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Executives

Marcy Graham - Senior Director, IR

Harry Hixson - Chairman and CEO

Paul Maier - CFO

Ron Lindsay - Director and EVP

Analysts

Josh Schultz - Oppenheimer

Bill Quirk - Piper Jaffray

Nandita Koshal - Barclays

Kevin DeGeeter - Ladenburg Thalmann

Brian Weinstein - William Blair

Elemer Piros - Rodman

Varun Dua - Jefferies

Zarak Khurshid - Wedbush

Sequenom, Inc. (SQNM) Q3 2011 Earnings Call November 3, 2011 5:00 PM ET

Operator

Good afternoon and welcome to the Sequenom third quarter 2011 earnings conference call. All participants will be in listen-only mode. (Operator Instructions) I would now like to turn the conference over to Marcy Graham, Senior Director, Investor Relations.

Marcy Graham

Welcome to the Sequenom conference call to discuss operating results for the third quarter of 2011. Joining me today is Dr. Harry Hixson, Chairman and CEO and Paul Maier, CFO. Dr. Ron Lindsay, Director and Executive Vice President of Research and Development 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 Friday, November 11 on the investor section of our website at 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 or future financial performance, statements that are not historical facts but forward-looking.

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 risks 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 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.

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

Harry Hixson

Thank you, Marcy. Good afternoon and thanks to everyone for joining us on today's call to discuss Sequenom's results for the third quarter of 2011. We had a very busy quarter, ending with revenues up 16% from the same quarter last year. We saw continued growth in both business segments for the third quarter.

We continue to make excellent progress and met or exceeded our performance goals for the quarter and, most notably, in the few weeks following the end of the quarter. The last few weeks were highlighted by the exciting simultaneous announcement on Monday, October 17th, of the publication of the women and infant's trisomy 21 clinical validation study. And we launch a Sequenom Center for Molecular Medicine, or SCMM, noninvasive prenatal laboratory develop test for trisomy 21, MaterniT21 LDT here in the United States. MaterniT21 test services were made available to ordering physicians on the day of the launch by SCMM in 20 major metropolitan areas across the country.

The lab received our first samples for processing, the same week, it launched. And SCMM had completed in build the first round of test by the end of October. We are pleased with the initial response that we've seen from the medical community in just a few weeks since introducing the LDT.

The sales staff was reported increasing activity. And SCMM has been managing calls and e-mails from interested parties all over the world. MaterniT21 test is indicated for women who had increased risk of fetal aneuploidies, including women who are over age 35 at term, a positive screening result, a positive ultrasound result or a prior-affected pregnancy or family history. The test is suitable for women in the late first or early second, trimester of pregnancy, at 10 weeks of gestation or later.

As planned, the sales effort includes the initiation of physician educational seminars in each targeted launch market, and the provision of in-service training to physicians' offices in select markets to explain the utility of the MaterniT21 test and to answer questions about the test and its use in their practices. Physicians have been very receptive to test and the results of the women and infant's clinical validation study published in genetics and medicine.

And are supportive of the approach SCMM has taken in providing its testing services. Most importantly, a primary 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 pregnant women, carrying a fetus with a fetal aneuploidy abnormality. We believe that the MaterniT21 needs that clinical need.

Recently, a statement by the international society for prenatal diagnosis, further validate massively parallel sequencing or MPS, as a method for the noninvasive detection of trisomy 21 in high-risk women, with confirmation of MPS positive results through later invasive testing. That statement can be found at ISPDhome.org.

Sequenom CMM currently has the sequencing capacity to run 100,000 tests on an annual basis. But we're currently stepped to the lower level. This capacity allows the laboratory to address a good portion of the target market of approximately 750,000 high-risk pregnancies in the United States each year. For which the women are at an increased risk of carrying a child with Down syndrome.

