Marty Chilberg's  Instablog

Sequenom has done a pretty good job of informing investors of the early response to their lab developed test ("LDT") for Trisomy 13, 18 and 21 ("T21 Plus"). The most recent announcement was that they had achieved an annual run rate of 60,000 T21 Plus tests processed as of May 28th. Watching the processed tests rate will go a long way toward reducing uncertainty with respect to market acceptance. Even so, there are substantial uncertainties still remaining with respect to the future of this space. The IP battle will go on in the courts, likely for years. Reimbursement by insurance carriers is also uncertain. There is the binary risk of yes/no but also the amount risk. Sequenom has stated they have 20 million lives covered, after Coventry decided to cancel their coverage. This post is focused on the cost of testing, but investors need to recognize that cost is linked to revenues. Ignoring the revenue timing and uncertainties could result in any cost analysis becoming meaningless.

Despite their cautionary comments, Sequenom has been very helpful to investors looking to understand their component costs of testing. The company has provided 2 pie chart slides in the presentation deck, which describe their expectation of test costs. In the first chart, the company stated that they expected to get the total cost of the test to between $500-$600 (used $550) within several quarters. In that chart, I'm estimating that the component costs are:

They provided a second chart which projected the component costs in mid C-13. They are projecting a 30-40% improvement in costs excluding royalties. My estimate of their chart relative costs are :

To put the above in context and to provide a sanity check, investors should note the following:

• The total cost of diagnostic services in CY-11 was $10,031k per the 10k.
• The total number of tests done in CY-11 per the company exceeded 21,000. This included approximately 1,000 T21 Plus LDT's. This calculates to $478 per LDT processed.
• The total cost of diagnostic services in Mar-12 was $6,871k
• The total number of tests done in Mar-12 exceeded 12,700 of which over 4,900 was T21 Plus per the company. This calculates to $541 per test.
• Per the 10Q: We have made up-front payments to Isis and agreed to pay to Isis royalties on net sales of products developed or produced using the licensed patent rights, including specified minimum royalty amounts and milestone payments upon commercial events with respect to products for particular indications. (bold/italics by author)
• The company has stated that they are reporting costs as incurred and revenues as received. Therefore, the royalty component of cost of diagnostic revenue should be reflected in the financial statements as the reimbursement is received. It therefore follows that the cost per test would have been higher in all historical periods. When the company has enough evidence to move to accrual basis for revenue recognition, there would be a royalty expense accrual associated with it. Assuming the above estimate of $65 per test and a benchmark of $1,850 blended revenue per test, the royalty rate calculates to approximately 3.5% of revenues.

The above analysis is based upon company provided information. However, it is an estimate and interpretation of that information, and may prove to be unreliable. Additional information from the company is required in order to validate and refine these estimates.

Disclosure: I am long SQNM.

Sequenom has provided several data points that are proving very useful in analyzing their experience with the newly launched MaterniT21+ test. The press releases can be found on their corporate website for anyone interested.

Specifics:

1) The test was launched late in 2011 with results first processed during the week ended 10/22/11.

2) During 2011 Sequenom processed in excess of 1,000 tests.

3) For the first 2 months of 2012, the company processed over 2,500 tests.

4) The tests processed during the week ended 3/3/12 represented an annualized rate of 20,000 which was 2x that of the week ended 12/31/11.

5) During the week ended 3/31/12, the annualized number of tests processed exceeded 30,000. The total number of tests processed during the Mar-12 quarter exceeded 4,900.

6) For the week ended 4/28/12, the annualized number of tests processed was in excess of 45,000.

7) The total number of tests processed through the week ended 5/12/12 exceeded 10,000 for the calendar year to date.

8) Annualized run rate was > 60,000 as of 5/28/12 (Jefferies conference).

9) The company has also stated that high-risk pregnancies totaled approximately 750 thousand of the 4.3 million annual U.S. births annually. Per the table below, this appears to be referencing the birth rate for 2007. This puts the high-risk percentage at around 17.5% of the total annual births.

Here is what a search for U.S. births shows for the past 10 years:

Notes

1) Average births between 1995 and 2002.

2) MaterniT21+ estimated tests processed per month using company data. Info assumes 4 calendar weeks ended Saturday for January, February, April and May. March is a 5 week month. 4/4/5 system used to align with company press releases. May is projected based upon trend and info released by company through 5/28/12.

