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Executives

Marcy Graham - Senior Director, IR

Harry Hixson - Chairman and CEO

Paul Maier – CFO

Ron Lindsay - Director and EVP

Bill Welch - SVP, Diagnostics

Dirk van den Boom - SVP, R&D

Analysts

David Ferreiro – Oppenheimer & Co.

Brian Weinstein - William Blair

Nandita Koshal - Barclays Capital

William Quirk – Piper Jaffray

Kevin DeGeeter - Ladenburg Thalmann & Co.

Elemer Piros - Rodman & Rodman & Renshaw

Jon Wood (Brandon)– Jefferies & Co.

Zarak Khurshid - Wedbush Securities

Sequenom (SQNM) Q1 2012 Earnings Call May 3, 2012 5:00 PM ET

Operator

Good afternoon, and welcome to the Sequenom Inc. first quarter 2012 earnings conference call. (Operator Instructions).

I would now like to turn this conference over to Marcy Graham, Senior Director of Investor Relations. Please go ahead.

Marcy Graham

Thank you, Laura. Welcome to the Sequenom conference call to discuss operating results for the first quarter of 2012. Joining me today are Dr. Harry Hixson, Chairman and CEO, Paul Maier, CFO, Dr. Ron Lindsay, Director and Executive Vice President of Research and Development, Bill Welch, Senior Vice President of Diagnostics and Dr. Dirk van den Boom, Senior Vice President of Research and Development, who will join us later for the Q&A portion of our call.

This call is also being broadcast live over the web and will be available for replay through Friday, May 11th, 2012, on the investor section of our website at www.sequenom.com. Before we begin, please note that this call will include a discussion of Sequenom and Sequenom CMM’s current plans and intentions regarding product development, operations, commercialization, including diagnostic test projections, goals and other matters, as well as expectations regarding Sequenom’s future financial performance and reporting, statements that are not historical facts, but are forward-looking statements. Forward-looking statements are not guarantees of performance, they involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by any forward-looking statement. For information about the risks and uncertainties that Sequenom faces, please refer to the risk factors set forth in our recent filings with the Securities and Exchange Commission. 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 like to now turn the call over to Dr. Harry Hixson. Harry?

Harry Hixson

Thank you, Marcy. Good afternoon and thanks for joining us on today’s call to discuss Sequenom’s first quarter for 2012. We are pleased to report that Sequenom and the Sequenom Center for Molecular Medicine, or Sequenom CMM, enjoyed a very productive start to 2012. During this first full quarter since the launch of the MaterniT21 PLUS laboratory developed test, or LDT, unit test volumes for diagnostic testing services grew at a rate faster than our internal goals, while we work to expand our operational capabilities, to manage this growth going forward.

Two weeks ago, Sequenom CMM announced total prenatal and retinal LDT volumes of more than 12,700 tests accessioned in the first quarter of 2012, including more than 4,900 MaterniT21 PLUS samples. This compares to a total volume of 21,000 for all Sequenom CMM tests performed during the entire previous year.

As of the last week of March, the number of MaterniT21 PLUS tests accessioned equated to 30,000 tests on an annualized basis, up from our earlier announcement of a projected run rate of 20,000 tests per year. Based on this steadily increasing adoption rate, at that time we increased our internal 2012 corporate goal to 40,000 billed MaterniT21 PLUS tests.

Today I’m pleased to announce that as of the last week of April, our 52-week sample accession run rate is now at more than 45,000 tests. This increase reflects the continued growth in volumes at the end of the first quarter and the initial impact of the recently expanded Sequenom CMM sales force.

Last month, we announced our first significant reimbursement agreement. This contract with MultiPlan Incorporated provides coverage of the MaterniT21 PLUS LDT for more than 900,000 nationwide providers under contract, with more than 55 million lives in its network. We are working to achieve our corporate goal to become an in-network provider with at least two national payors before the end of 2012.

In parallel, we continue to negotiate agreements with regional and local payor organizations, as well working towards providing testing services to medicate patients in both states. Acceptance of the MaterniT21 PLUS LDT in the prenatal diagnostic community has exceeded our expectations. The weekly test volumes and uptake of MaterniT21 PLUS LDT continues to increase steadily week-over-week. The response from patients and healthcare providers has been very positive.

As is typical in the first year following the launch of a new testing service, diagnostic service revenue is primarily recognized when cash is received, but costs are recognized at the time services are performed. The delay in revenue recognition results in a decrease in gross margin, which is significantly magnified by increasing test volumes. Therefore, diagnostic revenue recognized in the current period does not relate directly to the costs incurred in the same period. This will continue until such time as the company converts to accrual accounting for diagnostic service revenue, which is expected when sufficient reimbursement history has been established.

