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Executives

Marcy Graham - Senior Director, Investor Relations

Harry Hixson - Chairman and CEO

Paul Maier – CFO

Ron Lindsay - Director and EVP

Bill Welch - SVP, Diagnostics

Dirk van den Boom - SVP, Research &Development

Analysts

Nandita Koshal - Barclays Capital

Bill Quirk - Piper Jaffray

Brian Weinstein - William Blair

Brandon Couillard – Jefferies & Co.

David Ferreiro – Oppenheimer & Co.

Zarak Khurshid - Wedbush Securities

Kevin DeGeeter - Ladenburg Thalmann & Co.

Junaid Husain – Dougherty & Company

Sequenom, Inc. (SQNM) Q2 2012 Earnings Conference Call July 26, 2012 5:00 PM ET

Operator

Good afternoon, and welcome to the Sequenom’s Second Quarter 2012 Earnings Conference Call. All participants will be in listen-only-mode. (Operator Instructions). After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions). Please note this event is being recorded.

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

Marcy Graham

Thank you, Emmy. Welcome to the Sequenom conference call to discuss operating results for the second quarter of 2012. Joining me today are Dr. Harry Hixson, Chairman and CEO, Paul Maier, CFO, 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, both of whom 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 August, 4th 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 operations and commercialization, including diagnostic test projections, goals, diagnostics test enhancements, operational enhancements 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 Harry Hixson. Harry?

Harry Hixson

Thank you, Marcy. Good afternoon and thank you for joining us on today’s call to discuss Sequenom’s results for the second quarter of 2012. We’ve continued to build on our positive first quarter results and I am pleased to report that the adoption rate of Sequenom’s CMM’s MaterniT21 PLUS LDT has continued to exceed our expectations. We ended the second quarter of 2012 with over 20,000 MaterniT21 PLUS samples accessioned since launching the testing service in October of last year. On the basis of this excellent uptake, we have upwardly revised our internal goal of invoicing a minimum of 40,000 MaterniT21 PLUS tests to 50,000 tests for 2012. This is double our original goal of invoicing 25,000 tests in 2012 as announced in January of this year. In the second quarter alone, more than 13,000 MaterniT21 PLUS samples were accessioned. Nearly three times the volume of samples accessioned in the first quarter of this year.

At the close of the first quarter of 2012, the 52-week run rate of MaterniT21 PLUS samples accessioned, equates to approximately 30,000 tests. As of the last week of June 2012, the annualized run rate had increased to approximately 65,000 samples accessioned.

The positive trajectory of MaterniT21 PLUS test adoption in the market place since its launch in fall of 2011, it’s been extraordinary and we are pleased to report that the MaterniT21 PLUS test is now our largest contributor to diagnostic revenues.

Based on the positive feedback we’ve received from patients and their physicians, we expect this trend to continue in the future. Until such time as we convert from cash to accrual accounting for diagnostic revenues, we will continue to report samples that accessioned at the end of each quarter as a method of providing clear visibility of our growth trajectory and the market acceptance of Sequenom’s CMM’s testing services.

Our total revenue growth has been strong, improving 37% in the second quarter over this quarter last year led primarily by growth in revenues from by diagnostics services segments. This increase is largely due to the adoption of the Sequenom’s CMM’s MaterniT21 PLUS LDT, as well as continued increased demand in testing services or cystic fibrosis and to a smaller degree those for age related macular degeneration and Fetal RHD.

Our genetic analysis business continues to be a major contributor to total revenues even as the business profile and product mix continues to evolve. However, we did see softness is the overall genetics analysis revenue during the quarter as compared to the same period last year.

As market demand for the MaterniT21 PLUS LDT continues to grow, we are again expanding our sales footprint. We will be adding more than 25 additional sales representatives and managers to the Sequenom’s CMM team during the third quarter. This will bring the total number of prenatal diagnostics sales representatives to approximately 75 team members nationwide. We expect this expansion to help reinforce our presence in existing territories and will allow us to enter into new territories and broaden our overall national reach.

