Sequenom's CEO Presents at Lazard Capital Markets 8th Annual Healthcare Conference - Conference Call Transcript

| About: Sequenom, Inc. (SQNM)

Sequenom, Inc. (NASDAQ:SQNM)

Lazard Capital Markets 8th Annual Healthcare Conference Call

November 15, 2011 8:30 a.m. ET


Paul Maier - Chief Financial Officer

Ronald Lindsay - Director and EVP of Research and Development

Harry Hixson - Chairman and Chief Executive Officer


Sean Lavin - Lazard Capital Markets

Sean Lavin - Lazard Capital Markets

I think we will go ahead and get started. I am Sean Lavin, medical technology analyst here at Lazard Capital Markets. Today we have the full Sequenom team. Harry Hixson, CEO, is going to start off. We will also hear from Paul Maier, CFO, and Ron Lindsay, Executive Vice President of Research and Development. Thank you.

Harry Hixson

Thank you, Sean, and thanks to Lazard Capital for inviting us and thank you for coming to our presentation today. This is our forward-looking statements slide and safe-harbor and I think you should familiarize yourself with that. Sequenom, as a company, we operate in two segments. We have a genetic analysis business which is the early part of our business. More recently we have moved over into molecular diagnostics.

The core business that we have right now, most of our revenue comes from the genetic analysis business and the instrument sales, and the consumables. This business is transitioning from academic research work that started originally into the translational applications and clinical diagnostics. From our genetic analyst business we are seeing most of our new and interesting opportunities for molecular diagnostics. So the genetic analysis business and the molecular diagnostics business so we think are synergistic.

Revenue in 2010 was $47.5 million, through the first three quarters of this year, $40.4 million. We have almost a million shares outstanding. We have locations in the -- main locations in San Diego. And we have two CLIA labs. We have a wholly owned subsidiary called Sequenom Center for Molecular Medicine. It’s a wholly owned CLIA, Clinical Laboratory Improvement Act Laboratory. And we have locations in Grand Rapids, Michigan, and we have one also in San Diego.

Our current LDTs, which are cystic fibrosis carrier screen, fetal RHD and age related macular degeneration test. Those are all tested on our MassARRAY platform. Those tests are performed and services in Grand Rapids. We recently introduced the trisomy 21 detection LDT, MaterniT21, and that test is done in CLIA laboratory facility in our San Diego operation.

I wanted to review with you our goals from 2011. We presented these at a healthcare conference in January 2011, and I just wanted to -- we have been keeping you posted on how we have been doing throughout the year but at least this is for Sequenom Corporation. And we have met all of those goals. Actually we met them all by the end of October in ten months. We had a set of goals also -- some that were much more critical while the company was progressing, that related to Sequenom Center for Molecular Medicine, the LDT, CLIA laboratory.

These were -- we put these up in January, and you can see we had a pretty aggressive timetable. We met all of those. We did the same thing in 2010, and we showed our progress throughout the year, and we will do the same thing again in January 2012 for 2012 and we will keep you posted as we achieve them. We had a very good year, at least through the end of October. Since we met all of our goals and we are still pushing ahead pretty hard for the reminder of the year.

Our genetic analysis business has been very good for us. And basically good penetration of our target markets focusing now primarily on translational and basic research. Although we have a good business in pharma -- agriculture genomics, in pharmaceutical and biotech. In 2010, we had a 19% growth in revenue, year-to-year. The first nine months of the year were up 8% over last year. So this is basically driven by our new MassARRAY system, which is faster, better and much less expensive to manufacture for us.

Lots of publications. Over 250 in 2010 using this platform. We continue to develop research use only panels for the research community. This also is a key for our future molecular diagnostics as well. This is our current product profile. You can see we have Cystic Fibrosis Carrier Screening, Rhesus D genotyping. We have just introduced our trisomy 21 LDT. We also have our age related macular degeneration test which we introduced in the late spring. We are continuing to work towards filing a pre-market approval application for our trisomy 21 test.

We have been in discussion with the FDA about how to design these protocols and what other things would be required. We met with the FDA the last day of January. We have been in continuous discussions by telephone and email since then. We are working at the details of what will be required for us to file a complete PMA. The one things that’s very clear is that the -- there would be additional studies required beyond what we have already accomplished in the women’s and infant study, the study published in Genetics and Medicine. So, we have not quite reached closer with the FDA. Although I think we are getting quite close.

We think there is an advantage in having approved trisomy 21 test with the FDA. We can promote broadly based on the approved indications in the package insert. And we think that it sets up a higher barrier for competitors as well. Our current plan is we think we will file this pre-market approval application in 2013. Obviously, we will have to reach agreement with the FDA, and then we have to have the timely execution of the clinical trials and pre-clinical studies to support the filing.