We will continue to report test volumes at the end of each quarter as a method of providing clear visibility into our growth trajectory and the market acceptance of Sequenom CMM’s testing services in the near term. To manage the growing diagnostic services business, and to ensure that we can meet anticipated market demand, we continue to invest considerable resources to expand our operational capabilities and improve our process efficiency, which should reduce our cost of goods sold over time. For example, Sequenom CMM expects by mid-year to increase the level of sample multiplexing, which translates directly into higher sample throughput per sequencing instrument, and to introduce automation steps in sample preparation.

When increased multiplexing is implemented in the second half of the year, our sequencing capacity will increase to over 200,000 tests per year in our San Diego facility. To further ensure our ability to meet anticipated market demand for the MaterniT21 PLUS LDT, we recently announced an extension to the term of our reagent and instrument supply agreement with Illumina Incorporated. The agreement is now extended from three to five years, terminating in 2016. This extended partnership should provide additional scalability, speed-to-market and the supply chain required to meet the projected demand for Sequenom CMM’s testing services.

Our genetic analysis business continues to evolve, as changing product mix and increased consumable sales comprise a larger part of the segment overall. Gross margins for the business have increased to 74% in the first quarter of 2012, based on this shift. However, we did see a reduction in system sales during the quarter as compared to the same period last year.

Sequenom continues to move forward in its discussions with the FDA regarding clinical and non-clinical studies for a trisomy 21 test. We recently started patient enrollment for a new high-risk study in support of an FDA submission. We will continue to build on the strong foundation that we’ve established for MaterniT21 PLUS LDT. The noninvasive, blood-based, laboratory-developed test is the first to be introduced in the United States for the detection of trisomies 21, 18 and 13, and is currently the only test of its kind to be validated in a large-scale clinical study. Studies of the MaterniT21 PLUS LDT show very high accuracy with low positive rates, plus positive rates, in detecting these fetal trisomies.

We continue to stand behind the strength of our IP position, both with regard to our patent portfolio and our legal strategy. We’re currently in litigation and therefore cannot comment on these cases and will not speculate on their outcome. We will leave it to the courts to decide. I will now turn the call over to Paul, who will discuss the details of our performance in the first quarter of 2012. Paul?

Paul Maier

Thanks, Harry. Our performance in the first quarter of 2012 reflects the successful achievement of our operational goals throughout the organization, specifically those associated with the expansion of Sequenom CMM’s testing services and the rapid adoption of its MaterniT21 PLUS LDT.

For the first quarter of 2012, total revenues were $14.9 million, as compared to $13.5 million reported for the first quarter of 2011. Diagnostic revenues increased 187% to $4.8 million for the first quarter, up from $1.7 million for the same period in 2011, an increase attributable to increasing growth in testing service sales volumes, principally the cystic fibrosis carrier screening test, and the MaterniT21 PLUS test.

Though Sequenom CMM is currently offering primarily as an out-of-network laboratory provider, with respect to the MaterniT21 PLUS LDT, we are receiving payments from a variety of insurers and reimbursement is in-line with the expected percentage of list price.

Our genetic analysis business in the first quarter saw a 14% decrease in revenues in a year-over-year basis, resulting primarily from reduced system sales during the first quarter of 2012. However, gross margins for this segment of the business improved, comparable to one year ago, as a result of increased consumables orders, moving up from 71% in the first quarter of 2011 to 74% in the first quarter of 2012.

As to be expected in the year initially following a new product launch, overall gross margin was reduced in the first quarter of 2012 as compared to the same period one year ago, falling to 36% of revenue as compared to gross margin of 63% for the first quarter of 2011. In addition to the impact of delayed recognition of revenues, this difference also reflects the increased cost associated with Sequenom CMM’s accelerated nationwide commercialization and increased sales of the MaterniT21 PLUS LDT during the first quarter of 2012.

Gross margin on diagnostic tests will continue to fluctuate based on test volumes, cash collected during the period, reimbursement levels and laboratory operational costs. We continue to account for revenue from our diagnostic testing services on a cash basis, and will do so until sufficient reimbursement history has been established, at which time we will then convert to the accrual method of accounting. At that time, revenues recognized during the period will more directly correlate to the costs incurred in the same period.