We’ve also been working diligently to expand our international presence and we’ve recently signed additional agreements to make Sequenom’s CMM’s testing service for the MaterniT21 PLUS LDT available to physicians in Northern and Eastern Europe, the Middle East and Japan. We firmly believe that the MaterniT21 PLUS laboratory developed test is the highest quality and most accurate test of its kind, and along with the commercial and operational infrastructure we have established today, we are cementing a firm position as the market leader and innovator in the U.S. and international prenatal testing market.

In addition to responding to worldwide market demand, Sequenom’s CMM will introduce process enhancements to the MaterniT21 PLUS test in the third quarter. These enhancements will increase capacity in the San Diego laboratory to more than 200,000 tests per year. The addition of automation, improved bio-informatics and additional efficiencies built into the process, should help reduce cost on a per test basis. A clinical important aspect to these enhancements will have the ability to determine fetal sex, which we feel will improve the clinical utility of the test for our physician customers and their patients.

We’ve continued to see reduction in the cost of goods per test and look forward to the introduction of these new efficiencies and the associated cost reduction. As we mentioned last quarter, due to the lag in cash receipts the revenue recognized in the current period does not relate directly to the costs incurred in the same period, and we continue to monitor our costs very closely as the strong uptake of the tests continues.

We continue to build increasingly strong relationships within the payer community and confirm that more than 26 million lives already have insurance coverage or Sequenom’s CMM’s LDT’s. We are working to achieve network status this year with national, regional and local payers and health systems.

Finally, we continue to vigorously defend our intellectual property rights pertaining to our proprietary noninvasive prenatal testing technology. Most recently, we filed an appeal with the Federal Circuit Court of Appeals with respect to the preliminary injunction decision of the District Court in our litigation with Ariosa. This appeal is a reflection of our continued belief in the strength of our patent position, and that’s all I can say about the litigation at this time.

I will now turn the call over to Paul, who’ll discuss the details of our financial performance in the second quarter of 2012. Paul?

Paul Maier

Thank you, Harry. Our results in the second quarter of 2012 reflect the continued achievement of our operational goals, specifically those associated with the expansion of Sequenom’s CMM’s testing services and the rapid adoption of this MaterniT21 PLUS LDT. For the second quarter of 2012, total revenues were $18.3 million, an increase of 23% from revenue of $14.9 million in the first quarter of 2012 and a 38% increase as compared to $13.3 million reported for the second quarter of 2011. This quarter, the MaterniT21 PLUS LDT made the largest contribution to Sequenom’s diagnostics services revenue which increased to $8.1 million for the second quarter, up from $1.6 million from the same period in 2011. An increase attributable to continuing growth in testing services by.

Revenues from our genetic analysis business decreased 14% on a year-over-year basis resulting from reduced system sales and softening consumables sales during the second quarter of 2012 with a 71% gross margin for the segment.

Overall gross margin was 32% of revenue as compared to gross margin of 67% for the second quarter of 2011. A difference primarily attributable to the costs associated with the launch and increasing market adoption of Sequenom CMM’s MaterniT21 PLUS LDT.

Diagnostics services revenue is primarily recognized when cash is received. However, the cost associated with providing these services are recognized in the current period. This results in negative gross margins as we have not yet recognized revenue related to the increased number of tests accessioned during the quarter, which have been build but not yet collected. In addition to the impact of delayed recognition of revenues, this difference also reflects the increased cost associated with Sequenom’s CMMs accelerated nationwide commercialization and increased sales of the MaterniT21 PLUS LDT during the second quarter of 2012.

Gross margin is expected to continue to fluctuate quarterly due to changes in sales volumes and the timing of cash receipts. And until the company converts to accrual accounting for its diagnostics services revenue which is expected to occur after sufficient reimbursement history has been established.

Though Sequenom CMM is currently operating 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 this price.

Total operating expenses for the second quarter of 2012 were $35.1 million as compared to total expenses of $29.9 million for the second quarter of 2011.

Selling and marketing expenses during the second quarter of 2012 increased by $3.6 million from the same period a year ago. A change resulting primarily from higher labor costs associated with increasing headcount to support operations and the continued expansion of the diagnostics service infrastructure.

