Sequenom Inc Q4 2007 Earnings Call Transcript

| About: Sequenom, Inc. (SQNM)

Sequenom Inc. (NASDAQ:SQNM)

Q4 2007 Earnings Call

February 20, 2008 4:30 am ET

Executives

Jody Cain - Lippert-Heilshorn & Associates

Harry Stylli - President and CEO

Paul Hawran - CFO

Betty Dragon - SVP of Research and Development

Analysts

Elemer Piros - Rodman

Kelley Roche - Leerink Swann

David Chung - Lehman Brothers

Jeff Matthews - Ram Partners

Rod Wong - DK Partners

Mike McGinley - Paulson

Ram Selvaraju - Rodman

Alan Kessler - Argenis Capital

Operator

Welcome to Sequenom's fourth quarter 2007 financial results conference call. At this time all participants are in a listen-only mode. Following managements prepared remarks we will hold a Q&A session. (Operator Instructions)

As a reminder, this conference is being recorded February 20, 2007. I would now like to turn the conference over to Jody Cain. Please go ahead, ma'am.

Jody Cain

This is Jody Cain with Lippert-Heilshorn & Associates. Thank you for participating in today's call. Joining me from Sequenom are Dr. Harry Stylli, President and Chief Executive Officer, Paul Hawran, Chief Financial Officer and Dr. Betty Dragon, Senior Vice President of Research and Development.

Earlier this afternoon, Sequenom released financial results for the 2007 fourth quarter and full year. If you have not received this news release or you like to be added to the company's distribution list, please call Lippert-Heilshorn in Los Angeles at 310-691-7100 and speak with Amy Higgins.

Before we begin, I would like to inform you that this call may include a discussion of Sequenom's goals, milestones, financial guidance, future plans, time lines and other forward-looking statements. Including, some of the factors that are likely to influence the company's future results. I would like to emphasize that these statements are based on the information available to Sequenom today and the company's actual results may differ materially from comments made during today's conference call.

There are a number of risks and uncertainties that may affect the company's business and future results, including customer acceptance of and demand for new and existing products, applications and services, reliance on collaborative partners, risks and uncertainties inherent in research, product development, commercialization, regulatory compliance and approval, as well as other risks and uncertainties that are set forth in the company's SEC filings.

Furthermore, the content of this conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, February 20, 2008. Sequenom undertakes no obligation to revise or update any statements to reflect events or circumstances after the date of this call.

With that said, I'd like to turn the call over to Harry Stylli. Harry?

Harry Stylli

Thank you, Jody and many thanks to each of you for joining us today. We are reporting another quarter of solid performance with record revenues of $11.1 million, capping off the year of significant financial and operational achievements. Our revenues for 2007 reached $41 million up 44% compared with 2006. We are reporting growth in all segments our Genomic Analysis business, including MassARRAY system placement and consumables as well as from our Contract Research Services business. And we further solidified our role as a leader in fine mapping and gain recognition for our methylation and quantitative gene expression solutions.

I'd now like to turn the call over to Paul Hawran to review our financial results in greater details and introduce our 2008 financial guidance. Paul?

Paul Hawran

Thanks, Harry. We are pleased to report record total revenues for the three months ended December 31st of $11.1 million or a 41% increase from the fourth quarter of 2006 primarily due to higher placements of MassARRAY systems and other related products sales. We continue to benefit from our service business as well, which contributed $924,000 in the fourth quarter revenues.

Cost of product and service revenue was $5 million for the quarter compared with $3.2 million in the fourth quarter of '06 with the increase primarily associated with higher sales volume. Research and development expenses increased to $4.5 million from $4 million in the prior year quarter, reflecting higher expenses associated with product development, product improvement, and new applications for the MassARRAY platform, along with increased R&D investment in non-invasive prenatal diagnostic technology.

Selling general and administrative expenses increased to $9 million from $6.3 million, primarily as a result of higher marketing expenses and head count-related costs. Total costs and expenses for the quarter were $18.5 million, up from $13.6 million in the prior year. Our net loss for the fourth quarter of 2007 was $6.8 million or $0.16 per share and that compares with a net loss of $5.3 million or $0.16 for the same quarter in 2006.

Turning to the full year 2007, we reported total revenues of $41 million or an increase of 44% from $28.5 million in 2006. Gross margins for the year were 56% with system sale gross margins at 50% and consumable gross margins at 70%. Both those margins grew from the previous year. Total costs and expenses for 2007 were $63.5 million, compared to $47.8 million in 2006. We reported a net loss for 2007 of $20.9 million, compared with a net loss of $17.6 million.

As of December 31, 2007, we had available cash, cash equivalents, restricted cash and short-term investments of $53.1 million. This compares with cash, cash equivalents and short-term investments of $26 million at the prior year. As we also reported in our press release, short-term investments include approximately $9.4 million in option rate securities. Although the collateral underlying these securities remain strong, we continue to monitor liquidity crisis, which is affecting the entire market.

Our balance sheet reflects the completion in October of '07 of the previously announced private placement of approximately 3.4 million shares at $9 per share raising approximately $28 million after deducting fees and offering expenses. Lehman Brothers, UBS served as joint lead placement agents with Leerink, Oppenheimer and Rodman & Renshaw serving as co-placement agents.