Additional revenues will be recognized on the accrual basis only after we gain further experience with new payors or inter-contractual agreements for diagnostic services. We expect to continue to recognize revenues associated with sales of the MaterniT21 PLUS LDT on a cash basis throughout 2012.

Total operating expense for the first quarter of 2012 was $29.8 million, as compared to total expense of $21.6 million for the first quarter of 2011.

Selling and marketing expense for the first quarter of 2012 increased by $3.7 million from the same period one year ago, a change due primarily to higher labor expenses relative to the expansion of Sequenom CMM’s sales force and the Sequenom CMM CLIA laboratory.

Research and development expense for the first quarter of 2012 increased by $1.9 million, as compared to the first quarter of 2011. This change was associated primarily with facilities, allocation, and increased overhead, higher operational supply expenses and labor-related costs.

General and administrative expenses increased by $2.5 million in the first quarter of 2012, as compared to the same period in 2011, primarily due to increasing legal costs associated with ongoing litigation, and high labor costs attributable to the growth of business.

Total stock-based compensation expense was $2.9 million for the first quarter of 2012, which is consistent with the stock-based compensation recorded during the first quarter of 2011.

Net loss for the first quarter of 2012 was $24.5 million, or $.22 per share, as compared to a net loss of $12.7 million or $.13 per share for the same quarter in 2011, reflecting an increase in costs associated primarily with the early commercialization of the Sequenom CMM’s MaterniT21 PLUS LDT.

As of March 31st, 2012, total cash, cash equivalents and current investment securities were $119.7 million. Net cash used in operating activities was $23.3 million for the first quarter of 2012, while purchases of capital equipment for the same period totaled $1.8 million, funded primarily through utilization of the company’s credit facility.

Having closed out our first full quarter of offering the MaterniT21 PLUS LDT, we are committed to expanding our diagnostic testing services business and plan to make the appropriate investments in the process as sales volumes grow. I’ll now turn the call back over to Harry for his closing remarks.

Harry Hixson

Thanks, Paul. We are extremely pleased with the progress the company has made during the first part of 2012, and we are dedicated to continued excellent commercial execution as we make Sequenom CMM’s LDTs available to patients and physicians throughout the U.S. and other countries. We continue to build relationships with stakeholders, both domestically and internationally, in an effort to expand our offerings.

Most recently, our European licensing partner, LifeCodexx, announced the successful completion of their clinical validation study for the noninvasive detection of fetal trisomies, and now plans to launch their test commercially in the next few months. This is a first step in providing fetal trisomy test services to patients in Germany, Switzerland and other German-speaking countries.

We continue to pursue additional licensing partnerships with groups in other European countries and in the rest of the world. We are excited by the positive response of the marketplace to MaterniT21 PLUS, the highest quality test of its kind for the detection of fetal trisomies 21, 18 and 13.

The results reported today exceed our internal expectations and reflect the enthusiastic response from the community for our product offerings. We continue to track very well against the goals that we have announced in January for 2012, and we look forward to providing additional updates on our goals as the year progresses. With that summary of our business and financial update, we’d now like to open the call up to questions. Operator, please open the line.

Question-and-Answer Session

Operator

(Operator instructions). And our first question is from David Ferreiro of Oppenheimer.

David Ferreiro – Oppenheimer & Co.

Thank you for taking my questions. Just the first question I have is on the recent sales force expansion. What’s your expectation for getting that – those new sales people up and running and producing? And how much of that is actually baked into the guidance right now?

Harry Hixson

First of all, there’s no guidance, David. But…

David Ferreiro – Oppenheimer & Co.

Testing volume guidance is what I meant.

Harry Hixson

That – just to be clear, that wasn’t guidance, that’s our internal goal for the year. But Bill will answer the question about the sales force.

Bill Welch

Hi, David. Yeah, in terms of the sales expansion, we have the second wave all on board. They’ve been hired and trained about the end of February, so not much in terms of their growth in the first quarter, but the group is terrific, they’re equal or even better than the first round and they’re being productive today. So I – part of the enthusiasm I think is not only where we are, but their ability to bring us forward as well.

David Ferreiro – Oppenheimer & Co.

Okay. And then my second question, I know you guys aren’t going to comment on litigation with the private competitors, but maybe you can comment on the market dynamics here as a couple of these companies have announced that they’ve actually launched a test. Have you seen them in the marketplace and has it had any impact on your business so far?

Bill Welch

Yeah, David, again, this is Bill Welch. We have seen some of the competitors, primarily the one that launched earlier this year in January, so Veranda. You know, I would say that we’re not concerned too much right now. We’re working diligently. There are, in certain locations, as you might imagine. And that’s about the most I can say about competition. One other one may be launching but it’s very unclear at the moment, frankly. So it’s – I would say a little impact on that.

