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Sequenom Undeterred by Patent Invalidation, Reimbursement Issues, as Sales of MaterniT21 Climb

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This story was originally published Nov. 11.

Despite a recent unfavorable court ruling deeming one of its key patents invalid, and ongoing test reimbursement challenges, Sequenom continues to forecast growth for its MaterniT21 Plus test for noninvasive fetal aneuploidy testing.

Last week the company reported third quarter revenues of $44 million — a 92 percent jump from the $22.9 million it reported in Q3 2012 and a 26 percent increase from the $34.9 million it posted in Q2 2013. Its Q3 revenues beat the consensus Wall Street estimate of $40.6 million.

Chairman and CEO Harry Hixson said during a conference call discussing the company's third quarter results that "record revenues" in the quarter were driven primarily by the MaterniT21 Plus test and that the firm believes it "continues to be the market leader in the noninvasive prenatal diagnostic testing market," estimating it has around 60 percent of the high-risk market.

Sequenom launched its MaterniT21 test for fetal aneuploides in October 2011 and has seen increasing uptake of the test. In Q3 2013, it accessioned 36,600 MaterniT21 Plus tests, up 2 percent sequentially from 36,000 in the second quarter of 2013 and more than doubling the 18,000 tests it sold in the comparable quarter last year.

In October, Sequenom added so-called Enhanced Sequencing Series indications to its MaterniT21 Plus test, giving it the capability to detect sub-chromosomal microdeletions responsible for DiGeorge, Cri-du-chat, Prader-Willi/Angelman, and 1p36 syndromes, as well as trisomies for chromosomes 16 and 22.

The addition of these syndromes will help improve the company's competitive position and "demonstrates the value of using genome-wide massively parallel sequencing as opposed to content-limited targeted approaches," Hixson said. Competing tests that specifically target chromosomes 21, 18, and 13 would not be able to detect subchromosomal alterations in other portions of the genome.

Going forward, Hixson said the company plans to continue to expand the test with "clinically meaningful content," and would give further updates in the future.

Dirk van den Boom, the company's executive vice president of research and development and CTO, added that incorporating microdeletions into the test primarily involved improving the bioinformatics.

The goal of using a whole-genome sequencing strategy in the first place, he said, was "to be able to report on additional content, additional findings based on the same assay. That was the philosophy all along when we started the process."

'540 patent invalidated

Late last month, the US District Court for the Northern District of California invalidated US Patent No. 6,258,540, a patent Sequenom held in the noninvasive prenatal testing field, ruling that it covers an unpatentable phenomenon of nature.

Sequenom has been embroiled in lawsuits with the three other US firms offering noninvasive prenatal tests for fetal aneuploidies — Verinata Health, Ariosa, and Natera — for the last two years. Many of those lawsuits involve the '540 patent.

Sequenom has always maintained that the '540 patent gives it broad protection from other sequencing-based tests. Commenting during the call this week on the ruling, Hixson said that the firm "believes the decision is wrong and misapplies or ignores controlling law," and reiterated the company's intention to appeal the decision to the US Court of Appeals for the Federal Circuit.

He added that the decision "does not change the competitive landscape, as we've been competing without the benefit of the '540 patent being recognized."

Additionally, the ruling does not affect the foreign equivalents of the patent, which are still valid in Europe, Japan, Australia, Canada, and Hong Kong, Hixson said.

Reimbursement issues

During the quarter, Sequenom said it had secured additional contracts with third-party payors and now has 90 million covered lives under contract and said that it still believed it could reach its goal of 120 million lives covered under contract by the end of the year.

"Importantly, we are receiving payments as either in network or out of network from all major national payors," Hixson said.

Earlier this year, the Centers for Medicaid and Medicare Services implemented changes to the CPT codes, which Hixson said has proved challenging, but added that the firm is making progress.

The new codes caused some payors to initially deny payment simply because their systems did not recognize the new codes, CFO Paul Maier said. The new coding system has also spurred requests for additional information by payors to ensure that the test meets the guidelines, and that is also delaying payment.

Company officials added that experience with its in-house billing system, which it implemented in the second quarter of 2013, as well as improvements with reimbursement as it and payors adapt to the new CPT codes, is helping to improve collections, including for tests conducted in prior quarters.

The firm estimates it has between $46 million and $51 million in uncollected test revenues.

"There is still an enormous amount of room for improvement in the reduction in the number of denials and our need to file appeals and also in the timeliness of payment," Hixson said. However, "we have the tools in place with our internal [billing] system to address those problems."

While the private payors seem to be adapting to the new coding system, Sequenom has had more difficulty in getting reimbursed by Medicaid. As such, it implemented a program to reduce the volume of uncompensated Medicaid tests, while continuing to work with state agencies to obtain reimbursement. As a result, the percentage of Medicaid tests declined to 21 percent in the third quarter from 26 percent in the second quarter, with the trend declining further to 17 percent in September.

Despite the reduction in Medicaid tests accessioned, the annualized run rate for the MaterniT21 Plus test continues to exceed the firm's goal of 150,000 samples.

Financials

While Sequenom's total revenues rose, its diagnostics revenue was particularly strong. Revenue from diagnostics services, as carried out by its Sequenom Center for Molecular Medicine, rose to $33.3 million from $12.5 million in the year-ago quarter and accounted for 76 percent of total revenues.

Meantime, the Sequenom Bioscience operating segment, which was formerly the genetic analysis segment, realized third quarter revenue of $10.7 million, up 3 percent from $10.4 million in the same period of 2012.

Sequenom's net loss for the third quarter of 2013 was $28.1 million, or $.24 per share, down from a net loss of $30.2 million, or $.26 per share, in the prior year quarter. Adjusted net loss, which excludes restructuring costs, was $22.1 million, or $.19 per share, beating analysts' expectations for a loss of $.22 per share.

The firm reported research and development expenses of $10.4 million in Q3 2013, down from $12.2 million in Q3 2012, while SG&A expenses were $26.5 million, compared to $22.8 million in the prior-year Q3. The increase in SG&A expense was primarily due to increased legal expenses associated with patent litigation, internal billing costs due to test volume growth, and increased efforts to collect revenues.

The firm also incurred a $6 million restructuring charge, which resulted in the elimination of around 75 positions and the exit from a facility planned for expansion. Going forward, this restructuring should allow the company to save $13 million in expenses in 2014.

As of Sept. 30, Sequenom had $84.7 million in cash, cash equivalents, and marketable securities.

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