Now turning for a moment to our 2008 financial guidance, we expect 2008 total revenues to be in the range between $53 million to $56 million representing a 30% to 37% increase over 2008. We also expect to continue to grow gross margins due to increased efficiencies and to operating leverage in our contract services group. We plan to increase our investment in non-invasive prenatal diagnostics as well as sales and marketing in 2008. As a result, the 2008 we expect R&D expenses to be up $26 million to $28 million up from $14.4 million in 2007.

The increase in research and development consist of a shifting of resources to non-invasive prenatal diagnostic as we move closer to commercialization, while also continuing to develop new applications in our Genetic/Genomic Analysis business. Our selling general and administrative expenses are expected to rise from $34 million to $36 million and stock based compensation expenses are expected to be approximately $3 million to $4 million, as compared to $30 million in 2007. Consequently, we expect our net loss in 2008 to be approximately $30 million to $33 million and our cash burn to be between $26 million and $28 million.

With that I will turn this back to Harry.

Harry Stylli

Thanks, Paul. As a key achievement late last year we launched through our partner Lenetix our first in a series of planned noninvasive prenatal laboratory developed genetic tests, marking our entry into a business that presents an enormous opportunity for Sequenom.

This launch for a test for RhD blood disorder is a notable event, as obtaining New York State regulatory approval validates our SEQureDx Technology. This tests commercial availability provides us with introductions and builds relationships with additional tests to follow.

In 2007, we also secured additional intellectual property from Professor Dennis Lo the Chinese University of Hong Kong, which has enabled significant progress towards a Down syndrome test based on fetal RNA markers from maternal plasma. In fact, there was a released today giving more details later during this call.

Now let me review with you several of our recent achievements in our Genomic Analysis business. During the fourth quarter, we added 15 new MassARRAY system placements bringing total placements for 2007 to 55. This is 21 more systems than we sold in all of 2006. In 2006, there were a significant number of system trade-ins as we worked to upgrade our install base to a latest technology. These trade-ins were minimal in 2007.

We have approximately 200 systems in the field each of which generates recurring consumable sales. Our EpiTYPER and [QGF] applications are showing increasing demand. We have growing expectations for both applications especially EpiTYPER as a consequence of the stronger funding of epigenetic studies worldwide.

From our contract research services as Paul mentioned, we reported revenues of 924.000 in the fourth quarter and $3.5 million for all of 2007, which is up more than three-fold from 2006. Our contract research services group also served Sequenom by supporting MassARRAY system sales for feasibility studies, cells and lead generation helps us create partnership opportunities.

We also controlled expenses while making ongoing investments in R&D and commercialization resources including sales and marketing. We anticipate realizing the full return from these investments beginning in the second half of the current year.

Now regarding some of our important new products we introduced last year. First, with our TYPER 4.0 Genotyping Software, this software is aimed at strengthening, what we believe is already the industry's best available fine mapping genotyping solution. This customer-friendly product is used with our iPLEX Gold Assay and offers higher data quality, while simplifying work flow and provides improved ease of use.

Our Assays-By-Sequenom service also introduced late last year include Assay Design and Validation as well as an online customer portal and so far is being well received by customers. It provides customers with the flexibility to choose snips of interest combined with the convenience and reliability of off-the-shelf pre-validated assay reagents.

MassARRAY customers can access this service through our custom portal called mysequenom.com, which also offer additional tools and download option, e-commerce capabilities and support functions. Also launched a new liquid handling nano-dispensing product to simplify liquid handling for our platform.

Finally, on the R&D front for Genomic Analysis business, we also took a major step toward entering the complementary whole-gene analysis market by exclusively licensing third generation single molecule nucleic acid technology for opti-nanopore technology from Harvard University. Although in an early stage of development, this initial technology promises to be highly scalable, has simple work flow, which is important for molecular diagnostics and has the potential to deliver a sub $1,000 human genome on a routine basis.

If the technology fulfills its potential, the first solution will be targeted at whole-genome genotyping followed by sequencing solution. Sequenom's current distribution channel should be ideal for commercializing this technology, as we share the same customers.

Now, let's talk a bit about our diagnostics program accomplishments. Last year we made significant advances in our prenatal molecular diagnostics programs based on our proprietary nucleic acid-based technology under the brand name SEQureDx Technology. We intend to continue to commercialize through license fee, homebrew versions of our genetic tests, which are now called Laboratory Diagnostic Test or LDTs. We have been in dialogue with the FDA and may thereafter seek FDA approval for select markets.

As previously announced following New York State approval we are delighted that the first LDT based on our technology, a test for the Rhesus D incompatibility on the RT-PCR platform is now been marketed through the US with our partner Lenetix Medical Screening Laboratory. The test is being well received by the medical community and we had the positive reception at the Maternal Fetal conference in January and already the first commercial test have been performed by Lenetix.

Now I'd like to turn the call over to Betty Dragon to discuss recent advances with our molecular DX test. Betty?

Betty Dragon

Thank you, Harry. Last month we announced that we will conduct a fetal Rhesus D genotype study at centers facilitated with the North American Fetal Therapy Network also know as NAFTNet. This will recognize non-profit research network has expertise in pregnancies at high risk of complex fetal disorders.

The prospective multi-center study will enroll 550 pregnant women, who are RhD negative and the RhD laboratory work will be conducted in the Medical Genetics Laboratory at Baylor College of Medicine using our RhD technology. This study will allow Baylor College of Medicine to use our SEQureDx Technology to validate its LDT assay for RhD for use as clinical service offering and will allow us to use the samples collected from the study, in clinical studies to support our planned regulatory application to the FDA.

