Sequenom's Management Presents at Bank of America Merrill Lynch 2012 Healthcare Conference (Transcript)

| About: Sequenom, Inc. (SQNM)

Sequenom Inc. (NASDAQ:SQNM)

Bank of America Merrill Lynch 2012 Healthcare Conference Call

May 15, 2012 4:00 p.m. ET


Ron Lindsay, Ph.D. - Director and Executive Vice President, Research & Development

William Welsh - Senior Vice President, Diagnostics

Dirk van de Boom, Ph.D. - Senior Vice President, Research & Development


Derik de Bruin - Bank of America Merrill Lynch

Welcome to the afternoon session of the 2012 Bank of America Merrill Lynch Healthcare Conference. I’m Derik de Bruin, the life sciences, tools and diagnostics analyst and our first company up this afternoon is going to be Sequenom. Here today from Sequenom we have Ron Lindsay, Director and Executive VP of R&D. We also have William Welsh, Senior Vice President, Diagnostics, and Dirk van de Boom, Senior VP of R&D, with us here today and there’ll be a brief presentation and then we’ll open it up for questions and answers after that.

With that, thank you and look forward to hearing it.

Ron Lindsay

Thanks. Okay. All right. Thank you, Derrick, and good afternoon, everyone, and welcome to the Sequenom presentation and I’d like thank B of A for the opportunity to be here for the first time and, in keeping with the recommendation, we’ll probably show fewer slides than usual, but, hopefully, we can update you on some key points.

For the last two or three years the senior leadership team and Sequenom has been sometimes accused, rightly or wrongly, of being very conservative. This is the bags that we don’t to give up in the near future, but I think its fair to say six months into launch of a very important product, we’re actually pretty mildly excited, I’d have to say. I think we share with you some of the updates on that and we’ll have time for some Q&A at the end.

So, first of all, for those of you here listening in, the Safe Harbor statement, just to remind you, you can read this in detail on our website with the whole presentation. At Sequenom, for those of you who may not be so familiar with the company, has two operating segments; our historical Genetic Analysis business, which has been the core of our research instrumentation and regent business for some years and the business that we are evolving towards, our Molecular Diagnostics business where we’re transitioning. Hopefully, our goal is to be a leader in this area in the next few years.

In terms of total revenue, 2011 was a good year for the company. Our overall revenues were up about 18% year-on-year. And, particularly, against the backdrop of the recession we were pleased that our Genetic Analysis business, actually saw some growth for some of our certainly much larger competitors in the instrumentation business saw some significant pricing and revenue pressures.

Clearly the other side of our business is the Sequenom Center for Molecular Medicine, our two CLIA labs, one in Grand Rapids, Michigan, a newer lab in California and our corporate site where we run all of our prenatal tests and apply the MaterniT21 PLUS test, any of our sequencing tests.

Over the course of 2011, our total test volume, which was primarily driven by our cystic fibrosis test, but also our Rhesus D and our AMD test and, at the time, our T21 launch test, we built a total of about 21,000 tests.

We’re pleased to report that for the first quarter of ’12 we already have received 12,700 total tests. Of these, perhaps, most significant to many of you, the launch of the maternity test and now the MaterniT21 PLUS test, we, from launch on October 17 of last year until the end of the year, we’re pleased that we got off to a good start with about 1,000 tests and the first quarter of this year we’re pleased that we received almost 5,000 tests, over 4,900 to be exact. So, we’re very pleased with this start of adoption and we’ll talk a little bit more detail about our projections or scenarios we anticipate for the rest of the year.

Clearly while our genetic analysis business and all the tests have been a very important foundation for the company, I think for many of you, certainly, the near-term driver for Sequenom is the MaterniT21 PLUS LDT. And just for a little bit of clarity, when we launched this test in October of last year, we initially focused on published data and we launched out for publication of a major clinical study involving T21 in particular.

Since then, as part of that overarching study, we have continued to publications and, most recently, have now included T1813 publication as part of our study and I think this has been very useful for the clinical community. So now the MaterniT21 PLUS test includes T21, T18 and T13. I won’t read the details that are showing up here, but the performance of this test has certainly met our highest expectation in terms of sensitivity, specificity, both for 21 and 18 and also rare T13.

