Marty Chilberg

About the Author Marty Chilberg

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.

Sequenom, Inc. (SQNM): IP Pool Updated Overview 

As previously described here, the Sequenom, Inc. (NASDAQ:SQNM) IP Pool agreement with Illumina, Inc. (NASDAQ:ILMN) is complex, clouding the new business model. After the Q1 2015 conference call I tried to clear up the confusion here. These conclusions though seemed inconsistent with company updated guidance for licensing revenue (midpoint of $6m to $14m range). That inconsistency led me to contact Carolyn Beaver for some clarification. This blog will hopefully help clarify the agreement and it’s impact on revenues.

IP Pool Components and Disclosures

There are several components to the IP Pool. They include:

  • Sequenom pays a test fee into the pool for any NIPT LDT Test (existing at effective date) processed in their labs.
  • Sequenom is responsible for administering their licensees. They pay into the pool for the tests processed by their licensees.
  • Illumina pays a test fee into the pool for any NIPT LDT Test (existing at effective date) processed in their labs.
  • Illumina pays into the pool for NIPT LDT Tests.
  • Illumina is responsible for administering their licensees. They pay into the pool for the tests processed by their licensees.

    There have been numerous disclosures related to the IP Pool in the agreement or on conference calls. Some worth noting include:

    • The effective date of the agreement was December 2nd, 2014.
    • The price schedule for licensees of the pool is variable based upon market pricing and conditions.
    • Illumina has responsible for licensing, administering and enforcing the patent pool for NIPT LDT.
    • Illumina has exclusive rights to exploit the patent pool for IVD. This includes alternative platforms.
    • The Sequenom pool payment for tests performed in their labs is reflected in cost of revenues. The portion earned from the pool is recorded as an offset resulting in a net test fee cost.
    • Most, but not all, of the Illumina licensees are on a cash reporting basis.
    • Reporting of activity related to the IP Pool is due forty-five days after the end of each calendar quarter.
    • There is a mechanism for Illumina to receive credit related to new patent enforcement actions.
    • There is a mechanism to adjust prices should Sequenom exceed a minimum threshold of tests performed using non-Illumina equipment and consumables.
    • The parties agreed to renegotiate minimum annual payments in good faith should one or more included key patents be held invalid or unenforceable.
    • There is a mutual terms confidentiality clause.

    Sequenom Q1 2015 recognition and guidance

    The two primary data points related to the IP Pool were:

    1. Reported licensing revenues of $1.3m in Q1.
    2. Guided to the midpoint of the prior range of $6m-$14m for CY.

    The drivers related to these numbers appear to be:

    • The Q1 2015 reported license revenues represents the net test fees earned from the pool. The primary sources this quarter were the Sequenom licensees activity for Q1 (accrual basis) and tests processed by Illumina in their lab for the month of December (reporting lag). Any amounts earned from Illumina licensees would have been insignificant due to the cash basis reporting and reporting lag.
    • The amount owed by Sequenom for tests performed in their labs was recorded, net of earned portion, in cost of revenues.
    • License revenues will ramp during the year. However the sequential increases will be constrained by the combination of cash reporting, the Illumina reporting lag and the transition of fees earned from Illumina for their lab processing to that of their licensed labs.
    • The primary reason for the company guide to the midpoint of the range was their decision to record the portion earned from Sequenom lab processed tests as a reduction of cost of revenues rather than in revenues. This is simply a reclassification and has no impact on cash flow or earnings.

  • Brady

    Nice.
    One other item from the pool agreement that has not received much notice:”Subject to certain conditions and limitations, including an annual
    purchase minimum, under the Supply Agreement Sequenom and its affiliates will
    receive pricing no less favorable than that offered by Illumina to similar
    customers”