Research and development expenses for the second quarter of 2012 were reduced by $3.3 million as compared to the second quarter of 2011. This change was associated primarily with a reduction in research related licensing and collaboration cost.

General and administrative expenses increased by $4.9 million in the second quarter of 2012 as compared to the same period in 2011 primarily due to increasing legal costs of $3.5 million mainly associated with ongoing patent litigation and also higher labor costs attributable to the growth of the business.

Total stock based compensation expense was $3.2 million for the second quarter of 2012, which is consistent with the stock based compensation recorded during the second quarter of 2011.

Net loss for the second quarter of 2012 was $29.6 million or $0.26 per share as compared to a net loss of $20.9 million or $0.21 per share for the second quarter of 2011 resulting from an increase in costs associated primarily with the growth in testing volume of MaterniT21 PLUS LDT.

Total revenue for the first half of 2012 was $33.2 million, an increase of 24% from revenue of $26.8 million for the first half of 2011. Revenues in the first half of 2012 from the Sequenom CMM diagnostics services operating segment grew 295%, while revenues from the genetic analysis operating segment decreased 14% in the first half of 2012 as compared to the prior year period.

Gross margin for the first half of 2012 was 34% of revenue as compared to gross margin of 64% for the first half of 2011. A difference primarily attributable to the cost associated with increased test volume resulting from the launch and increased market adoption of the Sequenom’s CMM MaterniT21 PLUS LDT.

Total operating expenses for the first half of 2012 were $64.9 million as compared to total expenses of $51.4 million for the first half of 2011.

Sales and marketing expense increased 53% from a year ago period. A change reflecting increased selling and marketing expense resulting primarily from higher labor costs associated with increased headcount to support operations and continued expansion of the diagnostics services infrastructure.

Research and development expenses decreased 4% as compared to the first half of 2011 primarily due to a reduction in research related licensing and collaboration costs.

General and administrative expenses increased in the first half of 2012 to $17.3 million primarily due to an increased in legal cost associated with ongoing patent litigation as compared to the same period one year ago and an increase in the infrastructure to support the increased diagnostic testing volume.

Total stock based compensation expense was $6.1 million for the first half of 2012, flat as compared to the first half of 2011.

Net loss for the first half of 2012 was $54.1 million or $0.48 per share as compared to net loss of $33.6 million or $0.34 per share for the same period in 2011 reflecting an increase in cost associated primarily with the growth in testing volume of MaterniT21 PLUS LDT.

As of June 30, 2012 total cash, cash equivalent and marketable securities were $98.6 million. Net cash used in operating activities was $12.4 million for the second quarter of 2012, while purchases of capital equipment and intellectual property for the same period totaled $11.6 million. Capital expenditures included capacity expansion of both our San Diego and our North Carolina laboratory facilities. These expenditures were funded in part to the utilization of the company’s credit facility.

As of June 30, 2012 the company had borrowed $20 million under the credit facility. As we moved into the second half of 2012, we expect to see further improvements in our diagnostics services segment as Sequenom CMM implements further test enhancements, takes steps to achieve the benefits of continued volume growth and as cash collection increase.

I’ll turn the call back over to Harry for his closing remarks.

Harry Hixson

Thanks, Paul. As we reach the mid-year mark, we are proud of the accomplishments that we have made thus far in 2012. We experienced very tangible progress in the first half of 2012 and we believe that the second half of the year will be equally successful.

We plan to continue to strengthen our position as a market leader in noninvasive prenatal testing. The enhancement that Sequenom CMM will make to the MaterniT21 PLUS LDT, along with the expansion of its sales team should help us gain further competitive differentiation and customer loyalty in the future.

So that’s summary of our business and financial update. We would now like to open up the call to questions. Operator, please open the line.

Question-And-Answer Session

Operator

Thank you. (Operator instructions). At this time, we will pause momentarily to assemble our roster. Our first question comes from Nandita Koshal, at Barclays.

Nandita Koshal - Barclays Capital

Hi. Good afternoon. Harry, maybe to begin with – could you talk about the conversations with payers that you have ongoing and how they view the less price differential between Sequenom’s test and some of the other competitive tests that are in the market now?