In addition, NAFTNet members along with other institutions may help us with the clinical validation and clinical trials for future tests including Down syndrome. Also last month, we reported that we are beginning a clinical assessment of our Down syndrome test at San Diego-based Sharp HealthCare under the direction of Sharp's Medical Director, Dr. Allan Bombard. This assessment represents an important step in finalizing the assay design that will allow us to initiate important clinical studies and validation efforts to commercialize an LDT for Down syndrome. It keeps us on track with our plan to introduce an LDT for Down syndrome in late 2009.

Today we announced significant progress in the development of a non-invasive test for Trisomy 21 or Down syndrome from maternal plasma. The test incorporates multiple RNA fetal markers, including markers from the PLAC4 gene as previously published by Dr. Dennis Lo from Chinese University of Hong Kong.

In preliminary studies more than 100 clinical plasma specimens of various ethnicities were tested with partners using our MassARRAY platform and SEQureDx Technology. The first multi-marker Trisomy 21 test indicates performance approaching 85% plus or minus 5% assay coverage, more than 95% sensitivity, and close to 99% specificity. The SEQureDx Technology for Trisomy 21 is being developed to directly assess risk of Down syndrome using a maternal blood sample as early as the first trimester or early second trimester prior to invasive procedures such as amniocentesis or chorionic villus sampling that carry unnecessary risks to mother and fetus.

It is expected that the performance specifications of our test may improve further as additional markers are validated, a greater number of patient's samples are tested, and the test process is made more robust for real world use. We believe that our test with the current specification has the potential to greatly enhance patient management worldwide.

Now back to Harry.

Harry Stylli

Thanks, Betty. We are optimistic about Sequenom's future and we expect 2008 to be a challenging and successful year. Demand for our products and services continued to be robust in all of our markets. Investments made last year in our sales forces and support organization is expected to create leverage for the business, especially in the second half of this year. We also expect to benefit from whole-genome sequencing and emerge as the preferred platform provider for fine mapping and validation studies for that particular field.

Fine mapping genotyping will remain the engine of our growth in 2008 with an increasing contribution from epigenetic and Quantitative Gene Expression Analysis. Our opportunities in livestock and agriculture are also promising. The recent expanded partnership with MMI/Cargill is above one significant relationship in this rapidly developing global market.

We are beginning to see increasing demand from translational and clinical testing groups for example, in Oncology and metabolic diseases, as the advantages of our platform are being recognized by these constituencies. We believe that these segments are potentially larger and more diverse opportunities in fine mapping alone. With the pending launch of our iSEQ product for Pathogen Typing and Identification, which we expect in June of 2008, we are poised to enter another large in promising market that we intent to develop and penetrate through partnerships with others.

As the Genomic Analysis business continues to perform, its test requirements is diminishing. The majority about 75% of our planned cash investments for 2008 is targeted at developing our molecular diagnostics opportunities. Our prime focus in 2008 is to launch Rhesus D and gender test for (inaudible) disorders on the MassARRAY platform and most importantly to finish developing the T21 Down syndrome as Betty discussed earlier in the call.

During 2008, we will also be preparing the MassARRAY platform for eventual submission to the FDA for a [registration], which will create further opportunity for Sequenom. Also this year, we are planning to invest in assets and partnerships that accelerate the commercialization of our SEQureDx Technology and other molecular DX assets. Our plans include introducing a number of new and enhanced products in our Genomic Analysis business and their improving customer experience among these.

We plan to launch a new PCR product and improving customer experience and expanding a higher margin recurring consumable revenues. We plan to launch reagents for Oncology customers and specific kits applications for those of our customers involved in second generation sequencing.

We have a new assay technology called iPLEX Platinum and Development. This newer version assay is being developed to further improved data quality, enhance ease of use, work flow and may offer improve cost per genotype. Improvements to our EpiTYPER application are being made in 2008 based on customer feedback we expect continued growth from this application.

By June 2008, we expect to introduce an entirely new application iSEQ for Pathogen Typing and Identification, which is being developed with input from the Health Protection Agency in the UK and Centers for Disease Control and Prevention in the US. It will also introduce Sequenom to new markets and customer with multibillion potential. As with the majority of our developments, this application works side-by-side with our family of MassARRAY applications can be added on by most of our install base.

We intend to continue to carefully invest in our sales and marketing organization to develop new geographic opportunities and anticipation of future demand. We are now direct in India and Japan. These countries have a high potential for our products and services. We also expect to make further significant progress in our SEQureDx Technology with initial focus on non-invasive prenatal diagnostics.

We are finalizing LTDs for Rhesus D incompatibility and for X-linked recessive gender disorders to be run on the MassARRAY. We expect to have these tests ready as LTDs within the first half of 2008 with commercial launch occurring shortly thereafter. We expect to announce additional clear license partners for these tests in due course.

Baylor College of Medicine is an existing customer that is operating MassARRAY under clear certification that will be helping us with the NAFTNet study. We believe the gender opportunity beyond the X-linked recessive disorders carries considerable potential upside for Sequenom in the 2009 timeframe.

We have through our QIAGEN collaboration considerably improved our ability to recover and enrich fetal DNA from plasma. As a reminder, we have a worldwide exclusive license for applying this technology to all short nucleic acid for a broad range of diseases and disorders, QIAGEN being the exclusive supplier.