David Ferreiro – Oppenheimer & Co.

Okay, okay. And then I’ll squeak one last question in there. With respect to your discussions with the FDA, has there been any more discussions including a low risk arm there or not on the table?

Bill Welch

From the very get go, we have always had an inclusion of low-risk patients in our PMA studies. And so, that we have – we’ve proposed those from the beginning and the FDA wants us to do such studies.

David Ferreiro – Oppenheimer & Co.

Okay. Thank you very much.

Operator

And our next question comes from Brian Weinstein of William Blair.

Brian Weinstein - William Blair

Good afternoon, guys. A quick question for you. We’re now at the early part of May, you guys revised your internal goal to at least 40,000 and you’re talking about being at 45,000 as the run rate already at this point. How should we think about when you guys are going to continue to – or how are you guys going to continue to revise that target? I mean, I would assume that that would be a target that is easily achievable at this point.

Harry Hixson

Well, first you have to remember that the running rate is as of the last week of April. We already have four months of the year that are already gone at a much lower rate. So even if we say at this rate, we have to make up for the lower, the lower sales rate that occurred in the first four months. So as I said in my remarks, we’ll provide updates on our test lines at each earnings call at the end of the quarters. So that’s how we’ll provide the information going forward.

Brian Weinstein - William Blair

Is there anything you can provide us in terms of statistics about same-store growth? I know it’s early, but, you know, new docs that are coming on, or number of physicians that are ordering, kind of what the patterns are of people that have been on board since the early days of selling the test back in October, and what the ramp of those physicians looks like? Thanks.

Harry Hixson

So Brian, I can’t give you specifics, but I can say that it’s broad. We’ve added a number of new accounts in the first quarter, from our base we had last year. And that’s an (inaudible) we do continually, so new accounts are coming on board. We see, in terms of the MaterniT21 test, it’s pervasive. It’s not from one state; it’s across all the states you might imagine. It cuts across the maternal fetal medicine specialists, as well as we’re getting a number of obstetrics-type of practitioners. And so, it’s what I would say the early days. This is a big market – many multiple users and every day first-time users. Let me just remind you, we had 20 or so sales reps for the majority of the first quarter. There’s still a lot of room for us to go out and touch people.

Brian Weinstein - William Blair

The last question, I just want to follow-up a little bit on that one. When you’re going into prospecting a customer, what’s your biggest hurdle that you guys think that you guys have to overcome at this point? And how long is the sales cycle, to kind of get somebody on board? That’s my last question. Thanks.

Harry Hixson

So, you know, what we’re doing is transformative medicine, really. Part of this is trust, understanding. There’s medical education, and then once you get past those kinds of characteristics, then it’s account setup, procedural, and other things. So it varies, whether it’s a hospital kind of based account or an office-based account. I can’t really, I’m hesitant to give you a days or so to bring someone on board. But once they’re on board, you know, I think there’s a high-stake factor. People seem very excited about it, and the repeat orders are going well.

Brian Weinstein - William Blair

Thank you.

Operator

The next question comes from Nandita Koshal of Barclays Capital.

Nandita Koshal – Barclays Capital

Good afternoon, thanks for taking my questions. Maybe to begin with, if you can help us understand how you guys are thinking about break even on the MaterniT21, and I know it’s early in the ramp. But could you share with us the thinking and the parameters that you’re looking at and, of course, the trend of the costs, but also anything incremental income (before inaudible) on the sales force (inaudible) associated with the clinical trials? And if you could also elaborate on the (inaudible). And should we expect some kind of (stepped function) change, maybe when you move to the higher market (Inaudible)?

Unidentified Company Representative

Well, that was several questions. First of all, as you know, we don’t provide specific guidance, but I’ll try to be as helpful as I can.

The behavior of the costs are really as we expected, although our volumes are much higher than we initially anticipated in the first quarter. So our costs are actually higher on an incremental basis. But as you know, when you put in the facilities and the head count and the equipment to support a launch, there is a high element of fixed costs. And then those get amortized as the volumes increase. And, of course, there are those that vary with the number of tests, such as reagents and logistics costs. So the costs are behaving the way we thought they would.

And in terms of when we would reach a break-even on the T21 test alone, that would depend on the ramp rate of us getting contracts in place, and being able to speed up the collection and revenue cycle. And so, right now, the cash that we collected in the first quarter really relates to the early days of tests that were performed in the fourth quarter of last year.

