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Sequenom, Inc. (NASDAQ:SQNM)

MaterniT21 Launch Conference Call

October 17, 2011 9:30 AM ET

Executives

Marcy Graham – Senior Director, IR

Harry Hixson – Chairman and CEO

Ronald Lindsay – EVP, R&D

Paul Maier – CFO

Dirk van den Boom – SVP, R&D

Analysts

Bill Quirk – Piper Jaffray

David Ferreiro – Oppenheimer

Nandita Koshal – Barclays Capital

Varun Dua – Jefferies

Junaid Husain – Ticonderoga Securities

Scott Gleason – Stephens

Zarak Khurshid – Wedbush Securities

Operator

Good morning, and welcome to the MaterniT21 Test Commercial Launch for Sequenom Conference Call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Marcy Graham, Senior Director of Investor Relations. Please go ahead.

Marcy Graham

Thank you. Welcome to the Sequenom conference call to discuss the launch of MaterniT21. Joining me today is Dr. Harry Hixson, Chairman and CEO, Dr. Ron Lindsay, Director and Executive Vice President of Research and Development and Paul Maier, CFO.

This call is also being broadcast live over the Web and will be available for replay through Tuesday, October 25, 2011, on the Investor Relations section on our Web site 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 commercialization and other matters as well as expectations regarding Sequenom’s financial resources, accounting methods, expected reimbursement and future financial performance.

These statements 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 Sequenom’s most recent annual report on Form 10-K and most recent quarterly report on Form 10-Q filed with the Securities and Exchange Commission as well as any subsequent filings 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.

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

Harry Hixson

Good morning, and thank you for joining us today, a very special day for many of us that marks a major inflection point, not only for Sequenom, but for the advent of noninvasive prenatal genetic testing for aneuploidies such as Trisomy 21.

It is with great pleasure that we announce on behalf of Sequenom Center for Molecular Medicine, or SCMM, the launch of a noninvasive Trisomy 21 test branded as the MaterniT21 test. MaterniT21 is a laboratory-developed test, or LDT, that has gone through the full FOVV, feasibility, optimization, verification and validation, at SCMM, a CLIA-certified and CAP-accredited clinical diagnostic laboratory in San Diego, California.

The MaterniT21 test is available as of today in 20 major metropolitan regions across the United States when ordered by a physician. The test is indicated for women who are at high risk of fetal aneuploidies, including women who will be either over age 35 at term, have a suspicion of problematic pregnancy indicated by a positive serum screening result, a positive ultrasound result or prior affected pregnancy or a family history. The test is suitable for women in the late first or early second trimester of pregnancy, from 10 to 22 weeks of gestation.

As we have previously indicated publicly, the launch of MaterniT21 test today is concurrent with the publication in a respected peer-reviewed journal of a clinical validation study of the test. We have commonly referred to this study as a women and infants collaborative study. The women and infants study results appear today in the online version of the journal Genetics in Medicine. The print version will appear in November.

During today’s call, we will present slides that outline the clinical need for the MaterniT21 test, the target high-risk group for whom this test is initially intended, some background on the science specifications and development of this test and the top-line results of the women and infants study.

My colleague, Ron Lindsay, will then provide us with a more detailed commentary on the study results and the science behind the outcomes. Later, our CFO, Paul Maier, will close with a few slides on the launch process and near-term commercialization plans. This will be followed by a question-and-answer session.

Before beginning the presentation, I would like to thank the many people who have displayed remarkable tenacity, ingenuity and resilience in bringing the MaterniT21 test from the drawing board all the way to today’s launch. In developing the test, SCMM has built on the seminal and pioneering work of Professor Dennis Lo, who first discovered significant levels of circulating fetal nucleic acid in maternal plasma in the late ‘90s, and his colleague, Professor Rossa Chiu, and their associates at the Chinese University of Hong Kong, who have explored several analytical methods that would take advantage of circulating cell-free DNA as an analyte to develop a noninvasive method for interrogating the genetics of the developing fetus, including the assessment of risk for the fetus carrying an extra copy of chromosome 21 or other rare aneuploidies such as Trisomy 18 or 13.

We are pleased today to recognize the extraordinary hard work, tireless devotion and diligence of the company staff over the past two years in developing and testing the vastly improved technology that underlies today’s launch, a DNA-based test that utilizes massively paralleled shotgun sequencing to detect in affected fetuses an extra copy of chromosome 21 in maternal plasma.

Ultimately, the motivation for all of us has been the desire to fulfill an unmet clinical need, a safer way for doctors and women to assess the risk of a pregnancy carrying a fetal aneuploidy abnormality. We recognize the patience of investors and support of the financial community in helping us achieve that goal.