Sequenom is a high technology company. We have been a high technology company since the very inception of the company. With respect to -- we have a comprehensive patent portfolio. I think we are -- a lot of people underestimate or don’t realize how much we have in the way of intellectual property protection. For the trisomy 21 test or anything in the pre-natal space, we have the issued 540 patent. It’s a Dennis Lo patent, it’s issued in the United States, and in Europe.

We have many other relevant pre-natal patents and applications that have issued -- that we think will offer us protection in this area. We also have two significant filings. It’s a 181 patent application on Random Sequencing or Massive Parallel Shotgun Sequencing. It’s filed in the United States and moving to the office. Same patent is moving through the European patent office as well. We are optimistic that we will have an issued patent to cover what we do in our T21 test, in both U.S. and Europe.

There is some question about who has priority, but I would like to point out that Dr. Lo’s filing for Massive Parallel Shotgun Sequencing was 14 months of any other filing in the area. So we believe we are going to have priority here. In addition over 500 other issued and allowed patents and we have over 300 pending patent applications.

I would like to shift now to the trisomy 21 market opportunity. This is data from a government publication. I believe it’s 2007, if you read the fine print. Anyway, we are focusing on the high-risk market. If you say advanced age as is currently begin said, but this data it makes cuts at five-year intervals. For age 35 to 49, there is some over 600,000 of these high-risk births. And in addition there are other, another 140000 that come out as the low risk group. Previous history of some problem. A positive screen or an ultrasound did indicates that there might be something wrong. If you add these together, this is about to 750,000. This is a large market. I would like to point out that it’s roughly equivalent to the number of new cancer cases in the United States every year.

So this is what we are focusing on. Our clinical studies in women’s and infants study addressed this market segment. I would like to turn this now over to Ron Lindsay.

Ronald Lindsay

Good morning. So the rest of the presentation will really focus on the development of our MaterniT21 test. And may be just before being into that, a little bit of detail, the kind of background to this and what was the driver to developing this test.

As some of you may know that Down syndrome or Down’s syndrome, as is called in the UK, that was first characterized in 1866. It took almost 90 years before a potential molecular. It took almost 90 years before a potential molecular mechanism was recognized and that was due to the advent of carrier typing, a histological method where you can look at individual cells and chromosomes. And in the mid-1950s it was pretty clear that an extra-copy of chromosome 21 -- chromosome 21 is a small chromosome and that’s actually why it didn’t allow to do that, even although carrier typing had been probably discovered some years prior to that.

It wasn’t till the late 60s, specifically in 1968 that the first utility of that in a clinical setting was the advent of amniocentesis. An invasive method that would take advantage of carrier typing to be able to identify that extra copy of chromosome 21, and potentially has been used since to identify other genetic disorders such as trisomy’s 18, 13, sex aneuploidies and other things. Now while these procedures are pretty accurate in terms of that, certainly the invasive nature of that creates a lot of anxiety for the pregnant mother, but more importantly the miscarriage rate as a consequence of that is probably 1 in 200, amniocentesis.

So that’s particularly for women who are in their late 30s, who probably wait a long time to have a child, that risk of amniocentesis is a very significant risk indeed. Probably as a consequence of that, during the 70s to 80s, the advent of serum screening and ultrasound had tried to develop a similar non-invasive approach that will give you the same kind of performance. And I think one of the reasons we have been working on this non-invasive approach is that serum screening and ultrasound together, while very helpful in the last 30, 40 years, have a pretty low sensitivity and specificity. So there are a lot of false negatives and also more importantly there are a lot of false positives. So there are a lot of women who undergo amniocentesis every year, about 200,000 of which probably 190,000 are unnecessary.

The advent of this for us was a seminal discovery by our collaborator Dennis Lo in 1997 who discovered that fetal DNA in pretty significant amounts circulates in maternal plasma as little particles. So circulating cell free fetal DNA was the basis of this. So about five or six years ago Sequenom, as Harry mentioned, made the transition to looking to molecular diagnostics to our future and this was the first opportunity that we approached. We thought this was a very important test to develop both unmet need and value to the patient.

And since then we have been working on that approach, with one or two false starts, with thousand other people. But about two years ago we were pretty convinced that this new second generation sequencing approach was going to be really be able to crack this. And at that time we wrote what's on this slide, a product profile of the kind of test we wanted to develop. So the key to this is we wanted a non-invasive test that would have similar sensitivity and specificity to amniocentesis. That is in the high 90s, 99 plus in both cases.