We’re also very pleased that overall in terms of a no-result rate in our clinical study that was less than 1% or indeed less than 0.9%. So, this, we believe, is the first large scale clinical study with this kind of performance. Part of that woman-infant study that we conducted as a collaboration, but independent study by the [Bon] University was indeed to prove that this test would work both in the first and second trimester and the results from this study indeed prove that very thoroughly. So, at launch we were pleased to say that this test is certainly suitable from ten weeks of gestation onwards.

The test is very simple in terms of its 2 times 10 mls of blood and at launch we had a slightly more complicated procedure where a patient would have to go to a blood draw site. The sample was somewhat processed before shipping. We’re pleased to say that since launch we’ve also been able to change that to ambient temperature shipping, which allows a blood draw to be done in the doctor’s office and to be shipped to us at ambient temperature, adding convenience and also a cost saving.

In terms of just, for those of you may have not been so close to this, the analyze in this case is circulating cell-free DNA and a maternal blood sample. The whole basis of this test was the work of Dennis Lo, our long-time collaborator in Hong Kong, and we have a very strong patent both in Europe and U.S. around analyzing this analyte, which we believe is a competitive advantage to some other companies that are out there.

The test method is massively parallel DNA sequencing. We now have very large experience of this since launch and at our clinical studies we’ve now run a total of both research and clinical samples of well over 10,000 samples and learned as we go a lot.

The turnaround time at launch, we guestimated this would be eight to ten working days. We’re very pleased that our average now is approximating from receipt of a sample to result being given back to physician of calendar days, which we think is very suitable for the marketplace.

As a company and our segments, we established goals every year. I won’t go into the kind of GA side of these things, but just in terms of the Sequenom Center for Molecular Medicine, our goals for 2012, first of all, to increase our sales force. At launch we had 20 reps and in the last quarter we are very pleased that we’ve added additional field reps and four regional managers, taking us pretty close to 50 folks in the field dealing with our prenatal genetics testing.

Hard always when you launch a test to have a guestimate of what might be the volume for the year. We presented a scenario in November of last year where we gave low scenario end of around 25,000. That was our goal. We’re pleased based on our first quarter run rate that, indeed, we’ve already increased that to 40,000. This is an internal company goal to complete at least that many tests in the course of this year.

Obviously, while the adoption rate, we’re very pleased that we’ve taken off. The key, obviously, is revenue and we’re working very hard. We have our team establishing reimbursements agreements across county. There are many people in this field and one of our goals is to establish potentially two agreements with national pairs by the end of the year.

As in all of our processes scientifically, we like to be driven by publication and we were pleased that the T18 and 13 publication came out and showed the performance of this test could also be added to our existing test and so we now include those in our reports. I’ve already covered the fact that ambient shipping has been introduced at the beginning of the year, so an improvement early in the process.

Clearly, this is a complicated test, in many senses, I’ll come to the process a little later, but the cost of goods at launch is certainly substantial compared to many, many tests and one of our goals over the next 12 to 18 months is to make significant inroads into that and I’ll talk about that in a moment.

In addition, we want to obtain a license for LDTs in New York. We’re pleased that we already have permission to sell our test in New York and we’ve added sales force folks to deal with that.

We, additionally, have a test that I won’t talk about today in the ophthalmology field, a test of age-related macular degeneration. We’re pleased that we just completed a progression study from the so-called arid study samples we received from National Eye Institute and we’re preparing that for publication and then we’ll modify our test on the basis of that.

To deal with capacity that we’ve talking about for some time, we have both improvements in the test volume we can carry in San Diego, but for a lot of good reasons we have established a ranges of facility in North Carolina are in the midst of fitting that out and hope that will be complete by the end of the year, which will give us the capacity to deal with a very large segment of our potential market.

I think just as a note here we have made it company policy that we will go beyond the standard player of having to analytically validate the test by having very strong clinical publications. So the launch of T21 was based on the publication by the group in Braun and we’ve added to that and will continue to add further content based on other things we do, just an important point.

