Executives
Marcy Graham - Senior Director, Investor Relations
Dr. Harry Hixson - Chairman and CEO
Paul Maier - Chief Financial Officer
Dr. Ron Lindsay - Executive Vice President, Strategic Planning
Bill Welch - President and COO
Dr. Dirk van den Boom - Executive Vice President, Research and Development and CTO
Analysts
Brian Weinstein - William Blair
Dave Clair - Piper Jaffray
Zarak Khurshid - Wedbush Securities
Bryan Brokmeier - Maxim Group
Brandon Couillard - Jefferies
Bill Quirk - Piper Jaffray
Sequenom, Inc. (SQNM) Q2 2013 Results Earnings Call July 24, 2013 5:00 PM ET
Operator
Good afternoon. And welcome to Sequenom, Inc. Second Quarter Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions)
Please note this event is being recorded. I would now like to turn the conference over Marcy Graham, Senior Director, Investor Relations. Please go ahead.
Marcy Graham
Thank you, Amy. Welcome to the Sequenom conference call to discuss operating results for the second quarter of 2013. Joining me today is Dr. Harry Hixson, Chairman and CEO; and Paul Maier, CFO. Dr. Ron Lindsay, Executive Vice President of Strategic Planning; Bill Welch, President and COO; and Dr. Dirk van den Boom, Executive Vice President of Research and Development and CTO will join us later for the Q&A portion of the call.
This call is also being broadcast live over the web and will be available for replay through Wednesday, July 31, 2013 on the Investors section of our website at www.sequenom.com.
Before we begin, please note that this call will include a discussion of Sequenom and Sequenom CMM's current plans and intentions regarding product development and commercialization and other matters, as well as expectations regarding Sequenom's financial resources, or future financial performance, statements that are not historical facts but are forward-looking statements.
Forward-looking statements are not guarantees of performance. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to differ materially from those expressed or implied by any forward-looking statement.
For information about the risks and uncertainties that Sequenom faces, please refer to the Risk Factors set forth in our recent filings with the SEC. Sequenom assumes no obligation and expressly disclaims any duty to update any forward-looking statements to reflect events or circumstances after today's call or to reflect the occurrence of unanticipated events.
With that, I would now like to turn the call over to Dr. Harry Hixson. Harry?
Dr. Harry Hixson
Thank you, Marcy. Good afternoon, everyone. And thanks to be -- for being on the line and joining us on today's call to discuss Sequenom's second quarter results for 2013. I’m pleased that we have maintained our leadership in penetrating the noninvasive prenatal diagnostic or NIPT testing market during this quarter.
Sequenom CMM accessioned nearly 38,000 MaterniT21 PLUS test samples this quarter, a 9% increase over the previous quarter. This equates to a run rate of approximately 150,000 test accessioned annually. The increase in the number of competitors in the field has moderated our growth rate as anticipated.
Along with many other companies in the diagnostics industry, Sequenom CMM experience delays in receipt payment as a result of molecular diagnostic coding changes adopted by CMS, Medicaid and third-party payors. These changes include the elimination or placement of certain molecular diagnostic billion codes.
Several payors are requesting additional information to process claims for services, and certain payors, including most state Medicaid plans, have not implemented the new codes, or in some cases are no longer providing coverage for certain tests. This is an industry-wide phenomenon.
I would like to refer you to the eloquent comments on this subject made earlier this week by David P. King, CEO of Lab Corp. in the second quarter earnings call transcript. Further, we know that the American Clinical Laboratory Association or ACLA is actively working to resolve this problem.
In addition to the impact of these coding changes Sequenom CMM transitioned from an outsourced billing provider to an in-house billing system during the quarter and lower than expected collections by the external billing provider also contributed to the decline in diagnostic revenues.
We knew that these coding changes were schedule to be implemented at the beginning of 2013, but didn’t expect these changes to slow or reduce payments to the degree we experienced in the second quarter, especially with government payors.
We expect collections to improve in the second half of 2013, as a result of moving billing in-house, as we work with payors to improve the process for adapting to the new CPT molecular coding changes which occurred at the beginning of year.
With continue active negotiations with third-party payors and as the end of the second quarter 74 million lives were covered for our test. Based on our recent projections, we are on track to reach our stated internal goal of 120 million lives covered by the end of the year.