Finally, we thank the Women & Infants International Collaborative Group who planned and conducted the study, which has led to today’s publication in Genetics in Medicine. While SCMM conducted the analytical part of the study, we thank Drs. Jack Canick and Dr. Glenn Palomaki for their tireless efforts in guiding and completing this important body of work.

I will now turn the call over to our Executive Vice President of Research and Development, Dr. Ron Lindsay. Ron?

Ronald Lindsay

Thank you, Harry, and good morning from San Diego.

Before running through the slide presentation we’ve made available, I’d just like to add my personal thanks to all the employees at Sequenom that worked tirelessly as a team for the past two years, learning and developing new technologies and instilling best practices in all of their work, such that the validation study published today, and the test that is launched today can be viewed with the utmost confidence by the scientific and clinical communities and most importantly, by the public.

We’re going to present several slides, and on Slide 3 we’ve just listed the topics we’d like to cover, particularly the market opportunity, and we’ll just touch on some scientific milestones that led to the development of the test we’re launching today, the product profile that we set a couple of years ago and then four slides on the clinical validation study plan, the process design and the data analysis. And at that point I’ll get to the top line results from the study and then comment on the potential, the clinical potential of this. At that point I’ll pass over to Paul who will present a couple of slides on the commercialization aspects of today’s launch.

On the next slide, this is a slide that I think several of you may have seen before. It outlines the market opportunity. I think as many of you are aware, there are about 4.3 million births in the U.S. every year, and of those about 750,000 women are considered to be at high risk of an aneuploidy. These women comprise about 610,000, the highest portion of the overall high-risk group who have advanced maternal age, that is age 35 or over at term.

In addition, any women who have a positive serum screening would indicate an aneuploidy, or positive ultrasound indicating of aneuploidy, would also fall into this group. In addition, anybody with an affected pregnancy or family history, previous affected pregnancy or a family history would also be in this group.

At the insert on the left simply indicates the risk of trisomy increasing quite dramatically with age, the overall incidence is about one in 800 births in the U.S., and from age 30 onwards that increases pretty dramatically. At such point at age 45, this is 1 in 30. The MaterniT21 test is focused on providing a noninvasive option for physicians to offer women who fall into this high-risk group.

On the next slide, the presentation today, and also the publication, have obviously been built on the shoulders of other previous things. The first seminal conversation with three individuals was Dr. Dennis Lo who discovered that fetal nucleic acid circulates in maternal plasma. This is a seminal paper published in 1997 in the Lancet and the core of an issue with the U.S. and European patents, the so-called 540 patent, exclusively licensed to Sequenom from Oxford University. Since then, Dr. Lo and his colleagues, and subsequently the SCMM, have explored the final patents and a variety of analytical methods that could be employed to use this circulating cell-free fetal DNA, or RNA, as an analyte for diagnostic tests for trisomies such as T21, T18 and T30.

A proof of concept publication using next generation sequencing, or massively parallel shotgun sequencing, appeared from Dr. Lo and his colleagues in PNAS, or the Proceedings of the National Academy of Science 2008. A group from Stanford also took advantage of Dr. Lo’s pioneering work to assess this technology in a separate PNAS paper that also appeared in 2008.

So these proof-of-concept studies are really what have driven this. Three larger, more clinically scaled studies have appeared in 2011, the largest of these with 212 cases of T21 appears today in Genetics in Medicine.

And the next slide. So based on these initial studies, we established a product profile for the trisomy test that we liked to develop. The goal of the study was a highly sensitive noninvasive test to identify pregnancies at risk for fetal Trisomy 21. We wanted this test to be able to be useful both in the first and second trimester. The initial market was going to be pregnant women at high risk for fetal aneuploidy, the group I described on the initial pie chart.

The test sample that we’ll describe in a little bit was 2mls – 2 times 10mls of blood draw up, pretty standard procedure in doctors’ office. The test analyte is the circulating cell-free fetal DNA that was discovered by Dr. Lo in ‘97 in a maternal blood sample. The test method that we’re employing is massively parallel shotgun sequencing. The test platform that we’ve used in our validation study, and also we use commercially, is the Illumina so-called HiSeq 2000 instrument.

The turnaround time for the test we wanted to be similar to amniocentesis, or CBS; that is 8 to 10 days and that will be the case in commercial practice. As of today, the work to develop test will be launched, and I think as many of you know, we are parallel to the LDT, have been developing a path towards an IVD and that we hope to be submitted to the FDA probably in the beginning of 2013.