We intend to broaden the technology for our Epigenomic Platform in 2008 and we are going to do this by investing in a new whole-genome wide technology for methylation markets. In fact, we have already licensed this technology. We continue to make progress with our centers in alliance to develop diagnostics for next generation HPV, chronic kidney failure, and autoimmune disorders are brought under MassARRAY's menu.

We intend to present at several scientific and clinical conferences in our prenatal diagnostics, launch Rhesus D and gender test (inaudible) disorders on the MassARRAY platform to clear certified laboratories and expect to transfer a T21 test utilizing a SEQureDx Technology in the MassARRAY platform to our partners' for broad clinical studies in 2008. I am encouraged by the progress in the last 12 months we and our collaborators have made with the first three MDx tests for our menu. There is a sustained R&D effort to fully develop these tests and expand our menu of future tests.

Going forward, expect an increasing emphasis on building our commercialization assets and partners to develop and deliver these opportunities to the marketplace. As a reminder, the market for Down syndrome alone in is US is estimated at $1 billion to $1.5 billion with an equivalent amount for the rest of the world. Our principal focus is the US market, but we shall be exploring international opportunities and these will most slightly involve for that partnerships.

In the next 12 months, progress for T21 and other SEQureDxs will be publicized primarily through press releases, media and key conferences.

We have reasons to be encouraged by the prospects of our Genomic Analysis business in 2008 and beyond based on the environment, market trends and our new products. Similarly, we are excited by the potential of our MDx opportunity as we mature assays, consider the benefits to patient management, and begin to address a large commercial opportunity that beckons.

So with that overview of our results and our plans, at this time I'd like to open the call to questions. Operator?

Operator

(Operator Instructions)

One moment please, for the first question.

Harry Stylli

I would just like to add, we had a very positive -- this is Harry Stylli we had a very positive reaction of the Maternal Fetal conference. Our focus is on our Rhesus D, but also in various seminar, it seems that the, that constituency of Maternal Fetal specialists are really been drawn to the potential of our T21 test based on free RNA markets.

Also in the summer, I would like to add in June we are presenting at the International Society of Prenatal Diagnostics. And this is the ISPD and at that conference, we expect to reveal a lot of new information.

And so with that, I'd like to invite -- okay operator we are ready for the first question.

Question-And-Answer Session

Operator

Thank you. Your first question comes from the line of Elemer Piros of Rodman.

Elemer Piros - Rodman

Hello, Harry.

Harry Stylli

Hello Ele.

Elemer Piros - Rodman

Congratulations on the quarter.

Harry Stylli

Thank you.

Elemer Piros - Rodman

Harry, I was wondering, if I could ask Paul just to clarify one item in the guidance please. Paul can you hear me?

Paul Hawran

Absolutely, please go ahead.

Elemer Piros - Rodman

You were saying that for 2008, you're expecting selling, general and administrative expenses go from $16.9 million in 2007 to $34 million to $36 million. When I look at your P&L, you actually break these items out and the $16.9 million usually refers to your selling and marketing expenses.

Paul Hawran

That's correct, Elemer. The number that should be quoted is the combined SG&A, which is the $16.9 million and $14 million. So it's rising from $30 million up to the $34 million.

Elemer Piros - Rodman

Yes, that looks much -- yeah now I understand. Thank you for clarifying that, Paul. So, Harry and maybe Betty could help me to understand. How good is over 95% sensitivity in the Down set? I mean it seems like a very high number and you still further plan to improve that.

Harry Stylli

I will have Betty answer.

Betty Dragon

Hi, [Alex]. Yeah I think that's a very good number. We are very encouraged by that number. We are continuing to look for additional markers as we go along. We are originally poised with this, as a reflex test. So, we would like to continue to make this to look ultimately for a screening test, to go for a real diagnostic with this.

Harry Stylli

So, in other words the sensitivity performance that we're indicating and especially the specificity and population coverage are very compelling performance characteristics. Invariably, Ele as you do more testing, things can change, but usually with these tests we expect sensitivity and specificity to improve as we test more and more clinical samples.

Elemer Piros - Rodman

Harry, I never asked you this, it seems maybe a naïve question. What is the big difference between homebrew and LDT and why do you choose or why did you choose the sequential route to go to get the product eventually to the market?

Harry Stylli

So, LDT and homebrew are synonymous.

Elemer Piros - Rodman

Okay.

Harry Stylli

LDT is the newfangled word-laboratory developed tests for homebrew.

Elemer Piros - Rodman

That's what I get. Okay.

Harry Stylli

And so they're identical. Treat them as synonymous. So it should then pull into place that we have the opportunity to initially commercialize our tests using the LDT/homebrew angle if you like and in parallel with we're developing our tests and platform for FDA.

Elemer Piros - Rodman

Okay. Sorry, Paul, but I have to jump back to one item. On your projections for 2008, did you include any significant royalty revenues from the diagnostic business in your revenue projections, Paul?

Paul Hawran

We have included in our revenue some modest revenues from the diagnostics side, and they would have incorporated some royalties associated with it.

Elemer Piros - Rodman

Okay.

Paul Hawran

But they are modest.

Elemer Piros - Rodman

Okay. Harry, coming back to you on, how should we think about 2008, in terms of news flow in determining the fate of how you're going to commercialize, that is the T21 test, the gender test, maybe some tests bundled together? Do you think that we will see these events develop in this year, perhaps beginning in the first half of '08?