We wanted this test to be applicable both in the first and second trimester so that it could be used early in pregnancy. In terms of being able to develop a test you need something to measure the analyte, which in this case is circulating cell free fetal DNA. You need an instrument that has the precision to do this reproducibly. And in that arena we have booked on two instruments from Illumina, initially the GA2x and more recently the higher throughput instrument, the HiSeq, which is the method we are using commercial.

To be able to do this test, to collect enough samples for a statistical study, which I will just talk about in a second which has been the major event for us in the last month, one had to select a higher prevalence population or the high risk group that Harry mentioned, that’s 750,000 births annually in the U.S., constitute a population where one could relatively easily collect enough samples to have a statistically powered study.

So the final components of this is in the actual test which is shown here. We collect two blood samples from a mother. The first one we will use for the test and in the rare instance where the first sample doesn’t yield a result we have a backup sample ready with us. So that is what will be deployed and is being deployed in clinical practice. The turnaround of this test is about 8 to 10 days, part of that is the sequencing and part of that is the preparation. This is very similar to carrier typing, so we don’t believe this time frame will be any different for either a physician or a patient waiting 8 to 10 days is quite likely.

In terms of our two goals initially and what we launched in the 12 or 17, is a laboratory developed test in our CLIA lab. Having done the analytical validation, which is what you have to do for that. And we believe doing a clinical validation study goes way beyond that. We felt it important to do a clinical validation study so that doctors and patients will be convinced by the test. And subsequently, as Harry touched on, we are also developing a test that we will take to the FDA in the future.

In terms of developing this test. The sequencing part is just part of it and certainly a very important part of the analytical precision, that is Dr. Van den Boom, who is behind you in the audience and his team, have been developing this test over the last two years. We have developed what we call a process. Part of this process is quality control measures in it to make sure first of all there is enough fetal DNA circulating in the sample that we have obtained. The quality control measures include measuring the library that you have to generate from the DNA, you initially extract. And also QA measures in the sequencing and the data analysis.

So altogether this is a fairly complicated process but works extremely well and we are very convinced with the performance. The initial cost of goods of this is quite high. It’s in the $500 to $600 range. Now that we have launched the test a lot of our focus is improving parts of this test, not just the sequencing component in term of cost. More of the upfront cost where we are developing automation approaches, better sample collection process, all of which are geared to make this test simpler for the patient and the doctor and also in terms of the cost of goods in the future.

Within a CLIA lab, all you have to do is actually show analytical performance of the test, but as I said we felt that very important to do a large study. This is potentially a game changer in the fetal maternal arena, and therefore we want to drive this with independent publications. So the key study that we published with our collaborators and independent PIs in October 17, was based on what we call the women and infant study. This was a sample collection that was collected over two years. There was a simple goal in this study, to get at least 200 cases of confirmed Downs by amniocentesis or CVS, in women who were in this higher risk group, who were going to have an amnio or CVS and prior that to that there was a blood draw.

The sample was conducted entirely by the PIs of Brown University, the leaders, in sites -- there were 27 sites to collect samples all over the world, so this is a broad study in terms of ethnic background we felt is important. But most important this was blinded to us at all stages. So the samples were collected and the only goal that we really indicated, we wanted to have at least 100 cases in the first trimester and 100 in the second trimester. So that when the test results were completed we would have confidence if it worked well, those statistics would indicate this could be broadly used, and enough power to show the confidence around this test. So this process was carefully thought through and every part of this as I said was blinded to us, and has, as we said, was published on October 17.

In terms of being able to collect those samples in the higher risk group, that’s the women of an advanced maternal age, anybody who has had a serum screen, anybody who had ultrasound that looks potentially a problem, or has any family history. So those women who are enrolled in this study, to obtain the 200 plus samples that we required overall, there was a 4664 women enrolled in this study. I won't go into the details, you can find those in the paper, but the final clinical design of this was what's called the nested control study. Wherein based on gestation, site, ethnicity controls were matched with cases in a 1 to 7 ratio.

Just as an aside, some people have mentioned that this kind of study may not have validity, I encourage any of you to read any statistics journal in turn. This is a very valid study designed for looking at low prevalence disorders in a commercially, or financially feasible manner, and is widely used both in therapeutics and diagnostics. So the final study enrolled 212 cases and 1484 controls. All of which were run in our lab and a subset were run in an independent lab at the university UCLA in California.

The final results from this, I won't go into the details, but simply what this test does is identify the small additional amounts of chromosome 21 which are present in the plasma of a women who is carrying a foetus that has an extra copy of chromosome 21. So that small additional amount of chromosome 21 can be detected by sequencing. The measure of that is called a z-score, again I won't go into that, you can look this up in the publication. So a cut of z-score where we think the foetus is fine in terms of that is below 3, and any sample that has a cut-off in this particular study above 3 is deemed and convinced to be that.