Harry Hixson

The conversation with payers and then in the second part of your question was what? Could you repeat please?

Nandita Koshal - Barclays Capital

Sure. Am trying to understand what the cracks of those conversations is? What do they need to see from you before they feel comfortable covering the test? And secondly, how do they view the difference between Sequenom’s best price and that of competitors like Verinata and Aliosa?

Harry Hixson

I am going to ask Bill Welch to take that question. Bill?

Operator

One moment please.

Bill Welch

Nandita, there’s two embedded as a conversation payers are going as expected. I would say that it pretty higher levels where the variety of payers both national and regional. And what we are discussing is the test and how it applies in the treatment math. It’s more about who can you use it, what the test benefits are. It’s probably last about competition frankly, but if I can embed it in ITT and in their treatment and then constantly coverage and price follows that.

Marcy Graham

Operator, are you there?

Operator

Yes. One moment please. (Operator instructions). Ms. Koshal, complete your question.

Nandita Koshal - Barclays Capital

Can you hear me now?

Harry Hixson

Yes.

Bill Welch

Yes.

Nandita Koshal - Barclays Capital

Thank you. Sorry about that. I was wondering if the payers need to see any more clinical data if that’s a factor at all. On the field, do they need to see more experience and if that – does that hold up the procession in any way?

Bill Welch

Well, I think Nandita that every payer is going to be different and it depends on the types of beneficiers they are looking at. Obviously, we think we have as much data as one needs for it and with the various other technologies and research, I think we would argue that the technology is here and now. We have – had create adoption by the Maternal-Fetal medicine specialist, especially key opinion leaders. And I assume that those are the folks that the various payers would ask question to in terms of how this meets in their policy and such. So we are looking forward to getting some national payers on board and then more payers. It’s a day-to-day conversation and certainly the uptake by volume and the adoption by physicians aids in that discussion.

Nandita Koshal - Barclays Capital

Okay. And maybe if you could talk about the turnaround time on payment of this bond. Thank you.

Paul Maier

On the turnaround time of payments, I guess they are behaving about how we expected. We are doing everything we can to accelerate those. But as you might understand with the payers, particularly with a newer technology, it takes continued dialogue with them and appeals when they deny claims and follow up and appeals that they paid less than we think is reasonable. And so we are investing in additional resources to help facilitate that. But the payers are behaving exactly how they have done in other cases and so I don’t think there are any surprises for us internally.

Nandita Koshal - Barclays Capital

Thank you.

Operator

The next question comes from Bill Quirk, at Piper Jaffray.

Bill Quirk - Piper Jaffray

Great. Thanks. Hello. Good afternoon. A couple of questions. So I guess one is building up the reimbursement comment. You mentioned in your prepared remarks you have 26 million covered lives. I assume the majority of those are for tests other than MaterniT21. Can you comment if you have any covered lives specifically from MaterniT21?

Marcy Graham

Members covered lives specifically from MaterniT21. Is that what you asking Bill?

Harry Hixson

It’s the same

Bill Quirk - Piper Jaffray

You got it Marcy.

Harry Hixson

It’s the same. This 26 million for MaterniT21 PLUS as well.

Paul Maier

Bill, just so you know our strategy all along since we have multiple prenatal tests in addition to our ophthalmology test is to cover all of those laboratory developed tests under our contract. And it actually helps open the door that we have a panel of testing services that we can talk to the payers about. So when we quote lives now and in the future it will include T21 and the other tests.

Bill Quirk - Piper Jaffray

Okay. Good. Thanks for the clarification there Paul. Secondly, just talking guys a little bit about the annualized run-rate, we went from 30,000 tests the end of March to I believe it was 60,000 at the end of May and then it slowed down a little bit I guess relatively speaking. Obviously it’s still a pretty steep curve, but slowing to about 65,000 or greater than 65,000 rather in June. Can you comment at all about July? Do you guys view this as any type of tampering from some of the torrid gross rate we were seeing earlier in the year. I guess what I’m trying to ask here is, are we seeing any maturing whatsoever of the market? Are we still very early days? Thank you.

