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Large Insurance Providers Are Calling NIPT Medically Necessary

|Includes: Sequenom, Inc. (SQNM)

United Health is the largest coverage provider in the US. Today they joined the ranks of Wellpoint, Aetna, Anthem, Humana and Empire, changing their policy for non-invasive prenatal tests (NIPT) to medically necessary for high risk pregnancies. The market leader in this space is MaterniT21 Plus (NASDAQ:SQNM).

This policy statement change is an important step for all companies offering NIPT. The primary competition to MaterniT21 Plus is Harmony (Ariosa Diagnostics) and Verifi (Verinata acquired by ILMN). These companies are all in various stages of negotiating to get paid for their tests. They are in high demand by pregnant women classified as high risk. A quick overview of the process required when new tests are launched follows. Note these are personal opinions based upon various company statements and not validated.

1) Launch test: out-of-network (OON). Fight with insurers over billings with numerous appeals and months of delay before resolution. Could result in complete denial, which results in no reimbursement. Time frame could take up to 9 months with payments relative to list from 0-100% Average reimbursement level is likely quite low with revenue recognition lagging cost of test by several quarters.

2) Test gains traction: Need to show significant activity in market to gain the attention of the medical community and coverage providers. Having large numbers of billings with resultant appeals, starts building a history. Process is still very time consuming and administratively intense. Payment fluctuations are still wide but with history comes some compression of range. Estimate of resolution of billing is still likely in the 6 month range.

3) ACOG/CTAF: The opinions that these tests were medically necessary was a significant step last fall. This determined the target market as high risk, and is required for many coverage providers to adopt policy changes. Payment fight is somewhat easier as repetition and validation of need have an influence. However, still out of network and not yet determined by coverage provider as medically necessary. Billing reimbursement process continues to be arduous and lengthy. Estimated reimbursement timeframe is 4-6 months.

4) Insurance provider adopts policy statement as medically necessary. Big improvement. Complete denials for reimbursement should be eliminated. The test should now be In Network but with no contract, the billings continue to be disputed. Reimbursement timeline likely reduces to 3-5 months with some earlier receipts and final appeal resolution still administratively intense. Should see acceleration of cash receipts and revenues.

5) Company signs a coverage contract with insurance provider. Test is In-Network with billing amount and payment terms now set. Contracts likely have confidentiality clauses which means rates can't be disclosed to market. Larger providers could require "most favored nations" clauses stating if other contracts get signed for lesser amounts, they will get a price adjustment. Now the receivables are real with cash flow projections more predictable. Could still have delay to accrual based revenue recognition however given accounting rules.

6) Once there is a contract and some reimbursement history, the company is able to properly document that 1) an agreement exists, 2) price is fixed and 3) reimbursement is reasonably assured. At that time revenue will be recorded upon billing rather than cash receipt. It's unclear how many billing and payment cycles a company will need to be able to convert. SQNM management has implied it would be a 1-2 quarters after each contract sign is signed.

7) If there is a contingency clause for most favored pricing, the company would still need to reserve revenue for price concessions. Only after all significant coverage providers have signed can investors start becoming comfortable with estimates of average selling price and gross margin of the test.

As of January, Sequenom had approximately 15% in category 5-6 and perhaps 5% in category 6. The level in category 6 was small enough that conversion would have been immaterial to overall results for C12. However, they now could have over 60% of their billings in category 4 which is substantial progress over prior quarters. Looking forward to hearing about coverage negotiations in call next week as well as any discussion of timing for conversion to accrual. Unless they are unable to achieve the reimbursement levels desired, we should see some substantial percentage of their billings convert to accrual within the next 3 quarters.

Disclosure: I am long SQNM.