So in this study the results of the z-score are matched to the outcome of either amniocentesis or a CVS. So we know the outcome of the carrier type of these patients. So these results are benched against the gold standards. So as you can see in here, the test is very accurate in terms of the overall values. The blues representing the controls or the euploid normal fetuses, and the reds were cases where the fetus had an extra copy of chromosome 21.

The summary results for the in the next slide. Just the initial analysis of that shows a sensitivity of 98.6 and a specificity of 99.8. In this particular group there were three false positive and three false negatives. Prior to commencing this study, we were aware and well published by other groups that there is -- I won't go into details -- is a methodology where you can correct for some of the small problems of sequencing, so called GC bias and repeat masking. So when we applied that in our well characterized methodology to those results, we improved just a little bit more to a sensitivity of 99.1, where two of the false positives were able to be correctly categorized and one of the false negatives was able to be correctly categorized.

The reason for doing this additional analysis, this is what we are going to do in clinical practice in our commercial tests. So the numbers that we go to market with, our sensitivity of 99.1 and specificity of 99.9. Very close in all intents and purposes to amniocentesis. The test was launched on October 17, within three days we had -- the first sample was delivered to us. This is simply the (order form) and the report and obviously right now commercialization of this test is our major goal.

So I will hand over to Paul for the last few slides.

Paul Maier

As Ron said, we have less than four weeks worth of marketing this test so it’s a little early to extrapolate what the adoption curve might look like. But we present here three different scenarios. This is not guidance. However, I wanted you to know that we do have in place all the infrastructure. We have been promoting our CF test for over two years now and so we have the medical affairs, customer support, reimbursement specialist and the sales team in place. We have 20 reps in the field that address the major population centers, and as the adoption improves, we will add additional resources so that we can continue to grow the market.

We also have the capacity in place to do approximately 100,000 tests on an annual basis. So with the most aggressive curve here of 60,000 units, that translates to the run rate of about 100,000 a year, in the fourth quarter of next year. The revenue makeup of this product will come in several pieces. First of all, we are targeting the private pay market which is about 70% of the population out there, of over 35. And we have established an out of pocket co-pay maximum of $235. We expect reimbursement to near that of amniocentesis or CVS, and it will come in several different steps.

We will use cost -- cash accounting initially for revenue recognition and as soon as we have enough experience and we have some contracts in place we expect to adopt accrual accounting by the end of 2012. We will report the volumes of tests performed on a quarterly basis when we go through our earnings calls in the future.

We thought it would be helpful to show the impact of cash accounting because you will not easily be able to determine what average revenue we’re achieving per test. And in this case if we took a January 1 test, we will incur the cost upfront and we will report those at the end of the quarter. We will achieve whatever co-pay the patient pays, we will bill the provider, the payer and probably within 90 days we will receive the first payment out of network payment. We expect that we will appeal and we will receive another payment. It could be up to 180 days afterwards. So the cash comes on a slower basis. The unit volumes will be reported on a quarterly basis. So there is not a simple way to determine exactly how much revenue we are achieving.

But as we put contracts in place with individual payers, we will report those on an accrual basis. Another way of looking at it is, here’s an adoption curve over the number of tests we bill. In the green area, the cash collected which lags the costs that are incurred as well as the test reported. When we do switch to accrual accounting at the -- expected at the end of the year, there will be a onetime bolus of revenue that we pick up. And so at that point going forward our reporting on an accrual basis will be representative of what the revenue per test is because the cost and the revenue will be mashed.

One of the other areas that we are spending our time on going forward is reducing the cost of goods. After the first quarter or two we expect that we will be in the range of $500 to $600 per test, after the initial launch. This pie chart depicts the areas of cost. The biggest opportunity for us for improvement will be in the logistics and shipping. As we go to an ambient temperature tube and as well as volume picks up, the amortization of the equipment and the lab overhead and labor will also improve.

If you look out 12 to 18 months, we expect that 30% to 40% improvement will be achieved in the cost structure, and that would be excluding royalties. Royalties are high single digits and are based on cash collected and the rest of the components so we do expect to come down. And this will be an ongoing improvement. The improvements we expect are increased multiplexing for the technology improvements, also flow cell and reagent enhancement by our supplier. As Ron mentioned we do intend to automate some of the front end processes, and as volume grows we will also see the benefits of that.

I think most of you are familiar with our financial results. Our year-to-date sales for the first nine months, little over $40 million. We had a $102 million in cash as of the end of the third quarter. Our burn rate was $45 million for the first nine months and that excludes the credit facility we put in place which we are using for capital investments.

That ends the formal presentation, thank you very much.

Sean Lavin - Lazard Capital Markets

Thank you. We are out of time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!