Harry Hixson

I think we are not seeing maturing of the market at all. Last week was a record week for us. You have to realize that there was a Memorial Day holiday. There was the 4th of July holiday. We’re now seeing a little bit of some bumps from week to week due to these sort of vacations. But last week was a record and the run rate based on last week obviously would be greater than what we said it was for the last week of June. So we are still very optimistic about the growth rate here and we don’t see any leveling off.

Bill Quirk - Piper Jaffray

Great. Thanks a lot Harry. Appreciate the color.

Operator

The next question comes from Brian Weinstein at William Blair.

Brian Weinstein - William Blair

Hi. Good afternoon. Thanks for taking the question. My question is where you have seen competitors come head to head with you and maybe taking them a counter way. What’s the reason that’s been given for any competitive losses?

Harry Hixson

I’m going to have Bill Welch take that question please.

Bill Welch

Sure. So when new competitors come on board they usually have done studies in a variety of other locations and some of those stores or locations are ones that one of our technology, one of ours because of true believers and where we’re approaching the KOLs essentially standing out from there to OBGYNs. So the losses we’ve seen primarily are the research sites where folks have done those clinical studies. We’d actually be chasing some of those as we go back and they get a chance to see commercially how those technologies play out. So it’s case by case, but I’m not sure that right now we’re in a competitive side. We’re trying to just grow the market and stay in our technology.

Brian Weinstein - William Blair

Okay, thank you for that. And then my follow up would be on profitability here. How do you balance the way that you think about profitability with some of the spending that you’re doing? You’re bringing in 25 more reps here in the next quarter which actually does seem to be a lot. So Harry, how do you think about that or do you even think about that here in the short term? Is it you’re kind of in maybe a situation where the market is growing very quickly and there may be a bit of a land grab going on. Thanks.

Harry Hixson

I think the market is growing. We have not reached all the territories in the United States we would like. Some of the richer territories we’d like to have greater concentration in sales effort. We think that this will be a profitable business for us. We think we’re going through the investment phase of a rapidly growing market and we don’t want to leave any potential accounts out there that we haven’t covered that one of our competitors might pick up easily. So we believe we have the best tests and we believe that in terms of turnaround time, test performance, customer service and the overall operation of business that we are far superior to anybody in this marketplace and we want to make sure that all of the physicians and patients in the US who might want to use our test have the opportunity to do so.

Bill Welch

And Harry this is Bill Welch again. The OBGYNs are coming on board. I think that’s the next big phase for growth and adoption. The key opinion leaders seem to be very aligned with our technology in IPT. So we’re being pulled as well to other physician groups and this is certainly going to help us do that.

Brian Weinstein - William Blair

Thank you.

Operator

Our next question comes from Jon Wood at Jefferies & Co.

Brandon Couillard – Jefferies & Co.

Thanks. This is Brandon Couillard in for Jon. Can you give us a sense of the tests built year to date? What percentage have been reimbursed and perhaps what percentage have been denied reimbursement?

Paul Maier

Well, that’s a very good question. We are not in the position where we are disclosing the details of that nature and I think that certainly for proprietary reasons we’ll be very careful about any dialog about that. What we’ll try to do is of course talk about our test performance, our test volumes and I think as the revenue is increasing you’ll see that in our reported results each quarter and at some point when we feel that we have enough data that we can talk about that we may be a little more fulsome. But right now we’re very careful about discussing those things. And the other thing you might note is that we have very sensitive discussions with the payers and we really don’t want to have any information out there on where we’re getting reimbursed or what our other contract arrangements are. That can be detrimental to having good open dialogs with our target audience there.

Brandon Couillard – Jefferies & Co.

All right. And then can you give us an update on what the current cogs realization is for P21 and how you expect that to trend in the back half of the year and if you could elaborate on some of the process enhancements that you think will help reduce the costs?