So these are the profile that we set ourselves about 18 months ago, and based on that and the next slide, the study details of this, the coordinate institution, was the Women & Infants Hospital, the Alpert Medical School of Brown University in Providence, Rhode Island. Sequenom has been the sponsor of the study. Collection sites; samples have been collected since April 2009 up ‘til February 2012 in 27 sites in the U.S., Canada, Europe, South America, Australia.

Samples have been stored at the Women & Infants coordination center prior to analysis. The study design that we’ll go into a little more detail in a moment, was a nested case/control study was designed entirely by the principal investigators within a large cohort of pregnancies collected from this group. And the initial focus in this is what is called the Simple Downs and the final study for this is a case-controlled match study of one case being matched with seven normals, or unaffected pregnancies.

The high-risk criteria, as we mentioned before, a woman 35 years of age or older at term, either high-risk also conferred by positive serum screen, positive ultrasound or previous-affected pregnancy. And the sample processing was done in a blinded fashion at SCM in San Diego.

And on the next slide, this simply outlines the process that we designed for this study. To ensure complete blinding across the study, the samples were collected by the Women & Infants group and coordinated across 27 sites.

As I mentioned, the samples were collected and shipped to Women & Infants where they were stored independently by them. These were accumulated over a period of time until we were ready to run the study. The samples were then shipped in batches to San Diego to the SCMM CLIA Lab where they were processed and the data was sent back to the academic collaborators.

And on completion of that, the clinical data that had been obtained from women at the time of blood draw, shortly after blood draw each woman had either an amniocentesis or CVS. And on blinding the analytical data and the carrier typing data were merged to give us the results. So results you will see later are in essence benchmarking MaterniT21 test against the gold standard in this field, the invasive carrier typing tests.

On the next slide; this slide, which is rather complicated, but it’s taken directly from the paper, simply outlines some of the numbers that we’ve discussed over the last year or so as this study was in progress. In total, 4,664 samples were collected. Of those, 4,385 met eligibility criteria, that is there were Single Down pregnancies with adequate sample and things like that. I encourage all of you to go to the manuscript to read the fine details of this because there are some new launches related to some other studies that will be reported later, including T18 and T13.

For the study that is being reported today, the PI’s arranged a nested case/control study as I mentioned, which ended up with a one-to-seven match in which there were 212 cases of T21 confirmed by carrier typing and 1,484 control, or unaffected pregnancies. So that is the basis of the results that we presented today.

And on the next slide, prior to beginning this study, it was agreed there will be two forms of analysis. So the blinded samples were sent to SCMM in a blinded fashion. The analytical work was carried out in San Diego, and a subset of those were also, as shown in the paper, were sent to UCLA as an independent lab who performed analysis of a subset of those samples and those data are also reported in the paper.

When samples of processed DNA was extracted, a DNA Library was prepared and the samples were sequenced. On the left-hand side are what are we call the uncorrected results, where sequence data was analyzed without correction for what is called GCRM correction; I’ll come to that in a moment. The results were reviewed by the laboratory director and transferred to the principal investigators as uncorrected results. These were sent individually in real-time for matching with a karyotype.

Independently of that and, I’ll come to the reasons in a moment, the cumulative blinded sequence data set were corrected computationally by what is known as GCRM. The GCRM corrected results were sent as a batch to Women & Infants prior to un-blinding. So basically there are two forms of analysis, one uncorrected and the other corrected, but both blinded prior to analysis.

The GCRM correction relates to some recent publications that have shown during the procedures, up to and including sequencing, certain sequences of DNA that are rich in two bases. Guanine-cytosine tend to amplify not quite as accurately as other sequences and this has been shown that can be corrected for bio-informatically and this allows for slightly enhanced results detection.

This has been published in two recent publications both by Drs. Lo and by Stephen Quake’s group, particularly in the analysis of Trisomies T18 and T13. So the results we’re going to report are basically the uncorrected and those corrected for GC and also for another factor, what’s called repeat masking. Large pieces of DNA are found repeatedly through the genome and, simply by eliminating this repeats, you can also improve the data. This is also well-published.

Here, I’ll move to the next slide which in essence gives you the top-line results. So on the left-hand side, we have the uncorrected results, those where there was no GCRM correction. Again, the study was a total of 212 cases. Using this analysis, 209 of the 212 T21s were correctly classified with three false positive and three false negative results. Using these numbers, the sensitivity of the assay would be 98.6% and the specificity would be 99.8%.

Using the corrective analysis where we account for GCRM correction, the total number of cases, again, was 212. In this case 210 T21’s were currently classified, reducing the false positives (inaudible) only two and two false negatives. Using this corrected analysis that were used both in our clinical validation and the CLIA lab before launch and now as we launch, this is what will be used. The sensitivity in this case is 99.1% with using GCRM and the specificity is also slightly increased to 99.9%.