Of these, fewer the 250,000 choose to get an amniocentesis. They recommended standard of care for prenatal testing for this risk population. Our sequencing test capacity will increase in 2012, as a result of expected improvements from our suppliers. I would like to reinforce that we are focusing on high-risk pregnancies with this test. And that our published clinical study, support the use of MaterniT21 test for high-risk pregnancies only at this time.

Based on Sequenom's ongoing discussions with the FDA, we may pursue some studies in the low-risk population in the future. But we are currently focusing on the scope and protocol to another high-risk study for eventual submission to the FDA. Sequenom CMM has conducted research using our technology to detect two less common aneuploidies, T13 and T18. A paper on that topic which is a component of the women and infant study has been submitted to a peer-review journal, and the results will be reported upon publication.

In the mean time, SCMM were reported over abundance of T13 or T18 directly to the physician as part of the laboratory test report, when appropriate. Beyond the excitement around MaterniT21 LDT, we are tracking progress in the adoption of Sequenom Center for Molecular Medicine's other LDTs. Particular, the prenatal test for cystic fibrosis and Rhesus D genotyping increases in diagnostic revenues of primary result of these sales. A trend we expect to continue as MaterniT21 LDT sales efforts provide opportunities for greater exposure to physicians and the potential or additional uptake of other prenatal tests.

We're also seeing increased interest in Sequenom CMM's RetnaGene age-related micro-degeneration or AMD laboratory developed test. The test was just recently launched in May of this year, yet we are encouraged enough by this interest. And the reimbursement history to move forward on plans to grow the Sequenom Center for Molecular Medicine ophthalmic sales force in the near term.

For now, we'll look forward to continued growth and engagement with the physician commodity, and to focus primarily on successfully launching MateriT21 in the coming months.

With that I will turn the call over to Paul, who will now discuss the details of our performance in the third quarter.

Paul Maier

Thanks, Harry. Results for the quarter demonstrated continued progress on the initiatives we have implemented to both enhance our revenue growth and manage our cost during this year. Total revenues for the third quarter of 2011 were $13.6 million, as compared to $11.7 million reported for the third quarter of 2010. This improvement reflects increased revenues in both operating segments.

For our genetic analysis business the improvement was associated with a larger installed base of our MassARRAY systems, which resulted in increased consumable sales. Diagnostic revenues increased 223% to $2.2 million for the third quarter up from $687,000 for the same period in 2010, an increase attributable to continuing growth in testing service sales volumes principally cystic fibrosis.

We currently recognize all diagnostic revenues upon cash collection as payment as received. We initially planned to move from a cash basis to accrual accounting during 2011 but are now choosing to take a more conservative approach and we're waiting for the close of 2011 to make this change relative to the cystic fibrosis and fetal Rhesus D recess D genotyping laboratory developed test. We expect to utilize cash accounting for our AMD and MaterniT21 laboratory developed test revenues from launch through 2012.

Gross margin for the third quarter of 2011 was 60% of revenue as compared to gross margin of 65% for the third quarter of 2010. This difference reflects the change in the mix of product sales and the Genetic Analysis segment as well as the increased proportion of molecular diagnostics segment revenue which were recognized on a cash basis with lower margins. Gross margin on diagnostic tests will continue to fluctuate based on test volumes, cash collected during the period, reimbursement levels, and laboratory operational costs.

Total operating expenses for the third quarter of 2011 were $26.4 million as compared to total expenses of $30.5 million for the third quarter of 2010. This reduction was primarily the result of a decrease in litigation settlement expense which is nonrecurring in 2011 but was $7 million for the third quarter of 2010.

Research and development expense increased by $1.3 million year-over-year to $12.6 million for the third quarter of 2011, this change was associated primarily with expansion of the Sequenom Center for Molecular Medicine laboratory and pre-launched development activities for the MaterniT21 laboratory developed test.

Selling and marketing expense was also up for the quarter increasing 20% from third quarter of 2010, a change primarily due to a higher labor expenses relative to the extension of our sales force in preparation for Sequenom Center for Molecular Medicines commercialization of the MaterniT21 laboratory developed test. General and administrative expense was up 3% for the third quarter of 2011 as compared to the same period one year ago due primarily to higher labor cost including increased stock-based compensation expense.