Paul Maier

Well, I think again with regard to the cogs on a per test basis, it’s behaving the way we expected it would and there are a number of variables that go into that equation. But we’ve seen the increased volumes that allow us to spreads some of our fixed costs over a larger pool of tests. I think that the enhancements that we’ve outlined previously that we had targeted they’re moving along and in the third quarter we do anticipate the newer version of our tests which will allow for greater multiplexing and with the new version of the luminary agents will give us better performance. We have done some automation in the sample preparation process and all of those things are behaving the way we expected they would. So our cogs are coming down on a per test basis as our volume grows and as those enhancements are implemented we’ll see the continued benefit of that. So it’s a very evolving process but right now you can’t see it so much in our financials because the costs are very much loaded upfront and the lag and the cash receipts doesn’t really give a balanced picture. But again according to our own internal plans it’s behaving the way we expected and I believe in the second half of the year we’ll have some significant reductions on our per test basis.

Brandon Couillard – Jefferies & Co.

Thanks. And then last question, how should we expect CapEx to look in the second half of the year? And then I think you mentioned you drew down $20 million on the credit facility. Was that following the end of the quarter?

Paul Maier

No. That’s $20 million since we’ve put it in place about a year ago and that credit line was – that portion of the credit line was primarily for capital investments. I think that what we’ve seen in the first half of the year is capital investments in additional equipment, both for the San Diego lab and the North Carolina facility as well in addition to the equipments some of the leasehold improvements as we build out and expand both of those labs. It should slow down a bit but we still have some projects in the queue. So we will continue to spend in capital as we build our capabilities and as we grow the business.

Brandon Couillard – Jefferies & Co.

Okay. Thank you.

Operator

The next question comes from David Ferreiro at Oppenheimer & Co.

David Ferreiro – Oppenheimer & Co.

Thanks for taking the question. Just a couple of quick ones and a follow up to one that Brandon just asked, maybe a little clarification on cogs. I think you guys have been very clear about where you can get improvements from and you said about 30% to 40% by mid 2013. Do any of the improvements that you’re making over the next couple of months accelerate the timeline at all or are you still on track for realizing that 30% to 40% by mid ’13?

Dirk van den Boom

I think on track is the answer and actually to go back to the CapEx as well. Clearly we’re in the midst of growing down the inventory of our sort of version 1 stuff. So we want to use that up and within probably the next few weeks. The timing of that is obviously dependent on volume. We will make that switch and among those going from four to 12-plex really allows us greater capacity without further instrument – view that is volume continues to increase. So I think overall we see it on track of where we hoped to be.

David Ferreiro – Oppenheimer & Co.

Okay, great. And then maybe you guys could talk a little bit about your interactions with the actual health care providers. Are you getting any pushback from them anything new there or they’re completely happy with everything you’re offering now or are there other things you think you should be offering that they’re asking for that you’re not with the MaterniT21 test?

Dirk van den Boom

In terms of content?

David Ferreiro – Oppenheimer & Co.

Yes.

Dirk van den Boom

I think obviously as we went from 21 loan to 18 and 13 there was a good perception of that and as we continue to add as we’ve recently announced the ability to determine fetal sex which is important for sex-linked diseases. I think all of those little additions certainly just make it easier for our sales folks to convince the doctors to use our tests.

David Ferreiro – Oppenheimer & Co.

Great. And then just one question for Paul. I’m sorry if you’ve already said this on cash. Do you still believe that what you have in hand right now is enough to get you guys to profitability?

Paul Maier

Well, we have never said when we would achieve profitability and we’re very careful about not giving specific guidance on that. I think to achieve profitability there are a lot of variables and the timing of the ramp raid and the timing of getting contracts in place and the reimbursement pace, all of those things affect the timing and whether or not we continue to invest in additional R&D initiatives. We’ve already told you about the investments we’re making in the sales force expansion and the facility expansion. So I think it is reasonable to expect the company will finance again before it reaches profitability. But in terms of where we are right now we’re comfortable that we have a strong cash position and we do expect as we’ve seen recently the cash receipts from our MaterniT21 plus test to continue to accelerate.

David Ferreiro – Oppenheimer & Co.

Okay. Thank you, guys.

Operator

The next question comes from Zarak Khurshid at Wedbush Securities.