Clearly as we grow as a company, intellectual properties are very important part of what we do. I think, as many of you are aware, we'd have some potential competitors out there. We believe that our core IP in this arena in terms of the analyte circulating cell free DNA is extremely solid, both in the U.S. and Europe and we continue to add to this portfolio as we go to defend what we think is a very exciting franchise.

Sort of addressing questions that, perhaps, have come up in the last two or three months, we are pleased at [option]. We are pleased that our reimbursement discussions are well underway. Clearly, over time our goal is to reduce the cost of this test.

When we established a method for doing this test, we built in a level of quality control measures to make sure day-in-and-day-out, we could do this test with great accuracy. As we went to launch, some of the parts of the process were still fairly manual and some parts of the process were clearly open to automation.

Just highlighting on this slide the individual parts. Sample processing, we've already introduced a tube that allows samples to be shipped at ambient temperature, which makes this more convenient for patient and [Doc] and also for shipping costs.

Similarly further down the line in terms of DNA extraction, we have been working automation methods for this and we will be pleased to introduce some of these later this year.

Library preparation which has been done in molecular biology labs for years has never been done at scale. There are a lot of manual records associated with it, some both for the good health of our techs and others and also then for avoiding any human error, we've been spending a lot of time automating this part in terms of automation and simplification.

Sequencing, as many of you know, we use the Alumina high seek instrument as our core sequencing tool. Alumina is constantly upgrading both their reagents and their flow cells. We've been working, and I'll come to that a little later, to increase the number of samples we can run on an instrument and also to use some of their latest [dye] chemistry. That will allow us higher throughput and also reduce some of the cost.

Also, a very important thing with experience in terms of analyzing the data, the fact that we've been able to run so many samples compared to some of our competitors, we've learned a lot as we have gone forward and how to separate, if you like, positives from negatives with even greater clarity. We have been able to build in new bioinformatics, I think makes our test even more robust.

Cumulatively, we will continue to add to this as we go forward, just some of the highlights, in terms of near-term things in the second half of the year. At launch, we were running four samples, so-called 4-plexing per lane and we have now almost finished validating that we comfortably run 12-plexing. A three-fold increase in the plexing level, probably relates to a little bit more than two to two and a half of increase of instrument capacity, which is good for throughput.

One of the reasons that this is possible is not just the real estate itself but the number of reads that you can get under the new flow cell and new biochemistry allows you to have way more reads than were previously possible. I just wanted to make the point that although we're increasing the number of sample run, the quality of data will always be the same or better.

I think somebody made a comment a couple of weeks ago that by going to higher plexing we may reduce sensitivity/specificity. That is totally inaccurate. We will always validate in a large study to make sure any improvements we make do not compromise the quality of our test. I think from this you can read that we will continue to make improvements but the test quality will always be the same.

In terms of the cost of goods, we have broken this out and I think we are very comfortable this is representative. The outer circle here, is kind of where we are today in terms of the spread among reagent, labor et cetera.

During the next 12 months, we anticipate our current costs which in the second half of this year will be between $500.00 and $600.00 per sample cost of goods. We anticipate we'll be able to reduce that by 30% to 40% by the middle of next year.

Some of these improvements are already in place; the collection tube, the plexing, which we've just about completed and some other areas. We look forward to a reduction in cost as we go forward.

Just in terms to be very clear, the total market available to us in terms of the high risk births are about 4.3 million births in the U.S. every year. The so-called high risk group which primarily is a woman of advanced maternal age, between 35 or onwards which is the majority of about 610 of the total of three-quarters of a million people in the high risk group.

This is our target market and we feel comfortable that our clinical validation allows us to go into this with confidence that we are dealing with the right patients in terms of futility and improvement in their options.

The adoption rate, I think if any of you have ever launched a test before or new therapeutic, it's always kind of a little hard to judge uptake. We presented this in November of last year, not guidance but three scenarios based on some of our, sort of, guesses about potential adoption. And at lower end was 25,000 and upper-end of 60,000.