Harry Stylli

I'd say you would see some of them in the first half of '08, but you would expect to see an acceleration in second half of '08. It could take a variety of forms, partnerships and also take the form of Sequenom building or acquiring reference labs and distribution channels.

Elemer Piros - Rodman

Okay.

Paul Hawran

Or the combination of the two.

Elemer Piros - Rodman

And just one last question and this may seem like an odd question here. But just this week or late last week the largest beef recall was announced in the US. My question is do you have an intention, interest in going into expanding into animal testing or food testing? Have you ever had any interaction with the USDA or some of those producers in this regard?

Harry Stylli

So, I actually had a conference call with senior people in the USDA only yesterday and here is they need us, okay. We actually, the USDA is one of our customers and many folks, who are involved in beef production are also our customers. We evolved in this industry. Now, in terms of -- that's just simply for genotyping beef quality for example, with the launch of iSEQ it creates an opportunity to also use iSEQ in our platform to access pathogen related issues for the other beef industry.

Elemer Piros - Rodman

Now the USDA and the government in general has been dragging their feet in mandating testing. Do you see some change on the horizon in this regard?

Harry Stylli

I cannot speak for the US government and I'm sure they got our best interest at hand. When their policy and strategy becomes clear, hopefully it will involve Sequenom.

Elemer Piros - Rodman

Okay. I'll get back into the queue. Thank you very much.

Harry Stylli

Thank you I really appreciate the questions.

Operator

Your next question comes from the line of John Sullivan of Leerink Swann.

Kelley Roche - Leerink Swann

Hi, guys.

Harry Stylli

Hello.

Kelley Roche - Leerink Swann

Hi, this is Kelley Roche in for John Sullivan today.

Harry Stylli

Hi, Kelly

Kelley Roche - Leerink Swann

Hi. So some questions I had with. How many fetal biomarkers of Down syndrome have you identified?

Harry Stylli

We've identified a total of about 20 markers.

Kelley Roche - Leerink Swann

Okay. And how many marketers do you think you'll have to use in order to make a test that is clinically useful?

Harry Stylli

Probably [skew] eight.

Kelley Roche - Leerink Swann

Okay. And if you have seen any significant issues regarding making Down syndrome test that is not ethically limited?

Harry Stylli

We haven't seen any issues of that type at this time.

Kelley Roche - Leerink Swann

I think that one other -- what is the per test cost of alternative methods of Down syndrome screening -- have you run into that?

Harry Stylli

Yes, we have I mean by range from hundreds of dollars to thousands of dollars, a very broad spectrum for the different tests for Down syndrome.

Kelley Roche - Leerink Swann

Okay. I think that's all for now. Thanks very much.

Harry Stylli

I appreciate the questions. Thank you.

Kelley Roche - Leerink Swann

Thank you.

Operator

(Operator instructions) Your next question comes from the line David Chung of Lehman Brothers.

David Chung - Lehman Brothers

Yes, thanks very much. Hey, Paul I was just wondering, have you had the revenue guidance for '08 $53 million to $56 million and expanding gross margin. I was just wondering if you could provide a little color on what your expectations of the services business, is and how that might impact the gross margin?

Paul Hawran

Yes, actually that's a great question. Thanks, David. As you know, the Genetic Services business we started up in 2006 and it really took off rather quickly. During most of 2007, what we have been doing is really building in the foundation for making sure that we can grow that business growing forward.

So, for 2008 we are looking for that business to continue to grow, but also at the same start improving the margins that we previously had. The margins that we are expecting to grow from that Genetic Services business would be somewhere in the area of around 40%, 45% area and that would complement as I mentioned, there were systems margins. This is around 50% last year and that compares actually with 45% in '06. So, those have been going up.

Consumable margins were 66% in '06. They have gone up at 70%. In '08 and we are hoping to certainly see if we can grow that any further. But the whole goal on Genetic Services in '08 is really to stabilize it, get the workflow through there and improve the margins there. So, it would help the entire business.

Harry Stylli

David, this is Harry. The Services Group also provides various internal services to support the business. So, to call it a business is a generous term. Okay? We are running it as a business for operational efficiencies. It provides a whole series of other functions in the aid of the rest of the Genomic Analysis business.

David Chung - Lehman Brothers

Great, thanks. That's quite helpful. Also I was just wondering if you could talk a little about the end market demand for MassARRAY's and what you could share in terms of what the customer demand is and if you could share anything with that?

Harry Stylli

Yeah, I attempted to do that in the call. So, most of our business today is being driven by the need to do fine mapping and validation studies, post whole-genome array and now whole-genome sequencing. We expect that the opportunity there is probably 1,000 to 2,000 labs worldwide, for all of us and that includes our competitors.

Now, another opportunity for Sequenom that's really driving some of our growth and we expect to play a bigger part of our future, is effectively translational research and which leads on to diagnostic testing and clinical testing. We expect that opportunity to be in the order of tens of thousands of labs worldwide. And that's obviously a market, we are eyeing with great scrutiny and intensity.

David Chung - Lehman Brothers

Great, thanks. I guess my last question is related, you had a deal in the middle of last year you talked about your partnership and you provided some information on HPV testing. I was just wondering, when do you except that we might see some data or catalyst related to that and if could you talk a little about how you see that this product would be differentiated from the current products?

Harry Stylli

It's not Sequenom's product. Our product is (inaudible) to use the MassARRAY. So, I'm sure they can do a more convincing job than I can, but effectively what drew them to our platform and one of the differentiates with the product is that, you are able to genotyping very sensitively in our technology. You want to add something to that.

