 2011 were $21.6 million, as compared to total expenses of $22.3 million, for the first quarter of 2010. Research and development expenses decreased approximately 4%, while selling and marketing expenses were reduced by 2%, and general and administrative expenses were down 1%, for the quarter as compared to the same period one year ago.

Total stock based compensation expense was $2.6 million, for the first quarter of 2011, down from $3 million recorded during the first quarter in 2010. Our net loss for the first quarter of 2011 was $12.7 million, or $0.13 per share, as compared to a net loss of $16.9 million, or $0.27 per share for the same quarter in 2010.

As of March 31st, 2011, total cash, cash equivalence, and investment securities were $125.3 million. Net cash used in operating activities was $10.8 million for the first quarter while purchases of capital equipment for the same period totaled $1.4 million.

Our net cash use was favorable as compared to the same period one-year ago enabling us to maintain our strong cash balances, as we head in to the second quarter, and the implementation of our commercialization strategy and infrastructure build out. As a result, we expect our operating expenses to increase in the coming quarters, as we invest further in expanding our diagnostic segment capabilities in anticipation of commercialization of the AMD and T21 laboratory developed tests.

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

Harry Hixson

Thank Paul. As we achieved this new milestone, we are becoming more enthusiastic and optimistic about the future and our prospects for success. With Sequenom Center for Molecular Medicines completion of the testing for women and infants clinical validation study, we believe we are firmly on track to launch the Trisomy 21 LDT by the end of 2011, or early 2012, following the publication of the clinical validation study results by our independent academic collaborator.

We are investing in Sequenom Center for Molecular Medicines commercial capacity, and capabilities preparation and preparations for the anticipated launches of the T21, and the AMD LDT'S. We look forward to providing additional updates on our progress in the weeks and months ahead.

With that summary of our business and financial update, I would now like to open the call up to questions. Operator, please open the line.

Operator

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

Tony Butler – Barclays Capital

Thanks very much. Harry a couple of questions, one is, could you comment, and I'm taking it from the words that you stated is the manuscript for T21, the current pivotal test, is that in preparation as we speak and the second question around T21 is, what is you waffle a little bit on the timing of the LDT, at the end of the year, or the other part 2012, and the question is what is the decision Tree on the timing, is it the timing of the publication or is there something else? And then, I have one more follow-up, please.

Harry Hixson

Okay. Tony, thanks for the question. The manuscript is under preparation at this time. And second, we are staying with our original forecasted estimates for launch of the LDT, because the remaining parts are out of our control. The writing of the manuscript, the submission and the editorial review by the journal to which it will be submitted are all out of our control.

And the decision point for the launch of the LDT, as per our agreement with our academic collaborators will be upon the publication of the study results. So that’s the trigger point. Hope that answers your question.

Tony Butler – Barclays Capital

It does, Harry, thank you. And then I have a brief follow up, if I may. What sort of additional capability of protection does the new IP give you, and can you give us the time limit on that royalty payment? Is it for five years, ten years or some other permutation? And then finally, Paul if I could ask you, you made reference to an increase in operating expense, would you care to characterize what that might be for the back half of the year? Thank you.

Harry Hixson

Your first question, what additional IP protection does that give. First, these are patent applications until they are approved and the claims are approved. We really don’t have any additional protection. We anticipate that they will add to our IP portfolio going forward and give us additional coverage. But until the patents has have issued and we know what the claims are, we won’t be able to answer that question. So, Paul, actually could answer the other question?

Paul Maier

The -- while we don’t give specific guidance on total operating expenses, as you might imagine, the investment we will be making in the second half of the year do relate to building additional lab capacity and capital investment related to that as well as that commercial infrastructure build we will be adding salespeople and have some marketing expenses that will grow.

So we had a very modest cash burn in the first quarter and our operating expenses, as you saw, were actually below last year. I just wanted to signal that, that we will see a gradual increase, but nothing that would be order of magnitude different than we’ve seen in the past.

Tony Butler – Barclays Capital

Thanks very much.

Operator

And our next question comes from the line of Bill Quirk with Piper Jaffray.

Dave – Piper Jaffray

Yeah. Good afternoon, everybody. It’s [Dave] here for Bill.

Harry Hixson

Okay, Dave.

Dave – Piper Jaffray

Congratulations on the quarter, first of all.

Harry Hixson

Thank you.

Dave – Piper Jaffray

As we approach the LDT launch, I was hoping if you could just maybe give us additional color on the reimbursement strategy there, and then it sounds like we are kind of ramping up sales and marketing for the commercialization, any kind of targets you can give us on sales force build would be great?

Harry Hixson

Okay. First, quite some time ago, we retained two consulting firms. The first consulting firm will assist us in the development of our reimbursement strategy, and assist us as we approach third party payers to establish a fair reimbursement price for the T21 LDT.

With respect to the sales force buildup, we’ve retained another consulting firm – well known firm in the area. I’ve used them twice before in my career to define sales force territories based upon call frequency, location of physician, appropriate physician offices, and we will use that to determine the size of our sales force at launch, and they will help us as we add sales force and sales territories going forward after the initial launch.