Total stock-based compensation expense was $3.1 million for the third quarter of 2011, an increase from the $2.8 million recorded during the third quarter in 2010. Including the reduction in litigation expense in 2011 our net loss for the third quarter of 2011 was $18.4 million or $0.19 per share as compared to a net loss of $22.7 million or $0.33 per share for the same quarter in 2010.

For the first nine months of 2011, total revenue increased 20% year-over-year to $40.4 million. Gross margin for the first nine months of 2011 was 63% up from 59% for the first nine month of 2010. Total operating expense for the first nine months of 2011 was $77.8 million as compared to $118.8 million for the same period in 2010.

As mentioned previously, this reduction resulted primarily from the decrease in litigation settlement expense which is nonrecurring in 2011 but was $48.8 million in the first nine months of 2010.

Net loss for the first nine months of 2011 was $52 million or $0.52 per share as compared to a net loss of $98.8 million or $1.44 per share for the same period of 2010, again reflecting the reduction in litigation expense year-over-year. And the additional cost of IP licensing and collaboration costs.

As of September 30, 2011, total cash, cash equivalents and current investment securities were $101.2 million. Net cash used in operating activities was $33.2 million for the first half of 2011. While purchases of capital equipment for the same totaled $13.2 million funded primarily through the utilization of the company's credit facility.

We continually work to balance our conservative cash management controls with our dedicated approach to innovations and commercial development, allowing us to grow while focusing on our priority expansion programs for the near future. We would expect our operating expenses to increase following the recent launch of MaterniT21 laboratory develop test as we further invest in expanding our diagnostic segments capability in the months to come.

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

Harry Hixson

Thanks, Paul. As always we've only been selling MaterniT21 test for two and a half weeks. We are encouraged by the response we have seen so far. It will take time to develop reliable trends and uptake in adoption, and to build a foundation for reportable metrics on performance.

We'll make every effort to communicate clearly and to provide insights on our operations, if these measurable metrics develop and become reliable. Until then, we will offer whatever transparency we can into our expectations and observations in addressing the markets during public events and conferences coming up soon and throughout the rest of this year.

We look forward to providing you additional updates on our progress in the weeks and month ahead. The net summary of our business and financial update, we would now like to open up the calls to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from David Ferreiro at Oppenheimer.

Josh Schultz - Oppenheimer

Hi, guys, this is Josh sitting in for David. I have a couple of questions relating to launch and the ramp. I know you guys, just initiated a facility in North Carolina and that you kind of building that up. I think you mentioned around 240 employees that you are going to have there.

Just think about, kind of, what your expenses are planning to be around that and expenses of our sales and marketing. And I know mentioned during the script, that you can do about 100,000 tests in the other facility. And kind of how that's going to be play out and where the tests are going to go?

Harry Hixson

Well, first let me address the North Carolina facility. We are in the process of entering into a lease for that facility. The State of North Carolina did announce a number of FTEs, and estimated capital investment that where part of our proposal to the State. But just to put that in perspective that was over a five-year project life. And they came back to us with a series of incentives that would spread over nine years.

So while we haven't finalized our 2012 budget yet, suffice it to say that there is a lead time in getting a backup site. And that would be the first reason for having a North Carolina facility a backup to our San Diego lab. Secondly, for future expansion and there is lead time in getting CLIA-certified and CAP accredited lab, in place.

So we identified a facility that would require a build out, the landlord will fund some of those tenant improvements. And then, one of the reasons we've put our credit facility in place earlier this year was to help in financing capital equipment, which would include tenant improvements and sequencing equipment, as we move forward.

So one of the things that's important to note on, that is we can control the rate of expenditures on those project. And we can calibrate it based on the market adoption for the product. But since there is a long lead time, we have said that the earliest, that we expect this other facility could be operational, would be towards the end of 2012.