Importantly, the overall No Result rate for this study was less than 1% at 0.8%. I think some of you who may be familiar with some of the earlier studies where the No Result rate was higher, this was due to the fact that in those early studies, there was no additional sample that could be used when samples failed the first test. Again, I encourage you to read the fine detail in the paper but, in some cases, the second sample was used that allowed us to get a result where that was not possible previously.

So I think, these results very much reflect what we anticipate in commercial practice; the test that is very sensitive of high specificity with relatively few false positives. And as I said, the corrected analysis using this computational GCRM is what will be used.

And on the next slide, obviously the purpose of this study was to develop a non-invasive test that would potentially allow a physician and also a patient to have reliable data that would be as good or close to as being amniocentesis or CVS without the risk of that.

How we envisage that this study will be used again. The test is targeted to the high-risk patient population. A majority of those are women who are maternal age 35 years or older at term, women who have had a fetal ultrasound abnormality or anybody whose serum test has come back positive in terms of potential aneuploidy. So this is the group the test is directed to. The process will be that they will be recommended by the physician to have this test, and the result will be reported directly to the ordering physician. Again, there will be no direct-to-consumer use of this test.

When the test results are obtained by the physician, he will consult with the patient and, if the test is positive, all this would be up to the physician, the patient, how this data are used. But the likely outcome is that it will be recommended, at least to begin with, that a CVS or amniocentesis are performed to confirm the test.

Conversely if the test is negative, we believe with a high sensitivity and specificity of this test, the physician and the patient may decide that the information is sufficient for them to make a risk assessment of what they wish to do, and potentially no further tests are required.

So this covers the background to the test, the process and the study, the results of the study and how it (inaudible). So I will now hand over to Paul for the discussion on the commercialization of the test. Paul?

Paul Maier

Thank you, Ron. One of the most exciting aspects of the completion of the study that Ron has just outlined is that we are now ready to offer this important test to physicians and their patients in the U.S.

So if we turn to the next slide, you can see from the map and, it’s Slide number 13, we are launching in 20 major metropolitan regions across the country. Starting today, we will offer the MaterniT21 laboratory-developed test to physicians in some of the largest markets, and we will be adding New York State upon acceptance of our submitted licensing application. We will initially target approximately 3,000 maternal fetal specialists and 2,000 OB/GYNs in these regions, each with higher-volume practices.

We plan to expand this coverage in the coming quarters to include another 2,500 providers as market adoption develops. At launch, our lab in San Diego has the sequencing capacity to manage approximately 100,000 patient samples on an annual basis using the current four-plex version, and we expect to see turnaround times of eight to 10 business days from blood draw to delivery of results back to the physician.

We are also in the process of finalizing an agreement to establish a CLIA lab in North Carolina, which should be operational in the second half of next year. That will provide additional capacity as we further penetrate into our expansion markets.

Turning to the next slide, moving to our expectations for reimbursement and revenues, we will initially offer the MaterniT21 laboratory-developed test on an out-of-network basis while actively working with major insurance coverage providers to ensure eligible patients will have coverage for this important diagnostic test.

We intend to have a patient-friendly billing policy and would expect the cost to insured patients to be no more than $235 out-of-pocket as we engage payers in contract negotiations. While rates of reimbursement will be determined throughout the coming weeks and months, we expect reimbursement will mirror that in the U.S. for current invasive procedures such as amniocentesis or CVS.

For uninsured patients or those choosing to pay out-of-pocket, the test price will be approximately $1,900. We will bill the payer at our list price. The payer may pay the list price or a portion of the billed amount. We will then pursue any outstanding amount on appeal with the expectation of receiving additional reimbursement following their payment. We will not bill patients for the outstanding billed amount after negotiations with the payer.

As a reminder, during the first year of selling the test, we expect to report revenues on a cash basis. So the timing of recognition will be distorted. Revenues for the test will not tie directly to the reporting period in which the test is performed until accrual accounting is implemented. As we become an in-network provider, we expect revenues associated with the specific private payer would move to accrual accounting upon contracting.

With that, we have finished the presentation portion of today’s call. I would now like to open the call up to questions. Operator, please open the line.

Question-and-Answer Session

Operator

Thank you, Mr. Maier. (Operator Instructions) And our first question will come from Bill Quirk of Piper Jaffray. Please go ahead.

Bill Quirk – Piper Jaffray

Thanks. Good morning and congratulations on getting the paper published, gentlemen.

Harry Hixson

Thank you.

Bill Quirk – Piper Jaffray

First question, Ron, with respect to the changes that were made, the enhancements, I guess, that were made in the past, you mentioned on a couple of occasions that that was consistent with what we’ve seen in the literature. I guess I just wanted to confirm that. And then secondly, that indeed, the, I guess, corrections for GC content and others, that that is going to be the commercial iteration of the test; is that correct?