Dave – Piper Jaffray

Okay. Thank you. Just a quick one on the genetic analysis business. I was a little surprised to see the sequential dip in consumables revenue, just given the building installed base, can you give us any color there? Was there anything to explain the decline?

Paul Maier

No. If you look at our historical results, the consumables tend to be somewhat volatile from period to period. And we usually expect and we even budget internally for a lower seasonality in that because of some budgets are maxed out at the end of the fiscal year and so some of the customers of ours build up a little bit of consumables inventory, and then they don’t re-order on the same frequency in the first quarter. So we do see the seasonal patterns from time to time.

But we are very pleased with the overall results of that business. It’s performing nicely and the fact that our installed base keeps growing, ultimately will, should bring the consumables to have a steadier growth pattern.

Dave – Piper Jaffray

Okay. Thanks for taking the questions.

Harry Hixson

You’re welcome.

Operator

And your next question comes from the line of Jon Wood with Jefferies. Mr. Wood?

Vernon Duane – Jefferies

Hi, guys. This is actually Vernon Duane for John Wood this afternoon. Thanks for taking my question. Just a couple of quick questions on your T21. Firstly, can you comment on how defensive your IP position is specifically addressing the competitive test that has been in the news recently. As we understand, it’s kind of based on the same technology with a few differences in the final algorithm.

Can you maybe just comment on if that test infringes on your IP, and secondly from your recent completion of the validation study, did you guys actually look at the T13 and the T18 data in your study, and is that something that could potentially be a part of the LDT asset depending on how the results are, or you are stating that that study was not statistically powered to include that at least for the time being. Thank you.

Harry Hixson

First, we are aware of, I think you are referring to the paper that was published in chemistry.

Vernon Duane – Jefferies

Exactly, yeah.

Harry Hixson

We are familiar with that paper. We believe -- it’s our opinion that they are infringing below 540 patent and that we feel very confident about the strength of that patent. It’s an issue patent in the United States and in Europe and we think it’s a very solid IP.

Operator

And your next question comes from the line of Kevin DeGeeter with Ladenburg Thalmann.

Kevin DeGeeter – Ladenburg Thalmann

Congratulations, guys. Thanks for taking my call. And one of my questions actually I think may have been the second part of the last question. Just with regard to 13 and 18, I don’t know, just kind of how that fits in, but maybe if I can just slip in two others as well? Can you give us an update with regard to some of the optimization processes for T21 on automation and sample perhaps, specifically, and then just maybe housekeeping item for Paul. How many mass arrays were placed in the quarter?

Paul Maier

In the quarter, I think we had 13 units that were placed.

Harry Hixson

Okay. To address your question on T13 and T18, first I would like to point out that other than the knowledge that approximately 100 T21s -- samples would be from the first trimester and a 100 -- approximately a 100 from the second trimester would be included in the samples, the design of the study overall was blinded to us. We did see some T13s and T18s in the study. And so we think that -- we await to see what our academic collaborators have to say in subsequent publications about T13 and T18.

With respect to our efforts to reduce the potential for human error in these in this very important test continue we are pursuing a number of automation efforts and sample collection improvement efforts but we are not -- we are not going to say exactly what they are and what we are doing for proprietary reasons.

Kevin DeGeeter – Ladenburg Thalmann

And then maybe one quick, I guess, related follow-up to that, is it realistic to expect perhaps at some point prior to launch, a little more clarity on the automation sample prep processes or will that really come forth when you are willing to talk about commercial launch and probably related pricing as well?

Paul Maier

I believe that we will -- that those will remain proprietary to us and that we probably will not discuss them publicly.

Kevin DeGeeter – Ladenburg Thalmann

Thanks for taking the questions.

Paul Maier

You are welcome.

Operator

And you next question is from the line of Junaid Husain with Soleil Securities.

Junaid Husain – Soleil Securities

Good afternoon, gentlemen. Harry or Ron, Ron if you are there, I know you can’t get into much details with the T21 results, but can you -- from women and infants, can you tell me whether the data from the study has actually been synthesized yet? Do you have the sensitivity and specificity numbers?

Ron Lindsay

We are working on that right now. Obviously this the first very large study that’s been done and we are looking at this very carefully with predetermined analytical methods, and I would say we are close to our first sets of results from this, and we obviously want to look at this very carefully from a number of different angles.

And I think that will be part of a manuscript discussion with the PIs. But fair to say, we are fairly close to our first set of analysis.

Junaid Husain – Soleil Securities

Got you. And then could you tell me who is writing and submitting the papers at Sequenom. Or is it the folks that were managing the study?

Ron Lindsay

The PIs, women infants, who, you guys know pretty well, are writing it and we have the authority to comment on methods and to help them with the general trust with the paper, but the principle analysis and writing of the paper is being done by them.

Junaid Husain – Soleil Securities

Got you. And then Ron, could you give us an update on your interactions with the FDA relative to T21? Is it still your sense with the agency is comfortable with you launching the LDT?