Josh Schultz - Oppenheimer

And then in terms of, talks with our payers and reimbursement, just in the kind of, initial short time, you guys have been on the market now. What's up in like in? And what you're hearing in terms of the acceptance?

Bill Welch

It's a very exciting time. It is early from the payers' standpoint. The process goes; you don't need to educate the provider, get the blood drawn, send it and run it, within 8 to 10 days, and then bill. So we're in the process right now of our first round with payers.

But I would say that the reimbursements methodology, we put out there, for the doctors, have been well accepted. They understand that the private payers were taking on that billing risk, and are engaging with them. And on those that are in state Medicaid or managed care, we've asked for propositional. We actually have gotten some of those. And some of those are going through. So it's just incremental early days, I would say, nothing unusual. And we haven't gotten, I guess, I wouldn't say, a number to say, what we're getting paid back, but I think it's what we expected.

Operator

Our next question comes from Bill Quirk at Piper Jaffray.

Bill Quirk - Piper Jaffray

First, question Harry or Ron. I guess to the extent that you as know, can you talk a little bit about how the test is being use? And I assume that for the vast majority it's taking towards the indication is. But do we know if this is largely, in conjunction with or perhaps is a reflex to amnio?

Ron Lindsay

I think, the simple answer is we don't have enough samples and the data in terms of patients to make any correlation, at this point. But in general terms, just to reemphasize the test has intended uses for high-risk women in the 35 or older category, who have positive ultrasound or positive serum screen. So that is the message that we are firmly sticking to terms of our sales activities, and also in terms of the recent guidelines that were issued, very quickly by the International Society for ISPD, Prenatal Diagnostics.

Bill Quirk - Piper Jaffray

And then two quick ones from me here, one, how do we think about expansion plans beyond the initial 20 metropolitan areas, and then secondly, and I apologize if you have mentioned already. But any update both on New York and California, approval for the LDT?

Harry Hixson

Well, we are in the midst of our 2012 planning. But we had a board meeting last two days. We gave them a preliminary view, what that would look like. We will not give final approval for our 2012 plan until our December board meeting, in our research or some of the expansion goals for an addition of additional territory, say in the prenatal area, but until our board approves the plan, I can't really say what we can do. But we do have plans to expand that next year.

Bill Quirk - Piper Jaffray

And then just to comments on the Californian and the New York lab approvals?

Bills Welch

So in New York, we filed our application for MaterniT21 around the launch time frame. We know New York is going to want to inspect us. And we're engaged with them. And that will take some time. And on the California work, we're active in California. California does have one group that's a prenatal screening group for product California and want to work with them like any group to go in and essentially in network with them. But in terms of the non-and-network portion of California, we can do that today.

Operator

Our next question comes from Nandita Koshal at Barclays.

Nandita Koshal - Barclays

Firstly, I am wondering if you could about your interaction with the ISPD in the preparation of their positions taking beneath a common noting that Down syndrome represents only about half of the chromosomal abnormalities identified through amnio and C.V.S. Are they aware of the T13 and 18 publications that's coming up? And are they waiting for that before they get behind this slightly broader applicability of the test?

Paul Maier

I think to be honest we had no part in this coming out. We were very, very pleasantly surprised this came out so quickly. I mean, this is a pretty unusual for any organization to gave guideline within a week of a test been launched. And I think, there are obviously a couple of small publications already out there, particularly the biggest one in terms of numbers, from Dennis Lo in terms of 18 and 13.

I don't know off the top of my head whether Downs is about half. I suspect this is probably a certainly more. But I think, as we've said for a long time, the priority of this study and our initial launch was for the really important unmet need of the noninvasive test for Downs.