Based on this, our initial goal for the company was 25,000 tests. Based on adoption to-date, we've already increased that to 40,000. In the first quarter, we received almost 5,000 samples. As of the end of April, actually a run rate if we annualized, it was already up to 45,000.

I mentioned that our sales force has increased from the initial 20 with another 23 in the first quarter and I think Bill would say that we are now beginning to see the benefits of that increase in sales force. Certainly, we are pretty confident that this run rate will continue.

In terms of reimbursement, our focus is certainly on private insurers. Our first signed contract is with Multiplan and in the course of this year, we are talking currently to many people. We have a strong team out there doing this. We anticipate we will add and we will announce these additional contracts as we put them in place. We can perhaps discuss some of these in the question period.

Obviously from a model-build perspective for some of you out there, one of the challenges with any new test like this is that initially we will have to pay for test we do ourselves in terms of all of the overhead, et cetera. And initially, we will only be able to do a cash accounting until such time as we become in that work and can go to accrual accounting.

So, our revenue for this year will certainly be very lumpy and certainly, our volume of samples will proceed by quite some distance the revenue associated with that. So, this is just, kind of, a fairly standard thing but just to alert everybody to the fact that we will focus on updating you on volume as we go forward. And hopefully, by the end of the year beginning of next year as we shift in some cases to accrual accounting, to give you some idea of revenue.

Just in terms of financial highlights, we ended the first quarter with about $119 million. We had a burn of about $24 million and our revenue for that period was about $50 million.

So just with these few slides, I hope I've given you at least a flavor of where we are and why we're pretty confident as we move forward with this exciting test. That we're seeing good adoption and that from the perspective of where the company's headed, we look forward to a great future.

Thank you.

Question-and-Answer Session

Derik de Bruin - Bank of America Merrill Lynch

So, I'll kick off the questioning. I guess, what's driven the upside, I guess, in terms of raise of ramp? You guys, you know, you went from 20,000 initially and then you're seeing, your initial guidance, what have been the key drivers? Is it just physician familiarity with the test?

Ron Lindsay

Perhaps, Bill, you want to answer that one?

William Welch

I think we are still in very much in the early stages of the launch. I mean, we started the last year at October17th at a cold launch, which means no education, no information, physicians and in the first quarter we started to see the very first traction of how that resonated with them and we added more Reps in the very end of the first quarter.

And I think based on how adoption is going, that's what gave us confidence to go to the next range for the 40,000. In terms of, it's all been positive, we are targeting the maternal fetal medicine specialists, essentially key opinion leaders in the space.

It's a high education discussion, once they're comfortable, we work with their OBs that refer to them, get them onboard and fan out from there. It's just the very early stages, but the adoption's been fine.

Derik de Bruin - Bank of America Merrill Lynch

When you look at the push back from the fetal maternal medicine specialists or just other people, what have been the major concerns, where were the reservations on the tests?

William Welch

At the very early, again, it was a cold launch, the question would have been: What do I do with this test? An obvious first question. We have embedded systems with screening and invasive procedures that are just, try to understand what this may be.

During those discussions, I think they became more comfortable with our data and how it could affect the treatment map.

Ron Lindsay

Let me just add to that. We were very pleasantly surprised at the additional publication of t18 and then 13 and had a pretty big impact on the comfort level, because certainly, first time around, folks were, " Well, it's great to have T21. It will be really nice to have 18 and 13, and that really ticked up, I think.

Derik de Bruin - Bank of America Merrill Lynch

And are you going to include, you can also do six chromosomes over the [30], are you going to include those?

Ron Lindsay

Yes. I think we have an addition to the publications some other things in the works in terms of some other things that came out of the women/ infant studying, could it be potentially multiple gestation, is that doable? Mosaics, is that doable? And some of the (inaudible). So, we will carefully and thoughtfully have those published and make them available as they come.

Derik de Bruin - Bank of America Merrill Lynch

One of the private companies that could be in this space has recently signed a partnership with a rather large clinical laboratory organization. What are your opinions on that? I mean, do you think a partnership program makes sense for you or do you think you can take this forward on your own?

