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Executive

Harry Hixson Jr. - Chairman and CEO

Sequenom, Inc. (SQNM) 30th Annual J.P. Morgan Healthcare Conference January 12, 2012 10:30 AM ET

Unidentified Analyst

All right. We’re going to go ahead and get started. Welcome to day four of the J.P. Morgan Healthcare Conference. This morning we have Sequenom and Dr. Harry Hixson, who is Chairman and CEO. Please silent your cell phones and the breakout will be in the Olympic Room.

Harry Hixson Jr.

Thank you, Allen. And thanks very much to J.P. Morgan for inviting us to present here at this the most important healthcare conference of the year. I’m also very pleased to be able to treat you today and to tell you about the outstanding year that Sequenom team had in 2011, and little bit of our plans going forward for 2012 and beyond.

I’d like to remind you that we are going to be making some forward-looking statements and you should carefully read this safe harbor statement as well.

Sequenom is composed of two operating segments, the first is our original genetic analysis business, we sell a MALDI-TOF mass spectrometer, consumable reagents and research use only panels for translational medicine OncoCarta and ADME panel for drug development. The other segment is molecular diagnostics business, which is centered in our Sequenom Center for Molecular Medicine.

I’m very pleased to report that for 2011 our revenues were up approximately 23% over 2010, just to remind you that those are preliminary and unaudited numbers. We are very pleased that in the very adverse environment in 2011 that our genetic analysis business should a 6% growth in revenue for the year and actually each quarter during the year, we were better than the same quarter in the previous year.

Our Sequenom Center for Molecular Medicine built a 21,000 prenatal and retinal diagnostic test in 2011. I think is important because we now have a revenue to cover our investment in our infrastructure that’s our billing, logistics, medical affairs, and sales force efforts going forward. And we plan to take advantage of that and we have successfully demonstrated that we can obtain reimbursement for this test as well.

We have about 350 employees worldwide, and two CLIA labs one in Grand Rapids, Michigan, where we do our MassARRAY; and in San Diego where we do our MaterniT21 test. This is our product portfolio in molecular diagnostics. I think the most important thing here is that we have introduced MaterniT21, and we did that in October. And that we continue to work with the FDA to obtain PMA approval for an LDT test for T21. In December we submitted to the FDA a clinical plan for clinical study for that LDT test. And we continue and expect to have discussions with the FDA in the first quarter of this year. We also introduced our age-related macular degeneration tests and we are seeing some initial success there.

In 2010, in January at this meeting and in 2011 in January this meeting, we laid out goals for ourselves for the year, and we during each of those years as we progressed through the year various financial meetings, we kept you apprised at how we are doing in those goals. In both 2010 and 2011 we achieved all of our goals as you can see in the checks in this box. Most important of course is the introduction of the MaterniT21 tests in October and also that we introduced our AMD tests, the RetnaGene LDT.

So, in keeping with that tradition, these are the goals we have established for ourselves for 2012, and that we expect to keep you posted on as we go through the year. For our Sequenom business, this is not the molecular diagnostic, we expect to file with FDA a 510-K for our MassARRAY system. We expect to continue to introduce researching (inaudible) for the MassARRAY platform throughout the year.

We also expect that the we present the slow random sequencing pattern or issue in that in 2012. As we have been saying for over a year, we expect to raise capital sometime in 2012 likely in the first half. We at least since base in North Carolina, for a second CLIA lab where we could do the MaterniT21 test. And we expect to have that built out by the end of the year. In 2011 we also licensed LifeCodexx to the patents and technology for our T21 tests in 2012, we expect to have additional licensees established in Europe and we should look for those to appear at various times during the year.

For the Sequenom Center for Molecular Medicine, and we have more aggressive goals, we expect to increase our field sales force from current 20 to over 50. Basically doubling the T21 sales force, doubling the AMD sales force, and now that we are allowed to sell T21 in New York State we are going to add additional three reps in New York State.

We have established a minimum goal for T21 test to be built of 21,000 for the year. I will speak a little bit more about that later in the talk. We have a goal of having contracts with at least two national payers for reimbursement for T21 during the year. We have submitted and had accepted a paper on the T13 and T18 portions of the women’s and infant study. We expect that to be published in Q1, quite honestly we know that the electronic version of that will be ready and available in four to six weeks.