And as we mentioned before, 18 and 13 are very well picked up by ultrasound relative to Downs, which somewhat makes the noninvasive component that are already very well covered. And I think as most people know the vast majority of 18 and 13s do not survive either to a term or after birth. So we've always considered the medical needs were strict for T21. In addition to that, the beginning, certainly, I think most folks. And we would agree, would find pretty hard to anticipate getting enough cases to do a fully, statistically powered study. I think as we've gone forward with our women-infant study, I guess it'd be a neutral incidence of 18 is probably rather higher than you would predict from the white books, which is the only data currently available. And I think it is possible in the future, one may be able collect enough 18s to have around 80 or so to do a precision study.

And obviously it's part of the women-infant that were significant number of other aneuploidies, then 21, and that, as we have announced, will be the subject at least for 18 and 13 of Manuscript that has already been submitted.

In terms of the test itself, we have said, that should we detect these at the movement by our methodology. These will be reported to the doc, with the caveat that there's no precision around that, currently available, in terms of a fully powered study. But, we're pretty confident that will be useful information.

Nandita Koshal - Barclays

And could you maybe talk about the logistics of the test. Just remind us, how the process works from patients' perspective. I've had some question around. Are there major pain points, which will active barriers to adoption either on the part of doctors' or the patients'?

Harry Hixson

Currently, the patient, the expectant mother, goes to a drawing site. We have the almost 40 in places around the country and the sample is prepared there. There is some centrifugation and then frozen and shipped to our laboratory. We anticipate that we will have an additional method of sample collection and shipment available to patients' by mid-year, next year and that will greatly simplify matters for the patient. Although with our 40 collections throughout the country we think that's not a barrier to test acceptance.

Nandita Koshal - Barclays

So by mid-2012, this becomes a blood draw the physician office then?

Harry Hixson

We think second half of '12.

Nandita Koshal - Barclays

And maybe just lastly, Paul, if you could talk about capital adequacy, at this point, just major sources and uses of cash for the next six months to 12 months. And at what point, you might consider accessing the capital markets again?

Paul Maier

Well, we don't give specific guidance on cash burn. I think if you look at this year, we have managed our cash very prudently. We put in the credit facility which is helped us finance the capital equipment purchases. And we're in a very strong cash position right now. And we believe that our current cash will cover our expected needs through the beginning of 2013.

However, we have said previously that we would expect another financing in 2012. And after we've launched the product and the timing of that will depend on market conditions and number of other factors. But we're quite comfortable that we've got a capital in place now to move forward and implement the launch with the necessary resources.

I would also add that in the past, we have noted that we would have the ability to control the expansion. And so we have a sales force investments right now of 20 field reps, and as we see the adoption curve improved going forward, we'll have the ability to expand the investment for the T21 sales force. As well as we take the same approach on AMD since that's a little different product area.

Operator

Your next question comes from Kevin DeGeeter at Ladenburg Thalmann.

Kevin DeGeeter - Ladenburg Thalmann

Just a follow-up on the last point, would the simplified blood collection process, that you launched by second half of '12, include room temperature shipping or is that process continue to be, sort of, on ice?

Ron Lindsay

I think potentially, ambient temperature is the appropriate word.

Kevin DeGeeter - Ladenburg Thalmann

With regard to addition steps to automate sample prep, is that, sort of a 2012 processes as well or should we think about that is a longer term project?

Ron Lindsay

I think probably both. We've been saying, for most of this year, in fact that we wanted to focus on the launching this test. And we will aware that were certain inefficiencies in the process from collection through the lab. And obviously doing the validation, get in the test, was key. And we're in the process of tackling certain parts of the automation which we will feed into what we might call of version 2 of the test including a better collection method and we will continue to do that as we go forward. So this will be an ongoing process, while we see some improvements in '12 and further improvements in '13.

Paul Maier

And we also would expect to see some improvements in the equipment that we receive, and consumables, from our suppliers as well.

Kevin DeGeeter - Ladenburg Thalmann

Are you optimistic that ACOG will have some comment in 2012? Is that a realistic time frame and I guess sort as a sub point, how do we think about, ultimately, issue of treatment guidelines?

Ron Lindsay

I think that's more independent to that. It's up to the organizations, up to the positions. This is itself motivating organization, so the timeframe is in their hands to a larger degree.