And as we go forward, certain of the expenses will be added in a stair step fashion. And so, you’ll see a choppiness, if you will, on a quarter-to-quarter basis, both in our costs, as well as the revenue. So it’s really too early to have a reliable predictive model. And this is not unlike anybody else who’s had a major breakthrough diagnostic test that has the complexity that ours does.

Now we have put in place the expansion capacity and, as we update our multiplexing in the second half of the year, and increase that with a new version of the test, as we implement the other automation steps, and as we fine-tune the next generation of reagents from our supplier, all of those things have an impact. So the costs per test, they vary on a daily basis.

And so, the good news from the acceleration of the rate of adoption of this test is that those fixed costs that have been in place will, you know, we have the first full quarter of having to absorb those, they’re spread over a bigger number of units. So we do get the leverage effect as we’re increasing our sales volume. And in the coming quarter, as the impact of our additional sales force, their training and then bringing new accounts on board, as we see that, that will give us a very positive impact on the cost structure.

But it’s too early to tell, to answer your real question there, until we have more progress in getting the contracts in place. And for any new test like this, it’s a nine to 12 month period as we go through the out-of-network process, and we convert individual payers into a contract dialogue, and then put a contract in place. So, I guess the bottom line from the essence of your question, what we’ve seen thus far is very much what we expected. There haven’t really been any surprises and we’re continuing to focus on fine-tuning the execution of the rollout.

Nandita Koshal – Barclays Capital

Thank you, that’s very helpful (inaudible). And just to confirm the (inaudible) $500 range now, and that should change meaningfully (inaudible)?

Unidentified Company Representative

I won’t comment on what the range is now. I think from our previous corporate presentations, we’ve said once we have several quarters of experience and volume growth, we would be in the $500 to $600 range. And I just can’t comment any further, but I think we’re very pleased with the direction of the metrics and with the other improvements that we are making in the test. And so I think going forward, we’ll continue to see a much better profile.

Nandita Koshal – Barclays Capital

(Inaudible)

Dirk van den Boom

(Inaudible) I think in terms of in December last year, we gave sort of an idea of what the costs would be, (you know, reasonably) high volume (this year), which was in that range. And improvements we would make during 2012, and early 2013, would potentially reduce that cost by 30% to 40%. But that was by mid-’13, to be clear.

Nandita Koshal – Barclays Capital

Thank you, Ron.

Operator

And our next question is from Bill Quirk with Piper Jaffray.

William Quirk – Piper Jaffray

Great. Thank you. First off, just an update on the FDA filing. It was mentioned during the prepared comments that we started a trial here to support the filing, can you just remind us what the timing will look like for the actual filing itself? And also, will this include all three of the trisomies that you’re currently reporting on? Thanks.

Harry Hixson

Sure. I think, obviously, if we just remind you, the whole discussion with the FDA about a trial and what’s required for for MPA for a test like this is very complicated. We sort of separate it into two buckets of it; the technical aspects of it, of a process, which we’ve outlined previously, which include several instruments, reagents and software. So we have discussions with the FDA about each and every one of those components and that is complicated and we are, you know, part way through planning that.

In terms of the clinical study that we started, certainly we believe that’s a propriety kind of design, but we’ve come to, I think, a good understanding of what will be required for PMA in terms of, again, a high-risk study with some additional patients to ensure that this test does have the same sort of characteristics in a lower-risk population.

So I think we’re on track with understanding what we need to do. We’ve begun to accrue samples for the clinical study and I think as far as T18 and 13’s concerned, that will continue in discussion. Clearly, the main focus here is on a PMA that would have sufficient samples to give you strong confidence intervals around T21, I think, because everybody on the line knows acquiring sufficient 18 and 13s to give you that statistical number is sort of beyond what is currently practical.

So I think the discussion with how one then includes 18 and 13 is part of the test, as we do currently with our LDT is assign strong enough to support, not without statistical numbers. I think that’s approximately.

Certainly, we would like the PMA to include being able to report those.

William Quirk – Piper Jaffray

And Ron, part of your discussions with the FDA was talking about an enriched population for the same reasons that you just mentioned in terms of the incident rates?

Ron Lindsay

It is very much the same as this is the high-risk population, it’s the same population that we drew samples for for the – the only large-scale study that’s been published to date on this by [inaudible] and in essence, the expectation is that this study would be in the same sort of range potentially. You don’t need as many cases as we have in the previous study. There’s no enrichment.