Ronald Lindsay

Correct. I think just to expand that a little bit, this has not been used before in terms of T21. But both Dennis Lo, Stephen Quake and I think another group published showing that particularly for chromosomes 18 and 13, you don’t get terribly good results without applying this kind of correction and they were able to pretty significantly enhance their results based on that.

So we thought, in this study, that these top publications became available at the tail end of our collecting, and as we began to enter the study, so we thought we’d include that in the process.

You can see from the results, the results are pretty good without that and this is a small additional enhancement, we believe, in the commercial process. This is certainly something that’s easy to do and will obviously give us that marginally better result.

Bill Quirk – Piper Jaffray

Very good. And then...

Ronald Lindsay

If you want the references, we can get them for you.

Bill Quirk – Piper Jaffray

Okay. And then just another quick question, here. If I read correctly, I think you asked for 85 of the 90 initial sample failures to be rerun. Why not the other five? And then secondly, was there any specific reason or a bias towards one reason or another, why we had the sample failures? And obviously Illumina has rolled out a couple of tools here to try to correct some of the reasons for other sequencing failures like MiSeq and some improved sample prep reagents. How should we think about those? Thank you.

Ronald Lindsay

I think the answer to the first question in terms of the five samples, those were able to be rerun and get a result with resequencing without going back to an additional plasma aliquot, which should obviously is one of our quality control procedures.

I think in terms of (inaudible) Dirk van den Boom, who’s beside me, may comment on improvements in the TruSeq reagents and things which have also become available since we did the study. Dirk?

Dirk van den Boom

Yes, we will use those improved reagents which are available and will integrate them into future versions of the assay and will properly validate that these reagents work fine and actually may lead to improvements in the process.

Bill Quirk – Piper Jaffray

Very good. Thanks, guys.

Operator

And our next question will come from David Ferreiro of Oppenheimer. Please go ahead.

David Ferreiro – Oppenheimer

All right. Thank you, and congratulations on the publication. Just a first quick question. I guess we can assume, by the fact that you’re launching the test today, that the FDA, that we can put to bed the idea that FDA is going to come in here and prevent you from launching this test as an LDT.

Ronald Lindsay

We’ve discussed it extensively, I think, with the financial community in terms of (inaudible) perhaps almost a year ago from the FDA.

David Ferreiro – Oppenheimer

Right.

Ronald Lindsay

The general sense is that the FDA still wish to make impact on the whole LTD process, but I think even some recent news came out on Friday, this potential bill in Congress that may do something different.

So I think it’s going to take quite a while. I think what’s important here is we have, in essence, in terms of not launching prior to having a very substantial clinical validation study out there, gone way beyond what is required by CLIA to launch a test. So we’re comfortable that we’re doing the right thing in terms of both the public, the validation study and also with the scientific community.

David Ferreiro – Oppenheimer

Okay. Fair enough. And then just for reimbursement, are you going to be going after a miscellaneous code or is it going to be a code stack that you’re working through?

Paul Maier

We have identified a miscellaneous code and that will be the direction we go.

David Ferreiro – Oppenheimer

Okay, okay. And then, just one final question on the false negative rate here. Was this in line with your expectations and will this have any impact on reimbursement?

Ronald Lindsay

I mean, I think obviously the publications from ourselves and Dennis Lo and others were all fairly small up to this and this is a statistical game. We anticipated that the detection of all T21s by everybody so far was unlikely to be the real world, and we’re pretty comfortable what we have here is a real world example. This is the first time anybody’s looked at over 200 samples in one study, so I think this is probably closer to what we anticipated.

David Ferreiro – Oppenheimer

Okay, and then just one final question. I saw that you used the Illumina version 1 chemistry kits there. Should we expect that you’ll be using some of their later version kits that actually make a correction for GC bias or actually improve some of the GC bias of the HiSeq, and then how would you expect that to impact the accuracy that it does?

Ronald Lindsay

I’ll answer the first part, then let Dirk answer the second part. In principle, we announced in July we have signed a supply agreement with Illumina, and one reason for a supply agreement is a to make sure we have instruments which we have on hand to launch. And also, as most people are aware, Illumina have been making improvements to their chemistry, to instrument, et cetera, over the past several years and we anticipate that will continue. We can cope with that in LDT as long as we have adequate time to test new reagents in advance of there being a change so that we can do what’s required in a CLIA lab to get the validation of that. So yes, what works appropriate, we’ll incorporate new changes.

Specifically, Dirk, would you like to comment on this?