Bill Welch

I don't think it's something that we can indirectly approach of about and advocate on treatment guidelines. But we would expect that the ACOG is into this. And they would be taking about appropriate recommendation to their members.

Operator

The next question comes from Brian Weinstein at William Blair.

Brian Weinstein - William Blair

I think, I heard you guys say, as it relates to FDA, that right now you guys are looking at doing a high risk study with FDA approval study, and maybe, eventually a low risk study. We had kind of assumed that low risk study would part of the initial study that you've been doing with FDA. Does this mean that, they may not be satisfied with the women and infant study and they want a high-risk study first and why, kind of, go down that path of high risk and the low risk?

Paul Maier

We are in discussions with the FDA about the protocols that would be required to get this test approved. The women's and infants study would not satisfy them for a number of reasons. One of them is it the FDA always likes to prove the protocols before you start the testing. And the second is a number of the samples in the women's and infants study came from outside of the United States. The FDA prefers that all the samples come from within the United States.

So we have always in our discussions with the FDA, said we wanted to focus on the high risk market. And we would have a study that was focused on the high risk of pregnancies. As we have defined them as entrance criteria for the women and infant study, that we had also suggested to them. But a small low risk study would be part of our testing for the just high-risk population.

The FDA, I believe, things that perhaps, there might be some leakage of this test into the low risk pregnancy market. And they will want to know, how it performs. So the size of that study in their discussions for low-risk has not been a large study, but we are still in discussions with the FDA about to design of protocols of these studies.

Brian Weinstein - William Blair

Any idea about, when those discussions may conclude. And we might here about when you'd be able to start that FDA-approval study?

Harry Hixson

The FDA doesn't like for companies, to give them target date. So we have our own ideas, but we wouldn't say them, publicly.

Brian Weinstein - William Blair

Understood, next question is how many covered lives do you guys have within the payers that you guys have already spoken with?

Harry Hixson

It is early the payer game, but the payers represent, we're focused my private payer market, which in the high risks groups about 70% with the total pregnancies. And so that's our target market. We have got a series of senior executives that have contracts for the variety of payers. And they have reached out, and I think, in terms of when they reached out to early, it probably is about a $133 million potential lives they cover. So this is about getting volume and engagement, but it will take some time. Essentially, the group was most focused at acutely at launch, is this private payer group.

Operator

Our next question comes from Elemer Piros at Rodman.

Elemer Piros - Rodman

So my question is if you look at the audiences, and especially for now focusing on high-risk pregnancies. What percent of the women would actually see the genetic counselor before? Or who would make a recommendation of your test, as opposed to the OB/GYN, themselves? So knowing this number or guesstimating this number. How do you target these two different and distinct groups in your marketing message?

Bill Welch

In terms of the way we've gone out, we've targeted it essentially. If you take the total provider pool of maternal fetal medicine specialists, which are essentially, the specialists for pregnancies on top of the high volume, OB/GYN. So they do abort the pregnancies. That group about 4000 to 5000 gets about 60% of the marketplace and we can reached them as we mentioned with our 20 major regions.

And so, within those groups they are often, either have on staff, or partner with genetic counselors. It's a native term for the entire process. We have both, a medical affair group that we're expanding, one which has joined us at genetic counselor. We're also a party with genetic counselor and have a third party company that does genetic counseling, advice to providers should they that. So the core of our business is really, when you think about the high-risk births, its with the MFMs, high-end OB/GYN's and their genetic counselor that work in conjunctions, that try is really the peak we look at.

Elemer Piros - Rodman

Now, I don't know Harry or Ron if you would care to comment, Verinata seemingly getting close to a large publication as well. How do you currently view and they are building up a marketing effort. How do you view them and you being the one at the marketplace at the same time?

Harry Hixson

Well first we believe that they would be infringing our 540 patent, which is issued in the United States, on the use of circulating cell-free fetal nucleic acids. And, in order to enter the market, they would be infringing that patent. There are other patents of ours that are proceeding we think nicely, in the patent office, which would also, we think, prevent them from entering the market.