William Quirk – Piper Jaffray

Okay, and then maybe a question for Paul. If you think about the competitive landscape here, your competitors, be it the ones that you’re currently competing against or those that are still waiting to launch, are by and large talking about test price points below yours. So I guess, how should we think about that in the competitive dynamic? Does that really play in or make – is that really a factor when you’re talking to physicians or do you think this is perhaps something that’s going to more likely come up when you’re talking to payers about going on contract? Thanks.

Paul Maier

Well, I’ll let Bill comment on the dialog with payers since that’s in his area. But I think that from an overall point of view, the physicians make their decision on what test to recommend to their patients based on the quality of the clinical data and the need of the patient. They don’t really focus on the cost of the – the price of the test. We have come up with our pricing strategy based on the amniocentesis as a frame of reference and this is something that the healthcare system is accustomed to paying for and we took that into consideration when we did all of our market research and coming up with our pricing strategy. We looked at the strength of our clinical data and we came up with a patient copay on the basis of the same market research and so we feel quite comfortable in our launch experience to date that pricing hasn’t been an issue for the patient or for the physician. And we’re focusing on providing the highest quality test. Bill maybe you want to focus on the other portion of the question about how do payers look at it?

Bill Welch

Yes, so Bill, we acted early. I would say the [inaudible] technology is the largest study founded in broad, good data sets with very tight confidence intervals. It’s just a different technology and we strive to work the differentiate ourselves both with the providers and then as we go forward with the payers. I would just say it’s an early process and I can’t give you much more discussions about on the payer levels. Are they comparing? I think that still very premature for that.

William Quirk – Piper Jaffray

Understood. So basically, in a nutshell, Bill, is that you have a differentiator product and ergo, it should have a differentiator price.

Bill Welch

That’s our goal.

William Quirk – Piper Jaffray

Very good. Thanks, guys, appreciate taking my questions.

Operator

And our next question is from Kevin DeGeeter of Ladenburg.

Kevin DeGeeter - Ladenburg Thalmann & Co.

Hey, thanks for taking my question. Congratulations on the progress. I actually just want to get back to the cost of goods issue. I’m trying to get my mind around sort of where we are and I guess where we – what we have to do to get to the target you’ve laid out. If I do a very kind of simple back-of-the-envelope calculation, you know, assume [inaudible] recognize revenue for T21, you know, negligible margin on the recognized revenue, which presumable see in A&D primarily [inaudible]. I mean, you’re getting north of $800 per test is the current COGS and I recognize there’s a lot of overhead baked into that that will come down, but I mean, you know, just kind of – can you give us a little more feel for what really drives a lot of that assumption, you know, down to the type of range you’ve discussed previously? Do we really need to see certain volumes for that to be credible? I mean, because it just feels like we have a really long way to go to get from here to there and there’s a little bit of delta around price.

Harry Hixson

Well, first of all, I won’t comment on the number that you deposited, but those of us who have been involved with the launch of a new product and especially the diagnostic products, this is – this is a very typical pattern. And while it may be frustrating for all of you in the analyst community and the investor community to try to nail down this price per test, it is volume sensitive and we made a very conscious decision to invest in the capability and the equipment and the capacity and to have the people in place and all the other infrastructure that gets allocated to this. And as I said before, it’s an equation that changes on a daily basis.

So we’re doing all of the things that we can do to drive the volume, the test volume up and that helps. And then we have a number of initiatives on the R&D side to improve the test performance and the throughput and all of those things help us in reducing the cost.

So we’re quite comfortable that this is behaving the way we thought it would and that each quarter we’ll see very steady progress. And only when we actually have enough data that we can do the revenue recognition on an accrual basis, will it all come together and will you be able to see, well, what’s an average selling price for the test and what’s an average cost per test. So it’s a very – it’s a very complex time, but we’re very comfortable that we know all of the levers that influence that cost equation and so we’re focusing on making the right business decisions as we go through this commercial process.

The fact that we have three other tests helps us as well and we get the benefit in the sales force productivity as well because we have a panel of tests to offer. So I know that may not satisfy all of your curiosity about how this works, but it’s very typical of a first-year launch and the behavior of what we’ve seen is exactly what we expected.

Kevin DeGeeter - Ladenburg Thalmann & Co.

So in the interest of better understanding the first year of a product launch, perhaps you could walk us through what some of the additional levers beyond automation and grid or multiplexing may be to hit this target that’s very clearly and comfortably in the mind of management. Thank you, that’s all.