Dirk van den Boom

Yeah, I can make a brief comment on improved reagents and as Illumina has shown in their work that the new reagents, the version 3, improves GC bias a little bit, so we’re going to benefit from that. But as Ron has alluded to earlier, we will still use the GC correction for any technical variance which may still occur during processing of the samples.

David Ferreiro – Oppenheimer

All right. Thank you, and congrats again.

Ronald Lindsay

Thank you.

Operator

And our next question will come from Nandita Koshal of Barclays Capital. Please go ahead.

Nandita Koshal – Barclays Capital

Good morning, gentlemen. Congratulations on the publication.

Ronald Lindsay

Thank you.

Nandita Koshal – Barclays Capital

I guess I wanted to ask Paul a couple of commercialization-type questions; one, just the assumptions around the cost of goods sold, so COGS on the test, if you could give us an update on that for the commercial version. And what fed into the minimum expected out-of-pocket or the maximum expected out-of-pocket for patients? How did you get to that level and what are the assumptions feeding into it?

Paul Maier

Okay, I’ll start with the cost of the goods. During the launch phase, the cost of goods will be high and, as we work through the logistics and process improvements and as the volume picks up and, of course, because we’ll be on a cash basis of accounting, the revenue won’t be matched with the cost.

But after a number of months, we do expect the cost of goods to fall in the $500 to $600 per test range based on the sequencing technologies, reagents and other critical factors. And as you know, this is a constantly moving target and, as Illumina comes up with the next generation of reagents, as we validate those and we improve the versions of the test, we expect that will have an impact, a positive impact, on the cost of goods. So I think that’s about as narrow a guidance as we can give at this time. And...

Nandita Koshal – Barclays Capital

Paul, the COGS number $500 to $600, will go down once you upgrade to the V3 kits, or does that include the V3 kits?

Paul Maier

No, this is without the V3. But we do expect it to go down, but I don’t think we’re going to identify by how much because, at the same time, a lot of these other variables are also changing and the volume of the test upfront will put a lot of capacity in place. So we’ll start seeing some depreciation, as an example, just one small example, hit as we launch the test.

Nandita Koshal – Barclays Capital

I see. And then in terms of the $235 out-of-pocket maximum, what might be a reasonable assumption in terms of the minimum expected reimbursement in the early days when you’re out of network?

Paul Maier

Well, we may have our own internal ideas of that. But I think, because this is a new test, we really won’t know until we have market experience, until we work with the payers. And so it would be impossible for us to give any kind of a reasonable range, but that will become evident over time as we start with reimbursement, as these policies are adopted and as we move to the contract basis. So that’s why we won’t really be able to go to accrual accounting until we have enough market data to substantiate where that amount will be.

And I think this is a similar process that other unique, highly complex diagnostic tests had to go through when they entered the market.

Nandita Koshal – Barclays Capital

Okay. Thanks, Paul. And, Ron, just a quick question for you. Based on your conversation with payers and physicians up until now, how do you think they’ll evaluate the slightly lower than amnio sensitivity and slightly higher specificity? What’s the balance there, and how are these numbers likely to be – when you think about a test that might be an amnio-like test in terms of cost, how are they likely to look at these numbers?

Ronald Lindsay

I think if we go back to when we first talked to the financial community about what we might anticipate from a test like this, we gave our low, medium and high expectation of sensitivity specificity. I think this adequately meets our definition of high sensitivity specificity. It’s pretty close to amnio by any standard. And I think as we move forward with new reagents and other tools, I think the anticipation is this is pretty close to amino by all accounts.

Nandita Koshal – Barclays Capital

Okay. Thank you.

Operator

And our next question will come from Jon Wood of Jefferies. Please go ahead.

Varun Dua – Jefferies

Hi guys, this is actually Varun in for Jon Wood. So I had a couple of quick questions. Firstly, can you provide a little more clarity on the 237 samples which were discarded as other outcomes? When in the workflow were these discarded, and when you actually go into the clinical practice, how does this actually fit into the whole workflow? Are you going to be able to identify this before you actually run the samples or these are actually going to go into the sequencing and you will know what these samples are?

Ronald Lindsay

I don’t know whether 237 comes exactly. But in general terms, the workflow will be that if a sample is inadequate, volume which sometimes happens as it shipped if the sample has inadequate fetal DNA when we do with the first step in the process, we would reflex to the additional samples.

So as we said in the study in the commercial practice, there will be two blood samples from all women who are tested. If, for any reason, a sample fails both of those, we would request back to the physician pretty quickly within a few days that, perhaps, further blood draw in a week or so would be the thing to do.

I think, overall, what we’ve indicated with the study, the no result rate was less than 1%; 0.8% is the exact number here. So I think that indicates a much smaller number of samples.