Zarak Khurshid - Wedbush Securities

Great. Hey guys, thanks for taking the questions. So Paul, I was just curious, what is the lag between billing and collection in the second quarter and how did that change versus last quarter?

Paul Maier

Well, just address it on 100,000 foot level because it’s individual to every claim and it differs by payer and I think that when you first launch a test, going back to the fourth quarter of last year, this is brand new and you might not hear from the payers for a while and you have to follow up with them. Now that we’ve gone through several cycles with most of the payers, I think that we’re seeing the response pick up. But there’s quite a bit of variability and along the way of course we’ve refined our own internal processes and tools to make sure that we are right on top of all the billing initiatives and we have better information feedback.

So we’ve done a few tweaks there and all I will say overall is that the performance of the payment cycle is again what we expected and now that we have greater volumes it gives us a bit more visibility and leverage and all of that helps. In the end the goal is to have contract coverage as broad as possible and so we’ve invested in the initiatives to achieve that. And I think about the best thing you can do is just watch the quarterly ramp rate of the revenues and that is a good indicator of how successful we are in achieving that improvement.

Zarak Khurshid - Wedbush Securities

I guess along this theme, can you qualify if the collections per or the revenue per collection went up or down versus last quarter and then within that, could you sort of break out maybe the fraction of MaterniT21 volumes from Medicaid that you’re receiving?

Paul Maier

Well, we really won’t get into that level of detail and I don’t want you to have an expectation that we will. Suffice it to say that in terms of the reimbursement per test, we’re pleased with the contract rates that we have put in place covering the lives that we discussed during the earlier part of the call and I think in the actual payments that we’re getting out of network, while there’s a range they’re in the vicinity that we expected them to be. So there are no surprises or disappointments for us in that regard. But I think that it’s probably safe to assume we won’t give too much granularity in this as we go forward and the true visibility will occur once we are on an accrual accounting basis when revenues and expenses will be matched up. And in the meantime we’ll try to do the best we can just to let you know how the volumes are increasing.

Zarak Khurshid - Wedbush Securities

Understood. Lastly, could you provide color around the non-MaterniT21 business? It looks like the orders or the volumes went down sequentially. Any sort of color around that business and if you could break out the revenue from that line in the second quarter that would be very helpful as well. Thanks.

Paul Maier

I’m sure it would be. We probably this year will not be breaking down the revenue by products since we’re still in a growth phase on all of those. I will say though that in the second quarter the revenue for each of the products increased over the first quarter sequentially for each of our diagnostic tests and so we’re quite pleased with that and because we have more sales force on the street for all of our products this year, we’re seeing continued growth in that regard. And so I think the overall business is moving in the right direction and the direction we expect it.

Zarak Khurshid - Wedbush Securities

Okay. Thank you.

Operator

Our next question comes from Kevin DeGeeter at Ladenburg.

Kevin DeGeeter - Ladenburg Thalmann & Co.

Hey, congratulations on the progress guys. Thanks for taking my question. Specifically congratulations on the improvements on cost per task. Just a housekeeping item there. Can you remind us whether that reported number up for cogs includes some sort of accrual for future royalty payments you’ll have to make to licensed partners for T21 or MaterniT21?

Paul Maier

Good question. The royalty expenses that we would accrue are only based on the royalty obligation being due when we get paid. So we’re not accruing for royalties until we get paid. So you’ll see the net effect. So if the revenue reported in the second quarter of $8.1 million for diagnostics, that’s net of all of the cogs includes all of the royalty obligations for that $8.1 million of revenue.

Kevin DeGeeter - Ladenburg Thalmann & Co.

Got it. Very helpful. And maybe just some of the quick items, can you just talk a little bit more about the metrics that you’re looking at that gave you the confidence to expand the sales force by 25 people, pretty substantial step up this early in the launch. Usually there’s some specific metrics that a company would be looking at. Can you just talk a little bit about just how you think about performance items it should be hit to justify increases in investment sales and marketing?

