Sequenom's total revenues increase 62% to $39.8 million in Q2 2014

Sequenom, Inc. (NASDAQ: SQNM), a life sciences company providing innovative genetic analysis solutions, today reported total revenues of $39.8 million for the second quarter of 2014, an increase of 62% compared to revenues of $24.5 million for the second quarter of 2013.

The Bioscience business segment, which was sold on May 30, 2014, has been accounted for as a discontinued operation and consequently its results have been excluded from continuing operations for all periods.

Revenues from the Sequenom Laboratories business are recorded primarily on a cash basis. In the second quarter, Sequenom Laboratories began using accrual accounting for several third-party payors. This accounting change during the quarter resulted in a net revenue increase of $1.9 million, based upon accrued revenue of $5.7 million for those payors, compared to $3.8 million in cash received during the quarter from those payors for tests during the quarter. International revenue, accounted for on an accrual basis, contributed 12.3% of diagnostic services revenues in the second quarter of 2014. In total, over 26% of our revenue in the second quarter is accounted for on the accrual basis of accounting.

Total patient samples accessioned increased over 7% to 50,100 patient samples during the second quarter of 2014, compared to the prior year second quarter. Approximately 40,800 of those patient samples accessioned were for the MaterniT21™ PLUS laboratory-developed test (LDT), compared to approximately 38,000 in the second quarter of 2013, an increase of more than 7% compared to the prior year quarter. On a sequential basis, the volume of MaterniT21 PLUS tests increased by about 3% over the first quarter of 2014, while total tests accessioned remained stable.

Sequenom Laboratories has continued to increase the volume of Medicaid tests accessioned in 15 states that are now providing reimbursement for its tests while limiting the Medicaid volume in states that are not yet reimbursing for its tests. The volume of Medicaid tests was 18% of total tests accessioned in the second quarter of 2014 compared with 16% in the first quarter of 2014 and 26% in the second quarter of 2013, when Sequenom's reimbursement policy for Medicaid was implemented. Sequenom Laboratories is continuing to work with other Medicaid programs that have not yet implemented the new molecular diagnostic codes following the coding changes which were implemented at the beginning of 2013.

Sequenom Laboratories continues its negotiations with the payor community. As of June 30, 2014, more than 140 million lives are covered for the MaterniT21 PLUS test. We now have agreements with three of the top five national payors, including a master service agreement with the largest US insurance association.

Total cost of revenues increased to $22.4 million for the second quarter of 2014, compared to $20.6 million for the prior year period. Cost of revenues increased primarily due to the increase in Sequenom Laboratories' test volumes and costs to support increased testing capacity.

Gross margin for the second quarter of 2014 was 44% as compared to gross margin of 16% for the second quarter of 2013. This improvement is attributable primarily to the increase in collections for tests performed in the current and prior quarters, the change to accrual accounting for certain payors and improved efficiencies in processing patient samples.

Total operating expenses for the second quarter of 2014 were $30.6 million, as compared to total operating expenses of $33.1 million for the second quarter of 2013, primarily as a result of the completion of the validation of the North Carolina laboratory site in the second quarter of 2013. Total operating expenses for the second quarter of 2014 were up sequentially from total operating expenses of $28.7 million for the first quarter of 2014 as a result of the non-cash stock compensation expense related to the retirement of the former chief executive officer and the additional restructuring costs related to the exited facility which the Company has been unable to sublease. Excluding these amounts, total operating expenses for the second quarter of 2014 were $28.4 million, in line with the first quarter of 2014.

Selling and marketing expenses decreased to $7.9 million for the second quarter of 2014 from $10.0 million year-over-year, resulting primarily from lower labor costs related to the restructuring completed in the third quarter of 2013 and a reduction in the associated expenses. Research and development expenses of $7.1 million for the second quarter of 2014 were down from $10.9 million in the second quarter of 2013, which included the completion of the validation of the laboratory site in North Carolina in June 2013.

General and administrative expenses for the second quarter of 2014 were $14.6 million, as compared to $12.2 million for the second quarter of 2013, primarily due to increased legal expenses associated with patent litigation, and $1.4 million in non-cash charges primarily related to changes in the terms of equity awards upon the retirement of the former chief executive officer in the second quarter of 2014. General and administrative expenses were up sequentially from $12.5 million from the first quarter of 2014 as a result of the same factors. Total litigation expenses in the second quarter of 2014 amounted to $5.3 million.

Loss from operations for the second quarter of 2014 was $13.2 million, as compared to $29.2 million, for the same period in 2013.

The Company received proceeds of $33.0 million upon the sale of the Biosciences business, including the milestone payment of $2.0 million which was received upon obtaining U.S. Food and Drug Administration clearance for the IMPACT Dx™ Factor V Leiden and Factor II Genotyping Test for use on the IMPACT Dx™ System. As a result of the sale, the Company recorded a gain on the sale of discontinued operations of $23.4 million, less tax expense of $9.6 million, and a loss from discontinued operations of $1.0 million during the second quarter of 2014. The loss from continuing operations in the second quarter of 2014 reflects a tax benefit of the loss as a result of the gain on the sale of the Bioscience business which is reflected in discontinued operations.

Net earnings for the second quarter was $4.5 million, or $0.04 per share, as a result of the sale of the Bioscience business in the second quarter of 2014, compared to a net loss of $31.0 million in the second quarter of 2013, or $0.27 per share. Excluding the impact of the discontinued operations on net earnings, Sequenom experienced a net loss from continuing operations for the second quarter of $0.07 per share, including a tax benefit of $.06 per share, compared with a net loss of $0.27 per share in the second quarter of 2013.