A significant improvement which we had originally put in place for it's a goal for 2012 was to convert shipping of our T21 samples to Ambient Tubes, and we actually introduced that in the middle of December. So, those are available for physician and customer base throughout the U.S.

We are working very hard on reducing the cost of goods sold for the overall process for T21. I will speak more to that later in the talk. We want to obtain the New York State licenses for all of our CLIA labs and hope to have that done by the end of the year. We have a significant study for age-related macular degeneration test, over the (inaudible) samples we expect to have that completed by the end of the second quarter.

So, I’d like to now talk about the MaterniT21 launch. This was a cold launch, because of the confidentiality of the publication and the data. Very few people in the company knew about this. Our sales force did not know about it, so when we launched on October 17, we had to tell the sales force the details of the performance of the test, they are obviously very pleased, but it was a cold start.

We focused on maternal-fetal medicine specialist and [high volume] OB/GYN which is about 7500 MDs throughout the U.S. Our initial coverage was in 20 major metropolitan regions, we were emphasizing a test that would be reimbursed by private insurers. If you look at the hospital [berths] for women over 35 our target market, about 70% of that is covered by private payers and another 8% by self pay, Medicaid is about quarter of that.

State Medicaids and HMOs require prior authorization, we are seeing that they are authorizing those things, and we are not a network provider. We expected to see the normal procedure of the payer would pay us, they pay us some range from list price down to some of the significant discounts. And for those where there is significant discount we plan to appeal. This is exactly what we expected when the test entered the market and the same sort of experience that other companies have found a deal with private payers.

We established for the T21 test MaterniT21 some design goals originally, and we found that in our clinical trials, we met all of those design goals. This is the characteristics of the test that we are now delivering to physicians and to expectant mothers. It's non-invasive and there we are focusing on higher risk pregnancies. We are reporting our T21 of course, but whenever we see a T13 or T18 we report those results as well.

Thus far this year through 2011 we reported our 24 T21s, two T18 and (inaudible) at T13. That’s not unexpected given the relatively low incidence at T13. I think the other thing that’s most important here is that our average turnaround goal was from 8 to 10 days. We are averaging less than 8 days now. So, we are providing a test to physician audience that meets their requirements for turnaround time and performance. The performance obviously, is outstanding 99.1% sensitivity, 99.9% specificity, the no call and the no result rate less than 0.8%, this was validated in the large women’s and infant study that was published in the Genetics in Medicine.

Our company policy has always been not to introduce laboratory developed tests until we had the results of a significant study published in the peer-reviewed journal obviously for MaterniT21 that was published in Genetics in Medicine, and you can also see we published our Cystic Fibrosis test and our AMD test in peer-reviewed journals as well.

This test offers an (inaudible) to patients and physicians it's safe, it's accurate, it's very easy to administer and avoids the risk of miscarriage, publish results are that one out of every 200 new procedures results in the loss of the fetus. Obviously, there is a lot of anxiety among in the high risk of pregnancy women. If you look at the size of this needle in the top photo, you can understand why they would be anxious obviously a blood draws very simple and virtually risk free. The OB/GYN and Denver captured it very clearly and succinctly. They said you should consider using MaterniT21 whenever you are thinking of doing (inaudible).

We are extremely pleased with the way the press received and picked up on the launch of our test, Diane Sawyer at ABC News picked it up and you can see this clips off of the TV screen and this is her quote, we also picked up by newswires across the world. Newspapers throughout the United States and Discover magazine this year in science addition said that, this was one of the 100 top science stories of the year.

I’d like to point out that this is MaterniT21 it's an healthy T test, it's ordered by physician and the results were reported back to physician. On the left you can see our test requisition form, and on the right an example of our laboratory report which is faxed or emailed to the physician if it's negative, we have our Chief Medical Officer from the doctor in all cases where we see a positive. And where we see a 13 of 18 [rep] we notify them that we have seen that as well.

The Trisomy 21 market is a pretty substantial market. This is data from CDC 2007. Total converse 4.3 million but the high risk converse to women over 35 little over 600,000, another segment producing high risk those women with positive ultrasounds, family history (inaudible) or a positive blood screen that contributes another 140,000. So, this is a market opportunity for us that we are focusing on at this time of about [3.25 million].