Ron Lindsay

It's not a primary strategic goal, but I think Bill may be comment on the comparative.

William Welch

Well, I think the one you're talking about made a partnership with LabCorp and I think, both the national labs and there are regional labs and there are local labs that are available, but the name of the game is for facilitation and ease of use for physicians. We haven't made it a priority right now, we could've over time, either approached presumably a lab for a request or otherwise.

It just hasn't been a key for us. My guess is they went that direction because they're a little earlier, maybe smaller and thought that would be a good distribution for them.

Derik de Bruin - Bank of America Merrill Lynch

Well, I've had conversation with investors looking at this overall market. I think there has been some concern about what the whole pricing structure is going to be for the test.

I mean, I think some of the, when I've had conversations with investors looking at this overall market, I think there's been some concern about what the overall pricing structure is going to be for this test. And, you know, obviously the IP does give you some protection if that is sustainable, but I guess where do you think pricing will ultimately settle out for this, and ultimately, how much do you think you'll be able to get reimbursed on that?

William Welsh

Yeah. Those are great questions. We're engaging pairs now. We've essentially done for the fourth quarter one billing cycle. That takes about 90 days, right? So it's the early days. I think we targeted the amnio-like [ph] pricing and that's still what we're targeting to get for the technology. It seems to resonate quite well. And these things can take a year or so to really work their way through, but I would expect somewhere in the amnio-like pricing range.

Derik de Bruin - Bank of America Merrill Lynch

Which is?

William Welsh

Which is about, it depends on where you are in the country. States, Medicaids and prior payers between $1,000 and $2,000 or so.

Derik de Bruin - Bank of America Merrill Lynch

And speaking of geographic adoption, have you seen, what's the rate of adoption been across the country? Obviously, you are not saturating the U.S. now, and with your sales force . . .

William Welsh

We started with 20 reps and with 20 major metropolitan regions, and then we added 23, so we have essentially 50 reps. They are focused on major teaching institutions, major locations where the hospitals, otherwise where the key opinion leaders are, and we are fanning out from that standpoint.

It's pervasive. I wouldn't say it's one region. We're opening new accounts every day, and we're seeing a lot of repeat orders.

Derik de Bruin - Bank of America Merrill Lynch

And have you had interest from outside of the United States?

Dirk Van de Boom

Yes. Just for an update, we have a collaboration with a company called Lycodex . . .

Derik de Bruin - Bank of America Merrill Lynch


Dirk Van de Boom

. . . in Germany, and they recently published their internal validation study, and they plan to launch sometime in the second half in the German-speaking countries. And it's fair to say we also have a lot of interest from private individuals who would wish to have the test done, and we'll be making channels to make that available. And further, we're dealing with the challenge of other European countries, and how we might go about this.

Derik de Bruin - Bank of America Merrill Lynch

So how about something boring, like Genetic Analysis business in that sense. Obviously, I have to ask the ubiquitous academic funding questions, and how you see that business kind of moving forward.

Ron Lindsay

I think I pointed out at least in terms of last year, I think we did pretty well against the recession in the academic funding. I think because while maybe a couple of years ago we thought mixed gen sequencing would overtake everything we'd done, it's very clear that some of our multiplexing is very suitable for individuals who want to very focused analysis of DNA in the ways the sequencing is over the top or too expensive. I think we're pretty comfortable with that.

The first quarter was soft. I would agree, but that means we will see how that plays out for the rest of the year.

Derik de Bruin - Bank of America Merrill Lynch

And anybody in the audience? Great. Can you talk about then, you mentioned briefly you AMD and your Rhesus, and some of your other tests, of the test volumes that you are talking about, what component of that is the T21? What component of that is your other . . .

Ron Lindsay

Well, last year, clearly, cystic fibrosis was by far the largest test, and we were very pleased actually. This is the largest panel available, but we were sort of a late-comer into this market, and we're very pleased that we could make inroads into that.

Our AMD test, which we're pretty excited about, when we licensed this IP around this test and developed it pretty minimal cost, launched it within a year of our license, we were very aware that we were moving into a field that was unfamiliar with genetic testing, an ophthalmology field. So we targeted mostly, since launch, which is less than 12 months, that would be educational, and we spent a lot of time at meetings.

