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Marty Chilberg
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I'm a retired CPA who spent the majority of his working career in technology companies. My work included management stints at Atari Inc, Daisy Systems Corp, Symantec Corp and Visio Corp. My last position at Visio (VSIO) was as CFO and VP Finance and Operations.
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  • Sequenom: March 2015 Preview Outline

    Sequenom Inc (NASDAQ:SQNM) scheduled their March 2015 Q1 earnings release for Wednesday May 6th. This blog is an detailed overview of what I'm looking for on the call or in the 10Q.

    Revenues $36-39 million

    • I'm looking at a range this quarter instead of a specific forecast because of the transition the company is undergoing.
    • Revenues and Cost of Revenues should be split between test and licensing revenues.
    • Illumina reports quarterly IP Pool revenues 45 days after each quarter is complete. The December 2014 results did not appear to include any revenues for the month of December (agreement dated December 2, 2014). If Sequenom estimates revenues and accrues the estimate, they should see a nice pickup for the four months of the pool. Domestically LabCorp had already released InformaSeq which provide some revenue. There were 21 licensees already under license in December but it wasn't disclosed how many were actually shipping product or in what markets. Sequenom has acknowledged several active licensees (Life Codexx, Lab Cerba, 2 in Japan, etc) but not enough information has been disclosed to project the net impact to the company.
    • The HerediTi Universal screen was launched in the middle of March 2015. No economic details have been provided about this test but it should have a neglible to no impact on this quarter.
    • Government revenues were reclassified in Q4 2014. The annual revenues reported in the 10k for 2013 and 2014 were comparable, but all prior results disclosed in the 10Q's are not. If the company does not provide a schedule of these revisions on their investor relations site, we will have to wait until the 10Q's are filed throughout the year to get the revised amounts. Regardless of the revisions some progress is expected in the number of Medicaid states (15), covered lives (26 million) and revenues this quarter.
    • On the last earnings call, management pointed to the December holidays as having a seasonal impact on accessions. If so, that impact should reverse and be a tail wind in the March quarter.
    • VisibiliT was made available to cash payers domestically. Internationally they launched this limited content NIPT in several market toward the end of 2014. Combined this should have provided some upside.
    • On the Illumina Q1-15 conference call they disclosed that they had seen a large increase in accessions in their December (43,000) and March (50,000) quarters. Much of this increase was reported to be from new licensees that were working to get their test validated and were temporarily sending samples to Illumina to process. The impact of this on Sequenom is unclear as to timing or size. Some of these accessions might otherwise have been recognized by Sequenom. Longer term this should increase the operating profit per test to Sequenom, but could have had a negative impact in this quarter.
    • The first calendar quarter generally has a modest negative pricing impact from copay revenues. Deductibles are reset at the beginning of the calendar year. All copays are recognized when cash is collected.
    • The company disclosed that they had no significant catch up payments in the 2H of 2014. The company estimates over $30 million in back billings that have not been recognized nor collected. Though this may never be fully recovered, the new CPT code and a new calendar year could free up some cash from payers that wish to resolve these disputed amounts.
    • Another question that has not been addressed: What happens to these unreimbursed amounts upon a licensing arrangement? Will Sequenom simply discontinue collection efforts with no leverage? Or will resolution be required before a license is awarded?

    Earnings per Share $ (0.01) to $0.02

    • This has to be a range as well with so many of the revenue questions impacting the bottom line.
    • VisibiliT was noted in the Proxy as having a $57 material cost in Q4 2014. Projected revenues per unit has not been estimated by the company but will be materially lower than MaterniT21. The mix of NIPT tests will have a large impact on revenues, unit costs and gross margin percentages. To the extent VisibiliT cannibalizes MaterniT21 significantly, it could impact the bottom line.
    • Spending in anticipation of the Universal Screen, the noninvasive prenatal karyotype and the liquid biopsy test were not discussed on the last call. There could have been an increase in operating expenses for those product initiatives.
    • There should be a decrease in administrative spending this quarter. The costs associated with IP litigation, negotiating the agreement with Illumina and the bonus accrual in Q4 should all contribute to reduction.

    Other items to watch

    • Sequenom deferred $21 million of the IP pool payment. This will be recognized once the clinical data is turned over to Illumina, which was projected to be during the first half of this year. This will increase earnings per share but is nonrecurring in nature.
    • Sequenom announced a company goal of launching at least three new lab developed tests (LDT) this year. The HerediT Universal screen is not a Sequenom LDT. Hopefully we can get clarity on whether the 3 new LDT's are incremental which would indicate that they are expecting at least one new LDT in addition to the noninvasive prenatal karyotype and the liquid biopsy RUO test in the back half of the year.
    • No mention has been made of the Grand Rapids lab for quite some time. At some point it needs to be discussed given the trends of the company. Between the first and fourth quarter of 2014, the tests processed at this lab dropped by 25%. This decline will likely accelerate now that the Universal screen is being processed by Recombine.
    May 02 6:22 PM | Link | Comment!
  • Sequenom: Looking To Q1 2015 Results For Business Model Clarification

    Sequenom Inc. (NASDAQ:SQNM) accomplished quite a transformation over the past year and a half.