Harry Hixson

Well, normally if you were on a business that was on accrual basis you look at sales productivity per rep. We’re not on that basis and so fundamentally we’re looking at territory coverage. Before we did our launch we had an outside consultant do a territory analysis for us. We knew when we made each of the incremental additions to our sales force how much additional coverage we would get of the position audience that we wanted to approach. And so we knew that we were quite a bit short of where we’d like to be. Our original plan was to make this addition in the first quarter of next year. We just brought it forward about basically two quarters I guess. Bill, you want to make any additional comments to that?

Bill Welch

No. I think you hit it right on the head. One thing I’ll say is the period acceptance by the specialists is allowing us to then go broader and so I think we have, it’s a matter of reach and frequency and these are pre-planned. But I think given the success in the first half of the year it’s prudent to continue to go forward. There’s a lot of people wanting information and we need to be out there to satisfy that and with this field force will allow some touch decision at a frequency that’s reasonable for them

Kevin DeGeeter - Ladenburg Thalmann & Co.

And then just maybe one more question if I can sneak in. Can you just give us an update on ongoing discussions with FDA, where you stand and maybe incrementally where there’s been a change since the end of the first quarter call?

Harry Hixson

No. I think we continue to have occasional – these are done by our regulatory vice president, she has occasional telephone calls there, some email traffic going on. But fundamentally I don’t think there’s been any change vis-à-vis the FDA.

Dirk van den Boom

We have begun to accrue samples for the study that we have available on nh.gov term stat.

Harry Hixson

Yeah. We started accumulating studies for a low risk study that’s part of our original agreement with the FDA.

Kevin DeGeeter - Ladenburg Thalmann & Co.

Terrific. That’s it for me. Thanks so much guys.

Operator

The next question comes from Junaid Husain at Dougherty.

Junaid Husain – Dougherty & Company

Good afternoon guys. Guys, I hate to bring this up, but just relative to Coventry, obviously the cancellation was disappointing, but I think the way that contract was structured it officially ends on August 31st. So you do have a couple of months where Coventry members do get the test before the contract is terminated. Is there anything you can tell us about how you’ve fared within the Coventry network for this limited period of time?

Harry Hixson

I’m not sure we really have that. The one thing I can say is when we said the 26 million lives covered, we did not count Coventry, even though currently they’re covered for our test.

Bill Welch

Sorry. Harry, I’ll just add that Coventry is a fairly, it’s a nice regional – one of the smaller players, but it’s a good player that we want to work with. We’ll continue to work within out of network and then obviously work to get in network and I think part of the – this is a long term process. So you wouldn’t expect to have much either way. It’s one of those things once you go forward you just continue to drive demand in that region.

Junaid Husain – Dougherty & Company

Got it. That’s helpful and then Harry, relative to your international expansion, could you maybe provide us some additional color on the strategy? Who are you looking to partner with internationally and from a profit perspective how would such a test work? Is it still run in the US clear labs or do you look to establish a reference lab internationally?

Ron Lindsay

Perhaps if you like, this is Ron. I’ll answer that. Really we have from the get-go had two approaches. One was to look initially at the bigger European countries, the so called G5 and as you know the first move there was to license LifeCodexx and I think as many people know they have obtained their CE mark and they’re preparing to launch probably in the next quarter which is the first one. For some of the smaller European countries and also Middle East and also in Asia, we’ve had demand from those who are privately covered insured or personally want to pay for it and to satisfy that demand we have opened conduits through client bill and for those countries some of which we have announced in the press release. We have arrangements in place where they will locally collect samples through the agencies and these will be shipped to us. We’ll process them.

They’re paid in advance and we will return the data to the individual physicians etc through those conduits. So we will continue that strategy. Obviously we’re keen to see how LifeCodexx launch goes in Germany and the German speaking countries and we do know there’s pent up demand for the test there. So that will read on that data and that will guide us to the next steps in Europe. We plan to do similar things for LifeCodexx with other partners, probably in the next 12 months or so with our discussions with at least two players in that arena.

Junaid Husain – Dougherty & Company

Great. Thank you very much guys. That’s all I’ve got.

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 for your continued interest in Sequenom. If you have any questions about results from today or if you need information of any kind, please feel free to contact me in our Investor Relations department at 858-202-9028. Thank you.

Operator

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

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