Ron Lindsay

I think as we’ve talked about before, we had a meeting with the FDA in the early part of the year to discuss the pre [IDE] which is our plans for moving forward with the PMA and -- what would be required for that which is a lot of things including the samples, instrumentation and so forth. But I think at this time we have no reason to believe that launching an LDT will be an impediment to put it that way.

Junaid Husain – Soleil Securities

Got it. Great. Thanks so much, guys. That’s all I have got.

Ron Lindsay

You are welcome.

Operator

(Operator Instructions) And your next question comes from the line of Scott Gleason with Stephens.

Scott Gleason – Stephens

Hey, Harry and Paul, thanks for taking my questions. Paul, I guess the first question is for you. You mentioned on the call that you guys are going to be transitioning into an accrual accounting base method from a cash collection method, when you look at the Rhesus D and cystic fibrosis carrier screening test. I guess first off it would be correct to assume that the T21 test when launched should be on cash collection method.

And I guess, secondly, how should we think about that? Is there any type of one-time adjustments associated with that change? What does that transition going to look like in terms of the numbers?

Paul Maier

Okay. To answer the T21 question, yes, when we launched that product we will use the cash basis of accounting until we have built up sufficient historical information to make reasonable accrual estimates. And the way you should think about when we do convert this year, later this year to accrual accounting for the existing tests that are on the market, there will be a one-time adjustment, which will fully disclose, that will put on the balance sheet, the accounts receivable that we have and so it will show a bump in revenue when we make that on a one-time basis.

Scott Gleason – Stephens

I guess Paul can you give us a sense for the what the kind of current allowance for doubtful accounts rate runs for those tests today?

Paul Maier

I don’t think we are prepared to talk about that right now. Once we finish the analysis and get our accountants comfortable with it and we go ahead and convert over, then there will be a more thorough disclosure on what that is.

But suffice to say, that to date our expectations are being met, and we think we’ve developed a reasonably predictable model which we will be able to manage the business with.

Scott Gleason – Stephens

Okay. Great. And then Harry, I guess when we look at the study that you guys have done on large scale validation study, did you guys actually look for T13 and T18 in terms of that study or were you solely focused on kind of just routing out the T21s? Was that analysis actually performed during the actual study?

Harry Hixson

Yes. It was part of the study.

Scott Gleason – Stephens

Okay. Thanks for taking my questions, guys.

Harry Hixson

You are welcome.

Operator

And your next question is from the line of Zarak Khurshid with Wedbush Securities.

Zarak Khurshid – Wedbush Securities

Good afternoon and thanks for taking my questions, guys. Congrats on some nice progress in the quarter. Is it safe to assume that the normalization approach and data analysis at launch will essentially be the same as in the most recent paper?

Ron Lindsay

I think the answer is, it will be very similar.

Zarak Khurshid – Wedbush Securities

Okay. Great. And then a general question about the tools franchise, how would you characterize the just the research funding environment in the quarter? How do you envision that to kind of progress throughout the year?

Paul Maier

Well, I would say that compared to where it was in 2009, I think we are seeing a more positive direction and that’s why last year that was driving part of our growth and we see that momentum continuing, and so I think that we feel the business has a very sound footing, and we do expect the growth to continue.

Zarak Khurshid – Wedbush Securities

Okay. And then one follow-up, if I may? What is the current thinking around multiplexing and ballpark costs per sample at launch?

Paul Maier

Currently we said publicly that we’ve used the four plex for the study and the reagent cost for that on an optimized fashion is about $200 per sample for sequencing reagents just prior to any formal agreement with [Alumina], which I think most of you know we are in discussions with. So, I would say the top end of that is a run back number.

Zarak Khurshid – Wedbush Securities

Okay. Great. Thank you.

Operator

We have a follow-up question from the line of John Wood with Jefferies.

John Wood – Jefferies

Hi, guys. Just a follow-up on the AMD, can you comment on the kind of ramp you are expecting with the AMD, any – if you can just comment on the ASP of the asset that would be great? Thank you.

Ron Lindsay

Well with AMD, in contrast to T21, this is a new test. The first genetic test to the retinal specialist market for optomology application. So we expect to see relatively slow and steady uptake, although we have noticed that retinal specialists are early adopters of all kinds of technology and we’ve had a lot of interest shown in this test but we are not -- we are planning on relatively modest growth at this point.

John Wood – Jefferies

And if you can comment on the ASP, that would be great.

Ron Lindsay

We -- this will be a code stacking and it will be somewhere between $1500 and $1600 list price.

John Wood – Jefferies

Great. Thank you.

Operator

And we have another follow-up question from the line of Kevin DeGeeter with Ladenburg Thalmann.

Kevin DeGeeter – Ladenburg Thalmann

My question was just answered. Thank you.

Operator

And that concludes the Q&A portion of today’s conference. So now I would like to turn the call over to Ms. Marcy Gram for closing comments.

Marcy Gram

Thanks everyone for joining us today and for your continued interest in Sequenom. If you have further questions or would like to discuss any portion of the results, you can call my direct line in the Investor Relations Department at 858-202-9298. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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