    In mid-2013 the company was a high-risk dubious-reward innovator of noninvasive prenatal diagnostic testing, burning cash at an alarming rate. It seemed they were under attack from every angle. Reimbursements were delayed, denied or negotiated by payers as our system of health care evaluated whether molecular diagnostic tests were cost effective and how much they were worth. Patents earned from years of research were left vulnerable by a series of court cases. Emboldened by the courts, new competitors (without the $1 billion in retained deficits of Sequenom) launched similar tests. Illumina, a long time supplier to Sequenom, decided to enter the fray acquiring Verinata. Patent interference and infringement spending reached a level close to that of NIPT research and development. Almost lost in this financial noise was the fact that the adoption rate of NIPT was unprecedented, heralding a new era of personalized medicine using genomic sequencing. The only question was: Would Sequenom survive to be able to benefit from it?

    The 2015 landscape has changed dramatically. Illumina and Sequenom decided that a prolonged battle would help competitors gain market share. So they became partners with an impressive intellectual property portfolio that Illumina is actively licensing and defending. Sequenom has taken a smaller, but secure and profitable, seat in the NIPT market with reduced operating and processing costs. A new CPT code was approved which should improve reimbursement and help increase penetration into the government payer segment which has largely remained untapped. The sale of the bioscience division (MassArray) provided a cash infusion along with a clarity of focus on molecular diagnostics. Payers with a history of nonreimbursement have been discontinued. Sequenom went from generating operating losses in the $30 million range to being on the doorstep of breakeven.

    Where does that leave investors waiting for Q1 2015 earnings this week? Comparing the 2014 income statement as an independent clinical lab processing tests, to 2015 having a hybrid of processing and licensing will be challenging. Revenue trends won't be meaningful. Even gross margin comparisons will have limited value because some operating cost savings result in reduced per test licensing revenues. Historically investors have focused on accessions or how many plasma samples were received by the company for processing. While still an important metric to track for lab utilization analysis, it will quickly become unusable for market share analysis. This quarter is the first step to understanding the new business model. Cash flow and operating income should be the primary focus when evaluating operating performance. Also we should expect to start seeing new disclosures to help with this transformation. The first is a split between testing and licensing revenues. That improvement would be made better if they provide their quarterly history restated, rather than making investors wait for future 10Q filings to recast trailing models. This is an opportunity to set the table so investors can view their performance in the context that makes the most sense. NIPT represents most of their trailing revenues but is NIPT the right way for investors to evaluate their market position? I prefer to view them as a market creator that is focused on the high risk market. The licensing revenue is their annuity for others use of their innovation to pursue the remainder of the market. Seems like better reflection of the company strategy. VisibiliT being commingled with MaterniT 21 is a bit of a problem but I would hope the company could come up with some disclosure solution that would address that.

    It is clear that Sequenom is in a much better position now to capitalize on their NIPT franchise and leverage their expertise. They know high risk pregnancies better than anyone, and their tests will be more differentiated through a new noninvasive whole genome karyotype test later this year. They also have the most clinical experience with plasma oncology diagnostics (liquid biopsy) which is a much larger market opportunity in the next few years. They expect to launch their first test for this market later this year. Exciting times for the company, but foundations are required before new floors can be added. This quarter let's get the foundational business model clarified so questions about how to interpret financial results don't cloud the future.

    May 02 1:34 PM | Link | 2 Comments
  • Connected Car Market

    Praveen Narayanan of Frost & Sullivan has been researching Telematics and the Connected Car market for over ten years. He recently hosted a webcast with downloadable presentation here that provided some solid insights into the current state of the market and where it is heading.

    To date telematics has had a hard time getting monetized.

    Prognostics provides the much needed business case.

    1. $400 million in savings per OEM
    2. Frost & Sullivan predicts 20% of recalls can be impacted using prognostics and over the air updates leading to billions in savings.
    3. Most of the 2015 benchmarked features are in this category including recall management, software and firmware updates, maintenance alerts, service scheduling, vehicle health reports and Geo-Fence alerts.

    360 Cybersecurity is a key building block.

    1. In-Vehicle and Back End Security is required
    2. In theory there are >50 vulnerable points in vehicles, 15 of which have been identified as hackable. Infotainment systems are heavily exposed.
    3. At least six OEMs have devoted cyber security teams to address needs and there is a significant trend of startups getting funding to address market opportunity.

    Cloud Connectivity and Smartphone integration is happening

    1. Smartphone is providing access and automation
    2. CD players and embedded navigation systems are selectively being eliminated and replaced with internet radio and interfaces for smartphones solutions.
    3. Apple Carplay and Android Auto are potential game changers.
    4. AT&T has been the most aggressive telecommunication company.

    Human Machine Interface (HMI) changes happening but will take time.

    1. HMI is a major problem area for OEMs including external options like Carplay and use cases for air gesture, or handwriting recognition.
    2. Heads-Up Display (HUD) and Instrument Cluster Display (NYSE:ICD) are happening and expected to have a high impact as they improve line-of-sight performance as content load increases.
    3. Augmented Reality (NYSE:AR) engines will be enabled by HUD and become a sizable opportunity.
    May 01 11:38 AM | Link | 1 Comment
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