So that's the first response. The second is, we think we have the first mover advantage. We are going to capitalize on that. We think our test that has established impeccable performance. The fact that that they would use our clinical results in there presentation is somewhat indicative of, what is it, indications with sincerest form of flattery. But I have always told everyone at Sequenom, that mentally, we should be expecting competition in the marketplace. If we don't have it then that's not plus to our benefit, but mentally we ought to be prepared for it. So, that's I think probably is much I have to say.

Elemer Piros - Rodman

And lastly, is it safe to assume, Ron or Harry that you would probably initiate the PMA study once you have sample handling perhaps even automation, buttoned down to a larger extent?

Ron Lindsay

We're currently working with FDA on what we've called the long leap items, in terms of what would be involved with PMA. Clearly we would like to lock in as much of the advantages of any automation into the ultimately submitted test. As you know once you file and get PMA approval, you can't make amendments. But it's a little harder than doing that in CLIA lab. So there's a balance between getting the PMA approved and wrapping into that as many improvements as you can before you commit to that lock process.

Harry Hixson

There is also the advantage of having an alternate laboratory like the North Carolina facility, where you could have your IVD tests in that laboratory. And you can have the LDT in the other to cover the conversion from one to the other, and once the IVD is approved. But, the others, we can't start anything in the way of the studies until we have agreement with FDA and the protocols.

Elemer Piros - Rodman

You can collect the samples?

Harry Hixson

Quite honestly, I don't think we would commit to collecting samples until we knew exactly what the protocols were, but the entrance criteria would be.

Operator

The next question comes from Jon Wood at Jefferies.

Varun Dua - Jefferies

This is actually Varun Dua for Jon Wood, this evening. A couple of quick questions firstly, on your T13 and T18, I know you wouldn't want to talk about, you wouldn't want to get into the details of it. But can you comment on if the T13 and T18 would actually be run on the same sample and in fact the same run as T21 or would you require two different runs, because from, looking at the locked assay study, it seems like T13 and T18 was optimized for two flex and T21 is optimized for four plex?

Ron Lindsay

The answer is they'll be run as eight samples they'll submit here for potential and aneuploidy detection. That is exactly how it works, so that you don't run both samples. And I think you would find that when that final publication around 13 and 18 is that we've optimized it for detection of either 21 or 13 or 18. So there is no need to run two samples. It's a singular process.

Harry Hixson

And that the T13 and T18 papers, is out of the women's and infant's study and those were just samples that if we shift to us, we had no idea. We just ran them with our regular protocol. And the paper will show the results of that.

Bill Welch

It's worth commenting that between the locked assay study, and what we ran for the women infant, we move to the iSEQ. The original study was done on the GA2x. We did a validation study, internally, that we have not published on the iSEQ before we walked on that. And that was on the same plex as we used in the women infant study. So as Harry said, samples have already been run. They're going to be published exactly under the same protocol.

Varun Dua - Jefferies

And then on your AMD assay, it has been out in the market for like five months. Can you comment on how is the reimbursement tracking for that?

Bill Welch

Yes, it's going fine. It's going as planned. Majority of that is with Medicare payments. But the prior is going as we have planned as well. It's the early days, because in that one we're creating a new marketplace and in most recent talks, it is interesting, genetics is definitely taking a higher role as you think about Retina Specialist communities. But in terms reimbursements, it's all coming in.

Varun Dua - Jefferies

And lastly on your genetic analysis business, it seems like the operating margin did declined significantly for around 32% in second quarter to less than 20% or close to 20% in third quarter. Can you comment around the reasons for that, is that entirely driven by gross margins and mix shift in the products?

Ron Lindsay

Well, first of all I'm not sure what margin you're looking at. The gross margin while it did decline compared to third quarter of last year, it's still very strong. And for the first nine months of the year, it's ahead of last year by a significant portion. The mix did changed a little bit in this quarter. But consumable sales were driving the growth year-over-year. The business is exactly where we thought it would be and from a gross margin point of view it's where we thought it would be as well.