We recently initiated a rollout of the national contract with the Blue Cross and Blue Shield Association or BCBSA and have just begun to enter contracts with those BCBS affiliate, which were not previously under contract. We expect to have most of these affiliates under contract by year end.
Our international business continues to grow. These agreements are based on direct bill arrangement and so do not have the same reimbursement hurdles as in the United States. In addition to our international client bill arrangements, we announced technology and licensing agreements with Laboratoire Cerba in France for noninvasive prenatal aneuploidy testing. This will provide access to their network in France, Belgium, Luxembourg and portions of the Middle East and Africa.
We announced in June that the Sequenom Center for Molecular Medicine completed the build out and validation of an additional laboratory location in Raleigh-Durham, North Carolina, and is now processing patient samples commercially.
This additional capacity is expected to contribute to the reduction of the costs associated with increased testing volumes overtime. This new laboratory also adds capacity and redundancy [patient]. The new laboratory location received it’s Clinical Laboratory Improvement Amendments or CLIA registration for operation in May.
We have managed through the challenges associated with the tremendous growth in our business following the launch of MaterniT21 PLUS. Uncertainties associated with the newly introduced coding changes in the molecular diagnostic industry have been paired our ability to collect from payors in a timely manner during the first half of 2013.
As with others in the industry, we believe that we should be paid for services already provided to patients in the first half of this year. Although, the timing and magnitude of these payments is uncertain, we expect improvements in collections in the second half. We are taking actions to reduce cost and improve our overall financial performance, including curtailment of services for which there is no current reimbursement available.
Going forward, we plan to implement expense reduction initiatives to reduce our net operating loss as we work to improve reimbursement. We have a number of actions planned for the next two quarters and are confident in our ability to continually provide superior customer service as we strive to meet our goal for this year.
I will now turn the call over to Paul who will discuss the details of our performance in the second quarter. Paul.
Paul Maier
Thanks Harry. We have seen remarkable growth in the last year but also recognize the opportunities for renewed efficiencies as we refine our operations. For the second quarter of 2013, total revenues were $34.9 million, an increase of 91%, compared to $18.3 million reported for the second quarter of 2012.
Revenues from our genetic analysis business of $10.3 million increased 2% as compared to revenues one year ago. Diagnostic revenues were $24.5 million, up from $8.1 million in the same period last year.
For the second quarter of 2013, diagnostic revenues accounted for 70% of total revenues versus 76% in the first quarter of 2013. The revenues from our diagnostic business continue to grow on a year-over-year basis. These revenues were below our expectations for the quarter, primarily due to the late payments resulting from coding changes which impacted companies throughout the industry and our transition to an in-house collections process which was completed in May.
Approximately 50% of diagnostic revenues reported for the second quarter 2013 are attributable to test performed in the same period compared to 35% during the first quarter. Collection of prior period test was weaker in the second quarter since the coding change which was adopted effective January 1 and is causing longer days outstanding.
Diagnostic revenue from international clients grew to $2.8 million in the second quarter compared to $0.7 million in the first quarter of 2013. As Harry mentioned, we expect our collections to improve through the remainder of 2013 as we work to sign on additional contracts with payors, which should also improve the timing of payments and as we work with additional government payors to gain coverage for our test and continue to build our in-house collections team.
I would also remind you the revenues from the Sequenom CMM diagnostic services operating segment are recorded primarily on a cash basis. Therefore all costs associated with providing an increased volume of the test is recognized during the current quarter while revenues are not recognized until the period in which the cash is collected.
With every quarter, we are gaining experience in the collections process and building a history that will eventually result in our ability to accrue these revenues and match cost and revenues to the period in which services are provided. Total test accession increased nearly 130% to 46,700 patient samples during the second quarter of 2013.
Approximately 38,000 of those patient samples tested during the second quarter were MaterniT21PLUS test samples compared to approximately 35,000 in the first quarter of 2013, growing approximately 9% sequentially. Total cost of revenues increased to $24.3 million for the second quarter of 2013, compared to $13.1 million for the prior year period but improved as a percentage of revenues on a year-over-year basis.
Cost of revenues increased primarily due to the significant increase in Sequenom CMM’s test volumes and cost to support increased testing capacity. Sequentially, cost of goods sold was essentially flat as compared to the first quarter of 2013 as we are beginning to achieve economies of scale resulting from growth and test volumes.