Varun Dua – Jefferies

No, I guess you’re referencing to the 13 samples that were discarded. But I’m actually talking about the 237 samples. So which were discarded because of additional autosomal aneuploidies or sex chromosomal aneuploidies or mosaic? So I was just wondering would you be able to – when you actually have this test in the clinical practice, would you be able to identify these before you do the sequencing or are these going to flow into the process and there is a possibility of not identifying T21 because you had sex chromosome aneuploidies or you had some of the other aneuploidies?

Ronald Lindsay

Right, I think – yeah, the Figure 1 in the publication indicates, and I think because we can now say, that there were other samples included in those that were analyzed at SCMM a total of 2,116 were processed. The subset for the simple (inaudible) is what’s been published today. A paper on the T18s and T13s, which are included in this other outcomes, has been submitted for publication and hopefully will also come out sometime in the near future.

And in addition to that there were one or two other samples, twins and other things that will be discussed potentially in the future. So I think, perhaps I failed to say, but meant to, what is that in the launch test, both from publications from Dr. Lo and others and from our own work, we’re pretty confident that T18s and T13s will be detected. Obviously, nobody as yet has obtained sufficient samples of those to do a statistically forward study and we feel it will be important to report these results to the physician. But it will be carefully made understood that there is no precision data available simply that we have detected another – a copy of either T18 and T13 and the physician should be aware of that and inform the patient.

So I think the answer is many of the other outcomes will be published.

Varun Dua – Jefferies

Okay. And then on your volume expectations based on your initial discussions with the specialists and the OB/GYN’s, what are your expectations for this quarter and for first quarter of 2012?

Paul Maier

I think, going forward, we really won’t be providing expectations for volume. There are so many factors that influence the market uptake. We are very confident that this test will be received well in the market on the basis of the feedback we’ve been getting to date.

But I think we will not give quarterly expectations that are forward-looking. What we do intend to do, because we are on the cash basis of accounting, is in the future when we report our quarterly results, we’ll come up with metrics to indicate how the test is doing. But that will be when we release our financial results.

Varun Dua – Jefferies

Thank you.

Operator

And our next question will come from Junaid Husain from Ticonderoga Securities. Please go ahead.

Junaid Husain – Ticonderoga Securities

Good morning, guys. Congratulations on the publication and the launch.

Ronald Lindsay

Thank you, Junaid.

Junaid Husain – Ticonderoga Securities

So, guys, broad strokes, what, from a sales and marketing standpoint do you think is required to support the launch efforts for T21, be it physician educational support, sales infrastructure, marketing campaign, et cetera, et cetera?

Ronald Lindsay

I think, Bill who’s here, perhaps he can comment on that.

Marcy Graham

Well, I think in terms of the way we structured this thing and, we’ve communicated this, I believe, before, we’re going out with an initial target sales force and commercialization efforts. One of Paul’s slides mentioned 20 major regions covering 24 states. We think represented in that group is about 66% of potential providers and, as we go forward, we’ll be adding reps based on adoption.

In terms of the total number of physicians, a fairly targeted market, and we’re already in the business today with our prenatal sales force and marketing efforts. So this, in some respects, is an add-on to what we’re doing. The exact expense, I’m sure Paul will say, these are forward-looking type things, but we feel very confident we can get the information out and actually handle their questions of logistics and such and reimbursement to make this come together. But this is, yeah, I think that the first step should be pretty reachable.

Junaid Husain – Ticonderoga Securities

And then as you guys think through the test itself and how the OB/GYNS use it, obviously they would use it for the high risk, the over age 35. But how do you think they’ll use it for the low-risk patients?

Ronald Lindsay

I think for the moment all of our efforts are focused on the high risk group. That’s where we have the clinical data. I think over time, we certainly will plan to do studies that may address the broader market. But I think for the moment, we have plenty of our hands full with this initial high-risk group.

Junaid Husain – Ticonderoga Securities

Got it, and then, Harry and Paul, if I could perhaps push you on guidance a bit. I know that you don’t want to give us quarterly guidance for T21 but, again, maybe broad strokes. As you get through the launch and we get a sense for the traction, what are your thoughts on perhaps providing some level of sales guidance, if not now, perhaps sometime in 2012?

Paul Maier

Well, Junaid, we’ll have to see how we do. I think we’ve been very conservative all along and avoided giving specific guidance. As you might imagine, with a product that’s innovative like this with an adoption rate that nobody can actually pinpoint going forward, we’ll have to see what our experience is, and as Bill mentioned, in terms of the sales force, as we see traction, as we see adoption of the tests, we’ll add to our capabilities and so we expect this will be a very dynamic environment.