So it's not growing at the rate it did last year but it continues to grow in an environment that where we continue to hear about cutbacks and NIH budgets and what have you. But our business is strong, outside the U.S. particularly in Asia. So we expect that we'll have a solid business going forward. And typically the fourth is a little stronger. And the third quarter is usually the weakest quarter of the year.

Varun Dua - Jefferies

And last if I could squeeze this to one more, you talked about 20 sales reps. Is that dedicated for the T21, or is that for all the diagnostics?

Harry Hixson

That's prenatal. So the benefits, we launched MaterniT21 is, one, to look to try to get in-network with payers, going forward, and also it's pulling through our other prenatal test, which is our HD test and our CF test. The AMD reps are separate from that.

Operator

Our next question comes from Zarak Khurshid at Wedbush.

Zarak Khurshid - Wedbush

So just curious, what is the strategy for penetrating the large payers in navigating their tech evaluation committee requirements? And would it be realistic? Do you think that they would endorse prior to FDA approval?

Bill Welch

Yes, so great question. The payer profit is when that evolves most times. My experience is payers will pay. We can negotiate a price that we are looking for. They are usually unless it's a closed system payer. So private payers are used to paying for and not wanting to restrict, because I get out in front of it negatively, it could negatively impact their beneficiaries. I think they're looking to see other volume goes, and it's less on price.

As we go forward go forward, and guidelines kick in, they more likely would come along with those guideline, and try to, for instance, if this says this test is solely for higher risk. And we would partner around the high-risk definition to work with them, to make sure that that took place. That's a benefit contracting. But between now and end of contracts. We expect to get paid a percent, or full amount of these prices, it will vary by payer.

Zarak Khurshid - Wedbush

As the last follow-up, what kind of studies would you be running to demonstrate the equivalency of the ambient shipping method?

Ron Lindsay

That's simply an analytical study in the lab. That's not pretty standard CLIA-lab activities. So there is nothing spectacularly complicated. That we have a very thorough study designed, but we are not going reveal it, but there is nothing very complicated about it.

Zarak Khurshid - Wedbush

And a last follow-up, just maybe a question for, Bill, you mentioned the 60% of the marketplace. I think it's touched by the genetic counselor. Can you just clarify what exactly that means in other words, how many high risk women were actually referred to and end up seeing the MFM and the counselor?

Bill Welch

Yes, just to re-clarify. I did not say 6% by genetic counselor. I said that our 20 metropolitan regions, we would be able reached out to about 60% of the prescribing positions. But we're not everywhere. There are some gray spots and colored spots. But in the colored spots people about 60 of all providers have access in our system. Obviously we would like to add more reps their and reps in the gray spots. But we feel like we're in a very good position to reach out to positions.

Regarding how much to genetic counselors, I think our target audience are the genetic counselors, are the maternal fetal medicine specialist and high end OBG /GYN. They all worked cooperatively. And especially as we think about where we're going, that's one triage.

Zarak Khurshid - Wedbush

Any sense for where your samples are coming from currently, is it mostly MFM's or OBG /GYNs?

Bill Welch

It's a mix. A lot of the caution is that how far they want to go with essentially with these test results. So I think, that's all being worked out. And it's interesting the ISPD, in a week one, came out with the statement. I think you'll see a number of these things over the next few months or more, when various people come on board, and may re-qualify them, as they get more comfortable, you never know. So it's just too early to say exactly but I think all three of those groups are welcome to order the test.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Marcy Graham for any closing remarks.

Marcy Graham

Thank you for joining us today on the call and your interest in Sequenom. Certainly if you have any further questions about the results or additional information about other points, feel free to give me a call at the Investor Relations department, 858-202-9028. Thanks.

Operator

The conference has now concluded. Thank you for attending today's event. You may disconnect.

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