3) Tests as estimated percentage of total birth market. Percentage assumes test is done in 3rd month of pregnancy.

4) Tests as percentage of High-Risk market which is estimated at 750,000 out of 4.3 million births in 2007.

5) Tests as percentage of MSS annual processed market. This is estimated at 2.6 million per Verinata.

Disclosure: I am long SQNM.

I recently saw that TCS had 7 job openings in Seattle for E911 test engineers. That led me to do a little digging to learning more about the market for NG911. This blog is my working space, which is mostly links at present.

US Department of Transportation study

http://www.its.dot.gov/ng911/pdf/USDOT_NG911_4-A2_FINAL_FinalCostValueRiskAnalysis_v1-0.pdf

TCS expertise

http://www.youtube.com/watch?v=FvpGu-XEAlc&feature=relmfu

· Dick Dickinson Sr Director public safety

http://www.youtube.com/watch?v=ctzpVibHDtA

http://www.e911institute.org/IP%20Issues%20Committee/IPIC%20Working%20Groups.html

http://www.apcowa.org/news/Legislation/Dec_2009/NG911%20Plan%20(final%20adopted)%20101609%20(11).pdf see pg 4 NG911 committee

http://phx.corporate-ir.net/phoenix.zhtml?c=123361&p=irol-newsArticle&ID=1629849&highlight=

http://phx.corporate-ir.net/phoenix.zhtml?c=123361&p=irol-newsArticle&ID=1620475&highlight=

http://phx.corporate-ir.net/phoenix.zhtml?c=123361&p=irol-newsArticle&ID=1617018&highlight=

http://phx.corporate-ir.net/phoenix.zhtml?c=123361&p=irol-newsArticle&ID=1594019&highlight=

Market has 2 segments:

· Carriers (TCS almost ½ all 911 and VoIP 911 calls)

VoIP

http://phx.corporate-ir.net/phoenix.zhtml?c=123361&p=irol-newsArticle&ID=1692900&highlight=

http://phx.corporate-ir.net/phoenix.zhtml?c=123361&p=irol-newsArticle&ID=1454914&highlight=

http://www.vonage-forum.com/article2019.html

Wireless operators

http://phx.corporate-ir.net/phoenix.zhtml?c=123361&p=irol-newsArticle&ID=1698483&highlight=

http://phx.corporate-ir.net/phoenix.zhtml?c=123361&p=irol-newsArticle&ID=1691256&highlight=

http://phx.corporate-ir.net/phoenix.zhtml?c=123361&p=irol-newsArticle&ID=1665577&highlight=

http://phx.corporate-ir.net/phoenix.zhtml?c=123361&p=irol-newsArticle&ID=1619520&highlight=

http://phx.corporate-ir.net/phoenix.zhtml?c=123361&p=irol-newsArticle&ID=1606205&highlight=

http://phx.corporate-ir.net/phoenix.zhtml?c=123361&p=irol-newsArticle&ID=1576651&highlight=

· Public Safety Answering Points (PSAP)

o 3 Stages

1) Upgrade equipment move toward software

2) NextGen capabilities

Switch calls, manage calls

Rich data content such as messaging and location

3) Integrate and pass on info such as location with routing, traffic overlay to first responders and end user

TCS PSAP announcements

Seattle pilot? 7 open jobs for E911 Test

http://www.glassdoor.com/Job/TeleCommunication-Systems-Seattle-Job-Openings-EI_IE11927.0,25_IL.26,33_IM781_IP2.htm

http://phx.corporate-ir.net/phoenix.zhtml?c=123361&p=irol-newsArticle&ID=1683165&highlight=

http://phx.corporate-ir.net/phoenix.zhtml?c=123361&p=irol-newsArticle&ID=1639471&highlight=

http://phx.corporate-ir.net/phoenix.zhtml?c=123361&p=irol-newsArticle&ID=1638997&highlight=

http://phx.corporate-ir.net/phoenix.zhtml?c=123361&p=irol-newsArticle&ID=1595023&highlight=

http://phx.corporate-ir.net/phoenix.zhtml?c=123361&p=irol-newsArticle&ID=1536255&highlight=

Disclosure: I am long TSYS.