And at this point, I don’t think we want to say when, if ever, we would do that. But I wouldn’t get your expectations up that we’ll, at this point in the launch, the very beginning, that we have a clear pathway as to exactly what that adoption curve will look like.

Junaid Husain – Ticonderoga Securities

Fair enough. Fair enough. Excellent. Congratulations again, guys.

Harry Hixson

Thank you.

Operator

And our next question will comes from Scott Gleason of Stephens, Incorporated Please go ahead, sir.

Scott Gleason – Stephens

Harry, Paul, Ron, congratulations on getting the study published. The data looks pretty good here. I guess just one question on the data. When we look at average gestational age in the study, you know, is biased; about 2/3 of the patients were second trimester patients. I guess, are you guys going to have a recommended gestational age to provide basically the test?

And then, I guess, secondly, can you give us a sense for what percentage of the false positives and false negatives were in the first trimester cohort versus the second trimester cohort?

Ronald Lindsay

Scott, I think if you look carefully at the T21s which was the goal of this study, they’re pretty much matched 100 to 100 first, second trimester which was the goal of the study. The euploids perhaps were a little more spread towards the second trimester. So I think we’re all pretty confident this test will work from 10 weeks onwards, and that will be the focus of our discussions with physicians. So I think we have the data to recommend that.

Scott Gleason – Stephens

So the recommended gestational age will be 10 weeks onward?

Ronald Lindsay

Yes.

Scott Gleason – Stephens

Hello?

Marcy Graham

Yes.

Ronald Lindsay

Yes.

Scott Gleason – Stephens

Okay. Great. And then I guess, just secondly, when we think about cash and the balance sheet and we think about being on a cash collection basis in terms of revenue or a cash recognition basis, will you guys mitigate, I guess, the adoption of the test or mitigate your sales launch, I guess, to try and preserve cash at all, or is that a thought process just in terms of your current balance sheet restraints?

Paul Maier

Well, Scott, one of the reasons we put the credit facility in place is it does have a component that we can use for working capital and so, for instance, accounts receivable, as they build, we would be working with our financial institution if we need to get some additional cash in to smooth out the cash flows.

But one of the reasons we raised as much money as we did in 2010 is to make sure that we headed into the launch very strong from a cash point of view and at midyear, we had $114 million in cash and when we give our third-quarter update, we’ll provide a little more color on where we are now.

Scott Gleason – Stephens

Okay. Great. And I guess just last question. Paul, if we think about R&D spend for next year, can you give us a sense of maybe how that would compare with this year in terms of your guys’ expectations?

Paul Maier

Well, I think in a general sense, R&D still remains a high priority as we will pursue a number of initiatives to further improve the process and the capacity for the test. And we also, of course on a parallel path, as Ron mentioned earlier, are still looking at the FDA pathway with an IB. So we are committing R&D dollars to that. So I think it’s reasonable that you would not expect our R&D expenses would go down in the next year.

Scott Gleason – Stephens

Okay. Great. Thanks for taking my questions.

Operator

And our next question will come from Zarak Khurshid of Wedbush Securities. Please go ahead, sir.

Zarak Khurshid – Wedbush Securities

Good morning, guys. Thanks for taking my questions. On the commercialization side, is California included in there? If not, what would the timing be and then any thoughts further on the New York license?

Ronald Lindsay

Bill

Marcy Graham

Yes, so, yes, California is included in one of our initial 24 launch states. New York, I think the team may be aware but, when you launch in New York, you apply for – they can and normally do come and inspect. So we triggered that application with the launch in terms of timing when they would come in and we would finally get our New York license for this test, that’s uncertain. It would just work through the standard New York regulatory process.

Zarak Khurshid – Wedbush Securities

Understood. Thanks. And then as a follow-up with respect to the out-of-pocket cost that you mentioned, how does that compare – how does the $235 compare to the current typical average out-of-pocket cost for amnio or CVS?

Ronald Lindsay

Bill

Marcy Graham

Yeah. You know, out-of-pockets vary broadly across technologies and states and payers and such. So we did market research and picked a number we thought was representative for this as we go out. I’ll remind you, there’s a pie chart that might have been hard to see in the presentation showing the initial payer mix and, for those who are 35 or older, we expect to be a 70% or so private pay marketplace. And that’s where this is primarily focused.

Zarak Khurshid – Wedbush Securities

Okay. Thank you.

Operator

And that will conclude our question-and-answer session. I would like to turn the conference back over to Marcy Graham for any closing remarks.

Marcy Graham

If you have any further questions about today’s discussion or if you’d like additional information, please feel free to contact me in the Investor Relations Department at 858-202-9028. Thanks for joining us today.

Harry Hixson

Thank you.

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.

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