Harry Hixson

Well, I think it’s – you can think of it fairly simply in that we have a fixed amount of laboratory space in place and there’s a fully loaded cost for that. As volume goes up, the overhead gets – the overhead per test drops. You have a certain number of instruments in place and some of the laboratory equipment that prepares materials for the sequencer. We have decide to lead with capacity because we wanted to be in a situation with this launch were we could always meet the market demand. As we get a better sense of the market demand, and it’s been very much better than we had originally forecast, we don’t have to lead with as much excess capacity both in terms of instruments and the number of people performing the tests. So as we get more efficiency, the depreciation per test goes down, the number of people required to have in place to do the test, the better idea of what it takes to do each test so we can add more staff judiciously. All of those factors are the things that management looks at and watches as we move forward to reduce our cost of goods sold. And then things like multiplexing give you almost an immediate improvement in some of those factors.

So that’s what we’re – those are the things that management looks at going forward.

Dirk van den Boom

One sample in this process that is not necessarily true to many other tests is that a flow cell, which is a consumable in this arena, is a very expensive item, costing several thousand dollars. So we can either run one sample or 784 samples, for example, that’s fixed cost. And clearly one of the first things you benefit from volume is with the flow cell. Occupancy goes up and that obviously, at the rate we’re at, we’re beginning to see the benefits of that.

So in addition to the things that harry said already, flow cell is the a huge benefit pretty quickly.

Harry Hixson

Yes, we’re not running [inaudible].

Dirk van den Boom

I think there’s always a balance too there in terms of providing patients and docs with a turnaround time that is the best in the industry in terms of a target. So you have to balance filling a flow cell with being able to meet your turnaround time. And we’re beginning to get close to that point where the turnaround time is better than we initially expected and the flow cells are beginning to get full on every run.

Harry Hixson

Does that help you, Kevin?

Kevin DeGeeter - Ladenburg Thalmann & Co.

Yes it does. Thank you so much. That’s very helpful.

Operator

And next we have a question from Elemer Piros of Rodman.

Elemer Piros - Rodman & Rodman & Renshaw

Yes, hello?

Harry Hixson

Hello.

Elemer Piros - Rodman & Rodman & Renshaw

A very simple question. How many of the Illumina sequences do you have now employed? And do you expect to increase that number to be able to get through the 200,000 per year anticipated run?

Harry Hixson

I think, Elemer, we gave guidance when we launched the test, we’d have capacity with our sequencers to do 100,000 tests. That was the, you know, the bottleneck, so that’s the capacity we had and you can do the calculation based on, I think we originally said about 7,000 samples per instrument per year. So you can do the math on that, it takes you probably close to that.

Obviously, we’re very close and we’ve mentioned this to increasing our multiplexing so in the second half of this year that capacity, we think, would increase to well over 200,000 in terms of instruments without any further purchases. So the equipment benefit of that is pretty significant. I don’t see in the immediate near term we would increase here, but obviously, as we also indicated, our facility in North Carolina, which is now under construction, we would obviously have to put in some capacity there as we bring that on steam probably end of the year, beginning of next year. But there’s no immediate near-term need to increase sequencing capacity with instruments.

Elemer Piros - Rodman & Rodman & Renshaw

Thank you very much. And one last question, please. If you – if you could please bracket the estimated cost over PMA study, we could get a fairly good idea of how significant of a competitive barrier that is.

Harry Hixson

Well, I think, well, first we couldn’t do that right now, mainly because we have not finished our discussions with the FDA what all of the requirements might be. And so we really don’t have an estimate of that cost.

Elemer Piros - Rodman & Rodman & Renshaw

Okay. Thank you very much.

Operator

Our next question is from Jon Wood of Jefferies.

Jon Wood (Brandon)– Jefferies & Co.

Hey, good afternoon. This is Brandon calling in for Jon. Paul, with respect to your disclosure around the more than 12,700 test conducted in the first quarter, if we go back to the fourth quarter, any chance you’d be willing to give us the aggregate number of tests conducted in the fourth?

Paul Maier

I think we didn’t disclose that and we probably won’t go backwards, but suffice to say that we’ve had sequential quarterly growth in all of the tests since the fourth quarter to the first. And so we’re very pleased with that. But this –as we go forward in 2012, we’ll try to give you as much color as we can each quarter to give you an idea of how we’re doing. But we probably won’t go into a detailed breakdown by tests.

Jon Wood (Brandon)– Jefferies & Co.

Okay, and I’ll beat a dead horse here, but looking at molecular diagnostics COGS in the Q, it looks like the figure increased about 2 million sequentially. Is it accurate to say that the substantial majority of that was attributable to 221?