Betty Dragon

I mean you have the ability on this platform of both detecting the virus, quantifying the virus and being able to say what type virus the individual is infected with, all with the same sample at the same time and none of the other commercial test that are out there, are capable of doing that with the single specimen. So, it provides with very unique test from that point of view and sets it apart comparatively for any other products it's out there.

David Chung - Lehman Brothers

Okay, thanks very much.

Operator

Your next question comes from the line of Jeff Matthews of Ram Partners.

Jeff Matthews - Ram Partners

Hi, thank you. I was wondering, it looks like your roughly doubling your cost structure going forward. Could you break out the key spending categories and secondly how many years does this push your breakeven level to

Harry Stylli

So, if I understand the question correctly as far as the increase in the expenses, keep in mind that there are two businesses within Sequenom right now, our Genetic or Genomic Analysis business and as revenues are driven up closer towards lets says even the $60 million marker. So, you're going to see that business actually growing towards or becoming cash flow neutral or even positive.

On the expense that we are growing in 2008, keep in mind that a big portion of that is really associated with the Molecular Diagnostic business. And not even just the prenatal, the non-invasive prenatal technology that we are developing, but we are also developing other diagnostics that we would like to pursue going forward as well. So, the research and development expense budget is really growing in that context along with also growing product development for the Genetic Analysis business.

As far as our break even is concerned, we have not really gone out much further than 2008. However, we have mentioned that it is certainly our desire that towards 2010 we would like to see the company break even and enjoining profitability at that point in time based on sales from both businesses.

Jeff Matthews - Ram Partners

Okay. Could you give a little more precise in terms of what the extra spending is going to be? Is it mostly R&D? But there is a lot of SG&A in there. So, what would be the category?

Paul Hawran

As far as '08 is concerned, most of that is -- as far as the R&D is concerned remember that as you develop a diagnostic market you are also making clinical samples and gauging clinical trials, a whole host of different research activities as well that have to be taken into account.

On the SG&A side, you are really taking a look at starting up a commercial operation for the diagnostic piece, but also continuing the run rate that we have started in '07 for the Genomic and Genetic Analysis business. So, to continuation of both those factors, we are seeing an increase.

Jeff Matthews - Ram Partners

Okay. So, would you expect to see a further ramp up in '09?

Paul Hawran

It really depends on the success that we have in a diagnostic piece. Right now, keep in mind that we are focusing in on the prenatal side. It depends on whether the diagnostics are brought in, but then also part of it, remember that we are careful about making sure that we are driving our way towards profitability and so our expenses going forward are really going to be geared towards the opportunity near-term as well as long-term.

Jeff Matthews - Ram Partners

Okay. Thank you very much.

Operator

Your next question comes from the line of [Rod Wong of DK Partners].

Rod Wong - DK Partners

Hi, Harry.

Harry Stylli

Hi, Rod.

Rod Wong - DK Partners

Thanks for the call. It's Naveen here actually.

Harry Stylli

Hi, Naveen.

Rod Wong - DK Partners

Just maybe you can just help me put the data from the Down syndrome test in perspective. The current standards, maybe you can just talk about what those sensitivity, specificities are for the current standards and how the data you have shown stack up.

Betty Dragon

Okay. So, from a serum screening perspective. So, when women go in and have serum screening done, what they're looking at are tests that are probably looking at a range of 79% to 86 % sensitive in terms of their sensitivity and have a specificity of 92% to 95%% in terms of what their overall specificity is in the best case, it depending upon, we are talking about there's multitudes of different ways serum screening is done today, and different markers that they're done whether it is first trimester, second trimester integrated however its put together. But that's the general range that you are looking at.

What you will see with this test and what we are proposing the utility of this first generation test that we would use is that, and from a reflex mode, we could go in with this test following a serum screen result, where a woman is told she's at risk for Trisomy and prior to any invasive testing one because now what the woman be told to do is go have an invasive test done probably.

She would have this blood drawn and then our test performed and what we would really be able to do is hone in on women that actually are address to Trisomy or not. So, this would be; we can really change how the markets being done and think about the market size that you are looking at, think about the markers that we're looking at, and the fact that's is a large number of false positives that are in that serum screening right now.

So, there is a lot of women that are going to amnio that don't need to go to amnio and the specificity of this test will be so much higher that we'll be able to actually rule out a lot of women that don't need to go on to further invasive testing.

Rod Wong - DK Partners

I see. I mean, since the test character is sound so much better than the current screening serum test. Any thoughts down the road if just positioning this as the serum screening test of choice?

Harry Stylli

I think ultimately as the test becomes established, we're pretty confident it would take the majority of the market. That including serum testing, I think people will also question why do you need the serum test? You can get the results in from one test. Now, of course we are probably going to need to add a few markets in the future to really achieve that ambition, but again it's all eminently realistic.

Rod Wong - DK Partners

Okay, great. Thanks for taking the question.

Operator

Thank you. Your next question comes from the line of [Mike McGinley of Paulson].

Mike McGinley - Paulson

Good afternoon. Congratulations and a great quarter.

Harry Stylli

Thank you.

Mike McGinley - Paulson

Couple of my questions already asked, but I guess the one that I've got here, projected market were looking 1 to 1.5 billion potentially replacing amnio as we know today?