We November we held an analyst meeting in New York and we showed a range of potential adoptions scenarios, not saying that these were guidance but these were possible. I’d like to just let you know that we have already reported out over 1,000 T21 tests, and our current running rate on an annualize basis is in excess of 9,000. But it's too early to tell, you can see that at the beginning of 2012 and these curves that there is very little gap in some of our (inaudible) for all of them. So, it's too early to tell what our adoption curve is, but our goal for the year is to build at least 25,000.

If you look at the fourth quarter rate for the high curve which is 60,000 units for the year, that crosses the line at 25,000 per quarter. That would be a running rate of about 100,000, which is getting pretty close to our CLIA lab capacity in San Diego.

It's going to be very difficult for us internally and also for anyone in the outside to be able to track our revenues versus our expenses. The reason for that is that we are on a cash, we are going to be on a cash basis and if you can see in the first box there for month one, we performed a test there. We have to book the cost of that test. We reported out the results and then we have to wait for the actual cash to be received from the third party payers which should be 90, 120 maybe even longer out in the future. And as our adoption curve increases throughout the year, this is going to be an even greater disconnect.

Accounting rules are such that we cannot book accounts receivable either. So, we expect that we will convert our account which allow us to convert from cash to accrual accounting by the end of the year. But we are going to have disconnects and we will be hard to follow through either. We will report test units performed by quarterly basis however.

As we established contracts with third party payers, for tests that they reimburse us for each of those we will convert to accrual once a contracts are in place, and the contract price is normal. So, that will be even more complicating problem throughout the year.

I’d like to point out, this is a slide where we have used for quite some time, that we don’t view this as a test, but we view this as a process. And that is it goes from the time we draw the blood sample that [it's drawn with physician] to the time when it's actually reported out back to the physician and we put multiple control steps in our process and I think you can see that from the results of the women’s and infants study this is paid an enormous dividend in terms of high sensitivity, high specificity, and a very little no call rate.

And I also like to point out that, that the sequencing component of this is only a small part of the overall cost and then any competitor will have to deal with these other items which are quite expensive as well.

Currently this is what our cost of goods profile looks like, the supply chart as you can see logistics and shipping are a big chunk of that, reagents and other large portion. We are estimating 500 to $600 per test after the initial launch. And we have a program to reduce that cost of goods sold on going. We have already implemented one major part of that, the (inaudible) which was original a 2012 goal, but we have already implemented that. Increased flexing through the sequencer will us some significant improvements, we expect to see continued improvements from alumina for the [high seq] instrument and reagents and flow cells.

We plan to automate the sample preparation and the process automation and there is a volume grows up the deprecation cost and the overhead cost for the laboratory facility will get proportionately divided out. So, we expect our cost of goods to decrease by 30 to 40% for the next 12 to 18 months.

We have over quite some time, established a pretty significant strategic path portfolio, I think the most critical ones at this point is the 540 Lo Patent in both the U.S. and Europe. This is the patent on circulating cell-free fetal nucleic acids as an analyte. Patents issued in the United States is issued in Europe where we are subjected to a lot of competitor’s objections. All of those objections have been rejected and this patent now stands issued free and clear in Europe.

We have the Dennis Lo Shotgun Sequencing, a random sequencing patent proceeding through the Patent Office in United States and also for the EU. We expect that the U.S. patent were issued sometime in 2012. We have a big patent portfolio, 500 issued and allowed patents and more than 330 pending patent applications. So, we are a high technology company with a very significant intellectual property portfolio.

Unfortunately we didn’t have preliminaries for our financial highlights or these are these are the financial highlights as of the end of the third quarter. Our revenues were little more than 40 million. We had over $100 million, $102 million in cash and our burn rate for the first three quarters was about $45.6 million. We think we have a pretty sound financial condition and as I said earlier we have said for over a year that we would raise capital in 2012 and we plan to do that.

So, I’d like to thank you very much for your attention and getting up early in morning and really see you in the breakout room.

Question-and-Answer Session

[No Q&A session for this event]

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