Paul Maier

That’s probably a global assumption that’s safe. As you know, we brought our CLIA lab on line in the fourth quarter and so in the first quarter of 2012, we had the fully quarterly cost of having that CLIA lab in place. So that contributed some of the increment you’re seeing.

Jon Wood (Brandon)– Jefferies & Co.

Okay. And then lastly, you know, with respect to your plan to increase the multiplexing, I know that doing that could reduce the sensitivity, and so if you expect to change a multiplex, do you think you’ll be required or would you expect to conduct another LDT validation study given the prior fourplexing study may not be as relevant in the new – under the new strategy?

Dirk van den Boom

This is Dirk. To comment on that, every process we do gets fully validated. We’re not just implementing these changes And just to give you an indication, when we have changes of this nature, we have an excellent test in the market, we do everything to make sure that we’re not decreasing performance when we’re trying to cost optimize or increase capacity. And the size of validation we do, just to give you a point here, is at least two to three times bigger than whatever our competitors have launched on. So we’re very, very diligent about those changes.

Harry Hixson

Just to make it clear, we would not launch a new version of a test if it was not the same performance as previously, or better.

Jon Wood (Brandon)– Jefferies & Co.

Great. Thank you.

Operator

And next we have a question from Zarak Khurshid of Wedbush Securities.

Zarak Khurshid - Wedbush Securities

Good afternoon. Thanks for taking the questions, guys. Can you break out the revenue contribution for the MaterniT21 versus the other diagnostics in the quarter?

Harry Hixson

We will not be doing that in the near term, so I appreciate the fact that you’d like to know it, but we’ll just show the aggregate on the basis of cash receipts each quarter.

Zarak Khurshid - Wedbush Securities

Understood. And then, I guess, you know, maybe help us out a little here. Of the collections for MaterniT21 in the quarter, how many tests did that represent roughly?

Harry Hixson

I don’t think we’ll be giving you that level of detail either. That’s – and we may never go into that level of detail for a variety of reasons and just don’t want to get into that now.

But I think – that’s one of the reasons that we have tried to educate the market and we will do it each quarter with showing the number of tests that we’ve accessioned and what are our internal goals for the year based on the test that we build. That’s really the best indicator of how we’re doing in the marketplace. The cost and the – which I know everybody’s super sensitive to the cost and the revenue for tests and how much we’re collecting, all of that changes constantly and as we go through the process of getting contracts in place and having more experience with payers, all of those things are constantly changing. So we’ll try to be helpful – as helpful as we can, but I suggest you focus more on the aggregate information here as to the trends that we’ve established.

Zarak Khurshid - Wedbush Securities

Understood. You know, I guess we’re just trying to understand, you know, what are the other – how are the other pieces of your diagnostic business, how they’re performing. So you know, it seems like the RHD and CF franchises perform petty well. Can you just maybe, qualitatively talk about sequentially how those are doing, you know, did it have another good quarter, was it up? And then the last question, what should we expect in terms of publications later this year, either around Multiplexing or other product enhancements? Thanks.

Harry Hixson

Well, in terms of the test performance, I think we’re pleased with the evolution. All the tests are up in the first quarter in terms of revenue versus the fourth quarter of last year. So we’ve seen that sequential growth. And that’s about all I can say on that. I’ll let someone else comment on your other part of your question.

Ron Lindsay

I think in terms of publications, maybe Dirk can add some, but certainly we have some additional information that will flow from the very large woman-and-infant study on some rare but very interesting adds to the test in terms of content and on the EMD side, we will complete [inaudible] study, which will hopefully indicate for this particular test, not just a lifetime risk of our genetic test, but a very useful parameter to assess when patients who have dry AMD, the risk to progressing to wet AMD. So I think that will be an interesting add to the AMD story as well.

Dirk van den Boom

I think we said previously that the women-and-infant study was larger than just trisomy 21 and you’re seeing the principal investigators have decided to subsequently publish trisomy 13 and 18 with excellent performance. And as Ron indicated, there’s more in this study, which sequentially will bring to light I think one very interesting topic will be multi gestations, but there’s more to come throughout the year.

Zarak Khurshid - Wedbush Securities

Okay.

Operator

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

March Graham

Thanks for joining us today on the call, and your continued interest in Sequenom. If you have any further questions, please feel free to contact Investor Relations at 858-202-9028. Thanks.

Operator

The conference is now concluded. Thank you for attending today’s presentation, you may now disconnect.

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