Harry Stylli

Amnio serum testing as well. So, not just amnio, but if you look at all the dollars that are spent in the healthcare cost around Down syndrome, pre-term, if you look at serum testing, the amniocentesis market, the CVS market, then you are looking at a market that's well north of the billion in the US alone.

Mike McGinley - Paulson

So, for T21 I'm just curious how competitive pricing wise will your product be versus one of those?

Harry Stylli

Well, I think there is two parts for the question. One is, if you are looking at a reflex test then you can value price that test. If you are looking at a test that's going to value price, don't quote me on this, but probably charge at least $1,000 for such a test. If you really want to drive adoption aggressively and take the screening market and you are probably looking half that amount.

Mike McGinley - Paulson

And what type of profit margin are you looking at?

Harry Stylli

Profit margins will be, the gross margins will be probably in the region of 80% plus, 85%.

Mike McGinley - Paulson

All right, terrific. Thank you very much.

Harry Stylli

Thank you for your question.

Mike McGinley - Paulson

Have a great night.

Harry Stylli

You too.

Operator

Your next question is a follow-up from Elemer Piros of Rodman.

Ram Selvaraju - Rodman

Hi, thanks very much for taking my question. This is Ram Selvaraju talking from Elly's line.

Harry Stylli

Hi, Ram.

Ram Selvaraju - Rodman

Paul just briefly I wanted to ask a few questions regarding the MassARRAY side of the business. So, initially commenting on the machine placements that were made in 2007, I believe you've said 55 machines?

Harry Stylli

Correct.

Ram Selvaraju - Rodman

Harry you said that right. So, what I was wondering is going forward, Harry you also mentioned sort of what the overall pool of potential MassARRAY customers looks like sort of in the region of 1,000 to 1,200 or so labs. To what extent do you think in the next sort of 18 to 24 months you would be able to penetrate that customer base and place MassARRAY machines in as many of those labs possible? To what extent is that achievable? And also regarding the potential transition more to revenue coming from the consumables side of the business, what sort of timing would you expect on that, please?

Harry Stylli

So, the first part of your question, we estimate that the fine mapping validation market is about 1,000 to 2,000 labs. I know it is quite a range. There's also the translational opportunity, which resides in clinical centers worldwide. We expect that opportunity is around 10,000 labs. So, I'd like to think we are going to dominate that market in total, but and we are certainly going to try. So, we believe that provided we remain viable and we innovate and get our products and satisfy our customers and the competition behaves itself, that we should capture a significant percentage of that market and therefore we anticipate continued growth and revenues over the longer-term.

Ram Selvaraju - Rodman

Okay. And with respect to the consumables side of the business, maybe I should phrase it with more detail. Regarding current utilization trends among existing MassARRAY users, what do you see that as right now? Are customers who purchased the MassARRAY machine recently running it at 100%, 50%? Could you talk a little bit about that?

Harry Stylli

They typically run the average consumable used across our 200 base is about $80,000.

Ram Selvaraju - Rodman

Okay.

Harry Stylli

Per annum.

Ram Selvaraju - Rodman

Yeah.

Harry Stylli

And that's the average per customer and the distribution obviously goes from zero to a couple million dollars.

Ram Selvaraju - Rodman

Okay. Do you see that number changing, Harry?

Harry Stylli

It may change. Actually we're seeing little upticks in certain regions and in certain markets. The average is to remain in the same. One of the point I want to make though, is in 2005 so the way we innovate, we enable our customers to carry out more test per dollar -- per dollar per genotype if you like. And that's the way we've innovated so effectively our customers are doing five times the amount of genotype that they were doing in '07 that they were doing in '05 for more less the same cost.

Ram Selvaraju - Rodman

Okay.

Harry Stylli

Okay. And so we're also looking to in terms of building our consumable revenues, we're looking at our value chain or the value stream that our system generates. We're making new consumables available to our customers such as for instance PCR sets, various panels that enable customers to carry out their experiments and so forth and we expect that to enhance our consumable stream in the near future.

Ram Selvaraju - Rodman

Okay, thanks. Betty I just had a few questions for you regarding the timing of clinical studies and the release of results from those study. So, obviously the two that I was most interested in would be the NAFTNet study and the Sharp HealthCare screening study for the fetal and (inaudible) test?

Betty Dragon

Okay.

Ram Selvaraju - Rodman

If you could just give me some guidance on when you would expect results from those trials going forward?

Betty Dragon

Okay. So, we will be initiating both of the studies at the end of this year, is what we are anticipating. The NAFTNet study actually is a prospective study, so trying to remember exactly when we end up reporting our results from that one. We'll take -- you got to wait until the baby born. So that's the ultimate, the ultimate timeframe. It's a prospective study.

Going have to wait at least nine months until baby is born for most of these. We will know testing because we are doing three time points during that study, so we will have results- but until you get the tiebreaker. It is when the baby is born. So it's going to take nine months to get result out formally for that, okay.

Ram Selvaraju - Rodman

Okay.

Betty Dragon

For the T21 test we're initiating those studies actually also start at the end of this year. Those sorts of results actually we can start to begin to compare right away because we get, they're paired with amnio. So, we will have intermittent results that we will be seeing come out. There is various phases and stages to the studies that we are doing with the Sharp okay. There is a three different phase -- actually four phases to that, but three main phases that are going on with that.

Harry Stylli

So, I'd add that Sharp is only the first of our number of collaborators. Most of the clinical samples we're accessing today are really for assay development, robustness testing, all these are good things to make sure that the test is rock solid before we initiate clinical validation studies for Down syndrome towards the end of this year.