Overall gross margin for the second quarter was 30% of revenues as compared to gross margin of 28% for the second quarter last year. This improvement is attributable primarily to the positive contribution from the Sequenom CMM diagnostics services business resulting from improved collection for accessions compared to the prior period and improved efficiencies and processing patient samples.
Gross margin for the Sequenom CMM diagnostics services business in the second quarter of 2013 was approximately 16% as compared to a negative gross margin in the second quarter of 2012. Gross margin for the genetic analysis business in the second quarter of 2013 was 64%, flat as compared to the prior-year period.
Total operating expenses for the quarter were $39.2 million as compared to total expense of $34.3 million for the second quarter of 2012 and down sequentially from total operating expenses of $41 million for the first quarter of 2013. Selling and marketing expenses increased to $13.5 million for the second quarter of 2013 from $11.3 million year-over-year resulting primarily from higher labor costs associated with the expansion of the Sequenom CMM sales force and increased headcount to support commercial operations.
Research and development expenses of $13 million for the second quarter of 2013 were comparable to $13.1 million for the second quarter of 2012 and down sequentially from research and development expenses of $13.8 million for the first quarter of 2013.
General and administrative expenses for the second quarter of 2013 were $12.7 million as compared to $9.9 million for the second quarter of 2012, primarily due to increased legal expenses associated with patent litigation, increased internal billing cost due to the transition to an in-house billing function and increased head count to support the company’s operations.
General and administrative expense was down sequentially from $13.5 million for the first quarter of 2013. Net loss for the second quarter of 2013 was $31 million or $0.27 per share as compared to a net loss of $29.6 million or $0.26 per share for the same period in 2012.
For the first half of 2013, the company reported revenues of $73.3 million, an increase of 121% from revenues of $33.2 million for the first half of 2012. Revenues in the first half of 2013 from the Sequenom CMM diagnostics services operating segment grew 316% while revenues from the genetic analysis operating segment decreased 3% in the first half of 2013 as compared to the prior year period.
Gross margin for the first half of 2013 was 33% of revenues as compared to gross margin of 29% for the first half of 2012, a difference primarily attributable both to the improved gross margin associated with the increased test volumes for Sequenom CMM diagnostic services.
We have been pleased with the recent trends of improved cost of goods sold per test for the MaterniT21 PLUS Test. Now, that the North Carolina facility is operational, going forward, the maturity of this cost will shift from R&D expense to cost of goods sold. Longer term as testing volumes continue to grow, we expect MaterniT21 PLUS cost per test to decline.
Total operating expenses for the first half of 2013 were $80.2 million as compared to total expenses of $63.2 million for the first half of 2012. This change reflects increased selling and marketing expenses resulting primarily from higher labor costs associated with increased headcount to support operations and the continued expansion of diagnostic services infrastructure.
Total stock based compensation expense was $5.7 million for the first half of 2013, down from $6.1 million as compared to the first half of 2012. Net loss for the first half of 2013 was $60.4 million or $0.52 per share as compared to net loss of $54 million or $0.48 per share for the same period in 2012, reflecting an increase in cost associated primarily with the growth in sales volume of the MaterniT21 PLUS laboratory developed test.
Net cash used in operating activities was $56.3 million for the first half of 2013 compared to $42.9 million in the same period in the prior year. The increase in cash burn included an additional investment of approximately $10 million in diagnostic inventory for safety stock to support expanded test capacity and commencement of commercial operations in the Sequenom CMM North Carolina facility, partially offset by an increase of $4.6 million in accounts payable and accrued expenses.
The company also used cash for capital investments of $9.1 million and $3.7 million for debt repayment during the second quarter of 2013. As of March 31, 2013, total cash, cash equivalent and marketable securities were $106.9 million. We expect our cash burn to improve in the second half of 2013 as our reimbursement experience improved and as we achieved the benefits of our cost reduction initiatives.
Sequenom CMM has achieved and maintained a strong leadership position in a high risk segment of the NIPT markets since launch of the MaterniT21 test in the fourth quarter of 2011. We are now at an inflection point on the path to profitability. For the remainder of 2013, the major focus of Sequenom CMM is transforming this market penetration success into a parallel success in revenue growth and profitability.