Cash burn related to continuing operations for the second quarter of 2014 was $4.1 million, compared to $41.5 million in the same period of 2013 and $18.4 million in the first quarter of 2014. The cash burn related to continuing operations for the first quarter of 2014, excluding annual royalty payments of $4.8 million and semi-annual debt service payments of $3.3 million, was $10.3 million. Cash burn does not reflect the operations or net proceeds from the sale of the Bioscience business.

Unrecorded diagnostic accounts receivable are estimated to be $36 to $40 million as of June 30, 2014. This range has decreased by approximately $6 million as a result of the adoption of accrual accounting for certain payors, resulting in recorded receivables of approximately $1.9 million, and collections during the second quarter.

"We are pleased with the steady improvements in reimbursements and collections resulting in increased revenues," said Carolyn Beaver, chief financial officer of Sequenom. "We will continue to evaluate our collection history with the goal to move to accrual accounting for additional payors. We also remain focused on our cost improvement initiatives as we look to continue to build value for our shareholders."

First Half Results

For the first half of 2014, the Company reported revenues of $76.8 million, an increase of 43% from revenues of $53.6 million for the first half of 2013. Revenues improved primarily due to increased collections and higher test volumes.

Gross margin for the first half of 2014 was 41% of revenues as compared to gross margin of 22% for the first half of 2013, a difference primarily attributable to the improved collections for tests performed in the current and prior quarters and the increased test volumes for Sequenom Laboratories.

Total operating expenses for the first half of 2014 were $59.3 million, as compared to total expenses of $67.9 million for the first half of 2013. This change reflects decreased selling and marketing expenses resulting primarily from lower labor and related costs following the August 2013 restructuring. Total stock-based compensation expense was $6.5 million for the first half of 2014, up from $5.0 million as compared to the first half of 2013, principally as the result of the retirement of the former chief executive officer in the second quarter of 2014.

During the first half, an additional restructuring charge of $1.9 million was recorded in connection with changes in assumptions regarding the expected sublease income to be received for a facility the Company exited in the third quarter of 2013.

Loss from operations for the first half of 2014 was $27.6 million, as compared to $56.0 million, for the same period in 2013.

Net loss for the first half of 2014 was $11.2 million, or $0.10 per share, as compared to net loss of $60.4 million, or $0.52 per share for the same period in 2013, reflecting the growth in revenue from the MaterniT21 PLUS test and the sale of the Bioscience business segment in 2014, including the related tax benefit for the loss on continuing operations for the first half of 2014.

Net cash used in operating activities was $18.2 million for the first half of 2014, compared to $55.2 million in the same period in the prior year. The decrease in cash used in operating activities for the first half of 2014 is the result of the increase in revenue and the reduction in operating expenses. The change was not impacted by the operations or proceeds from the sale of the Bioscience business.

As of June 30, 2014, total cash, cash equivalents, and marketable securities were $82.1 million.

Operational Updates

In the first half of 2014, Sequenom Laboratories accessioned more than 80,000 MaterniT21 PLUS tests, and more than 100,000 total test samples for all its LDTs, compared to 73,000 MaterniT21 PLUS tests and 91,200 tests in total for the first half of 2013.

The Company recently announced a test send-out agreement and a and licensing agreement with Quest Diagnostics for noninvasive prenatal aneuploidy testing, gaining access to its broad physician network in the United States and certain other countries. Sequenom Laboratories anticipates receiving its first samples from Quest Diagnostics sometime in the third quarter.

Last week, Sequenom Laboratories announced that it has completed the development of the VisibiliT™ laboratory-developed test, which provides a risk score for common fetal chromosomal aneuploidies that are normally evaluated within conventional prenatal serum screen tests. The results of a clinical evaluation study of the VisibiliT test were shared at the 18^th International Conference on Prenatal Diagnosis and Therapy (ISPD) in Brisbane, Australia, earlier this month. Performance of the VisibiliT test was determined by a clinical evaluation study of over 1,000 low and high risk samples, and demonstrated greater than 99% sensitivity and 99.9% specificity for trisomies 21 and 18. This performance has been maintained over subsequent validation studies which in total now exceed more than 100 trisomy 21 and 30 trisomy 18 samples.

Sequenom Laboratories is the first test service provider to offer two distinct noninvasive prenatal testing options, enabling greater testing access and flexibility for providers and patients. Sequenom Laboratories plans to first launch the VisibiliT test internationally in August 2014.

"The launch of the VisibiliT test is an important achievement for the Company and another example of our continued leadership in the NIPT field," said William Welch, chief executive officer of Sequenom, Inc. "The VisibiliT test allows us to meet the growing demands to provide additional choices to better serve the broader prenatal testing community."

Sequenom Laboratories also recently announced plans to launch the Enhanced Sequencing Series II for its MaterniT21 PLUS test. In August, the MaterniT21 PLUS test will begin reporting additional findings for the presence of additional subchromosomal microdeletions, including 11q deletion (Jacobsen syndrome), 8q deletion (Langer-Giedion syndrome), and 4p deletion (Wolf-Hirschhorn syndrome). These microdeletions are associated with various clinical conditions that can result in physical and developmental issues. With the Enhanced Sequencing Series, the MaterniT21 PLUS test is the most comprehensive noninvasive prenatal test of-its-kind available on the market, providing detailed information for use in patient care.