Ram Selvaraju - Rodman

I have a follow-up here Harry, I mean if we are in clinical testing for eventual formal approval with both the T21 test and the Rhesus D on the MassARRAY platform. Let's say it takes two to three years. In the interim with the homebrew being available on a widespread basis, what percent of the eventual market do you think you could capture initially, during those years while we are still in clinical testing?

Harry Stylli

So, first of all let me answer your question by saying the entire Down syndrome market today and genetic testing in general is a homebrew market. There are very few, if any, FDA approved tests in those markets. So, we believe we can make considerable progress and what will play on this is how we invest in our distribution channel or partnerships will have a big factor. Our pricing strategies will have a big factor. Medical education, education of the clinical constituents and the patients will have a big factor in driving adoption. Adoption by the various clinical authorities will also be, and the payers will also be a big factor.

So, these are all goals we have in front of us to undertake. And all of these will have a big impact and are interrelated when driving adoption in the US marketplace. It is not clear to me that, and I believe an FDA approved test will help us think, will basically increase our optionality. It will help accelerate the adoption of the test by those constituents, who prefer kits for example and don't undertake homebrew testing.

And that's the advantage of having an FDA approved test other than getting the FDA's endorsement seal of approval, if you like, is that we are able to then sell the test as a kit. And it gives us as the manufacturer because then we call ourselves a manufacturer at that stage, broader rights to promote the tests in the US market. So, those are the real reasons why we like to go to the FDA seal of approval, the ability to then manufacture and sell kit and just as importantly to really promote it.

Today for us to even, we can't even come close to that of course today. And we have to work through our licensees or potential labs that we will acquire or build in the future.

Ram Selvaraju - Rodman

Yeah. Thank you, Harry.

Harry Stylli

Okay.

Ram Selvaraju - Rodman

Just one last question if you could just give us some quick markdown Rhesus D on MassARRAY, gender test on MassARRAY and Down syndrome on MassARRAY, when do we expect to have the LDT versions available?

Harry Stylli

We expect Rhesus D on the MassARRAY around the summer. Okay, to be commercialized. We expect gender probably in Q3 towards the end of Q3, which is gender for X-linked recessive disorders. And we expect Down syndrome as an LDT to be commercialized in the first half of 2009.

Ram Selvaraju - Rodman

Okay. Thank you very much. Sorry we were a bit overwhelming here.

Harry Stylli

No, not all. I enjoyed the -- I'm flatted by the interest. Thank you.

Operator

Your next question comes from the line of Alan Kessler of Argenis Capital.

Alan Kessler - Argenis Capital

Hey, Harry.

Harry Stylli

Hi, Alan.

Alan Kessler - Argenis Capital

I've a question for you last year when ACOG revised the amniocentesis recommendations. Has that had a dramatic impact on the acceleration of testing or do you expect that to take some time and do you expect your test in fact help impact that?

Harry Stylli

I think it will take a little bit of time and also expect our test to help impact that because look at the current paradigm you'll really, you really have two choices, either serum tests which lead to high false positives, happens over two trimesters or amniocentesis, which has a small real risk of miscarriage for example or ill health to the mother.

So, if you were to deliver and this is an assumption of course, we call it speculation, but if you were to deliver a validated test for T21 that was safe that had the sensitivity and specificity, the population coverage that we talked about today, it could help accelerate the adoption of the ACOG recommendations. I could assure you that lots of current players in this field are sizing that recommendation up and they are looking to go, grow and build the market.

Alan Kessler - Argenis Capital

Thank you.

Harry Stylli

Okay.

Operator

Your next question comes from the line of [Mike McGinley of Paulson].

Mike McGinley - Paulson

Just a follow-up again, so for T21 the US market you are looking to keep that yourself and partner it outside the US market?

Harry Stylli

The way we intend to do in the US, while it is an LDT is to partner with certain reference labs in the US, particularly those that address the hospital market. We intend to vertically integrate for the primary care market. That's our strategy in the nutshell for the US. Now, worldwide we will be partnering with different players representing different regions.

Mike McGinley - Paulson

Are you looking to go -- would this be shooting for big Pharma, somebody such as a J&J outside the US?

Harry Stylli

There are lots of big, various Pharmas that have distribution channels were international. There are other molecular pure play molecular diagnostic companies that have the global reach as well, but also there is a local regional players' have a lot of power in their markets. It's not just a question of branch in international distributed entity. There may will be very powerful regional players that make compelling sense.

Mike McGinley - Paulson Partners

When do you think the earliest you could entertain a collaboration then?

Harry Stylli

I think you will be seeing those in the next 6 to 18 months.

Mike McGinley - Paulson Partners

Okay, terrific. Thank you and one other thing, once again, a great addition, Paul Hawran there at the company.

Harry Stylli

Paul who? Thank you.

Mike McGinley - Paulson Partners

Thank you very much.

Operator

That is all the time we have today. Please proceed with your presentation or any closing remarks.

Harry Stylli

So in closing, thank you for joining us in today's call and for your interest in Sequenom and for your questions. We are excited about our progress and opportunity for growth through our core business and our prospects in non-invasive prenatal diagnostics. This year promises to be very exciting and look forward to keeping you appraised of our progress. Good day, and thanks for your interest.

Operator

Ladies and gentlemen, that concludes your conference call for today. We thank you for your participation, and ask that you please disconnect your line.

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