We've garnished a very high-level clinical advisory board who are both involved with clinical studies in AMD and other aspects of AMD. And we anticipate significant uptake, but we anticipate this is a long-haul business. And we are already–it's well-reimbursed by Medicare. And we have a lot of interest to do clinical studies, both by physicians and also with some small biotech companies, potentially long-term positions with some companion diagnostics.

Derik de Bruin - Bank of America Merrill Lynch

I guess could you just give us a reminder of what the Rh market size it, and what the AMD market size is? I guess, how much of this are targeting?

Ron Lindsay

Okay. The AMD I can give you. There are about 1 million new cases of AMD in the U.S. every year. And the important thing is we have just completed what hopefully will be a progression claim, if you like. That is, we can identify out of that million new cases those at highest risk of progressing to wet AMD, which is the form of the disease, which, unfortunately, is going to make you blind. So the utility of that test is pretty clear in the long term.

Rhesus, do you, Bill, perhaps have the numbers for that?

William Welsh

You know, Rhesus, it's an evolving process right now. They use RhoGam, it's an autoimmune between the mother and the child, and if they detect that, they would use RhoGam. It tends to be a very cheap therapeutic intervention, and one that doctors probably provide to most folks whether they have or do not have.

We currently see people using RHD for those who just won't do that for a number of reasons, as it starts to get more embedded in the health system, I could see it getting more traction, but right now, it's a fairly modest-sized unit volumes.

Derik de Bruin - Bank of America Merrill Lynch

Obviously, there is a lot of questions going on in this space about the IP with this. Does you having potentially a first mover–well, you do have a first mover advantage in this market with being out there. How much of a barrier does that create for other companies, i.e. if the patents ultimately don't hold, is that sufficient . . .

Ron Lindsay

I think there are two components. First of all, it's not just first mover. It's first mover with the largest clinical study and with a number of cases that convinces docs this test is extremely accurate, and that the no result width is very small. So I believe that we're well-positioned not just to be there first, but with a very high quality test.

I think in the longer term, in terms of the IP, we are very confident that the (inaudible) pan, which covers the analyte [ph], in this case, has been issued in the Europe and the U.S. for quite some time. In the EU, the patent was contested and has been turned down twice. On average, the EU has stricter patent rules than the U.S. sometimes in terms of breadth, so we're pretty confident that this is an important patent that some of these companies are infringing.

I think importantly as we move forward with the excitement of this adoption, we are working on ways to make sure we have FTO, Freedom to Operate, regardless of how the IP shakes out. And also, have a longer term strategy, potentially, to do a test like that we're confident it's important, but potentially very different methods.

Derik de Bruin - Bank of America Merrill Lynch

You've said you wanted to make ultimately take this as an FDA-approved test down the line. I guess given that the sequencing technology continues to involve, at what point would you need to lock it down in terms of the technology in order to take it forward? And what are your conversations going on with Illumina along these lines.

Ron Lindsay

Sure. Let me just speak in general. Right from the get-go, three years ago, envisioned a path for the FDA, partly as a thoughtful insurance, partly as a long-term competitive advantage, and partly also, in terms of if you have a label, you can do a lot more advertising. And also potentially, not necessarily with method, to potentially kit a test and be able to sell it globally more readily. So we view those still as important reasons to do that.

It's a complicated test, the FDA has never had sequencing test brought to them before. They are not very familiar with sequencing, and so it's been a very good discussion, which is ongoing. The components of this instrument's software reagents are complicated, so we're working through with the FDA what's important. The only thing we've publically said so far is that we've begun to collect samples for this PMA study, which is available.

Derik de Bruin - Bank of America Merrill Lynch

And just one final question, as we're running out of time. What do you think is the biggest misconception about the company? What's the Street overlooking?

Ron Lindsay

Well, that's a hard one. I think we're almost out of time.

Derik de Bruin - Bank of America Merrill Lynch

Okay. With that, thank you for coming.

Ron Lindsay

Thank you.

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