Coding changes and their impact on collections have hampered our expectations for revenue growth in the first half of 2013. Responding to that challenge, we are taking significant immediate steps to reduce cost in the coming quarters. We have begun key initiatives throughout our operations that will reduce cash burn and increase cash reserves, steps that will improve our financial profile and our goal of achieving profitability in the foreseeable future.
I will now turn the call back over to Harry for his closing remarks.
Dr. Harry Hixson
Thanks, Paul. We were sensitive to the impact of cost on profitability and cash balances in developing a cost management strategy to identify appropriate reductions in spending. We’re also implementing changes to our infrastructure and operations that will drive towards profitability and positive cash flow.
We are confident of the actions we are taking will lead to the improvements necessary for success in the near term and ultimately in the long term. With that summary of our business and financial update, we would now like to open up the call to questions. Operator, please open the line.
Question-and-Answer Session
Operator
Thank you. (Operator Instructions) Our first question comes from Brian Weinstein at William Blair.
Brian Weinstein - William Blair
Hi. Good afternoon guys. Harry, just one, which I did miss, I think, did you guys -- are you comfortable giving any kind of expectation on volumes for the year at this point?
Dr. Harry Hixson
Well, as you know, our internal goal has been of 150,000 test accession during the year. We -- the week before last we set a record and we have been experiencing growth that Paul described. If we curtail the offering of our services to certain payors because they are not paying us that may have an impact and make it more difficult for us to achieve our internal goal of a 150,000.
Brian Weinstein - William Blair
So, have you started the curtailment -- did any of the curtailment happened in the second quarter or is all of that kind of forward-looking, let's say July 1 onwards?
Dr. Harry Hixson
It's all July 1 onward, forward looking.
Brian Weinstein - William Blair
So if that was the case, the sequential growth that you saw was only 9% this quarter. You alluded on the call to over a bit of a competitive pressure. And you said that's expected but that would have been a lower kind of growth that’s going on as it was competitive -- that was our growth and we would have thought is the competitive pressure getting more significant to you guys at this point that would have impacted the 38,000 in the quarter if there was no curtailment this quarter?
Bill Welch
Sure, this is Bill Welch. Brian, I think it is fair to say that there is competition and the competition is heated up. And so, I think, yeah we have foreseen that. I think it’s a still broad market. Some of the competition has partnered with various reference labs and so there is some restrictions in distribution as opposed to demand by positions and this is a -- this coding changes is a very transitional and impactful one to our industry. I know that where it is going to be thinking about profitable units as opposed to just units. And we have always thought about that. We state as you know in high risk segment, which is generally more commercial payor market.
Many of our competitors actually they, as far as I know, do not restrict where they use their products and that does put some pressure on us. But I think it’s good management now looking back that keeping the line to high risk and keeping the line to those groups is going to help us in (inaudible) pressure maybe to how they’re doing things.
Brian Weinstein - William Blair & Co.
Okay. Obviously, I have a lot more but I’d let some others jump in and ask some questions. Thanks.
Dr. Harry Hixson
Thank you, Brian.
Operator
Our next question comes from Bill Quirk at Piper Jaffray.
Dave Clair - Piper Jaffray
Hi. Good afternoon, everybody. It’s actually Dave Clair here for Bill. First one for me guys, just curious why didn’t you preannounce the quarter? Hello.
Dr. Harry Hixson
Hello. I find that to be a strange question. We announced the quarter when we are firm and we know what the numbers will be. Paul?
Paul Maier
And we actually accelerated the timing of this quarter’s call versus what we normally schedule the timing. So we just completed our process of reviewing the quarter. We had a quarterly Board meeting to review the results and that resulted in our accelerated timing this week.
Dave Clair - Piper Jaffray
Okay. All right. Fair enough. And then what percent of payors are not paying that did before the coding changes came out and then kind of a related question here, but what percent of tests do you ultimately expect to collect?
Dr. Harry Hixson
Well, there is a payor mix that we’ve got in our corporate slide and had for quite some time on the high risk and generally speaking 200 fund it is around 70% or so commercial payors and the other are more government payors, and that’s representative of the high risk (inaudible) market driven primarily by those over 35. That’s been our, as you know, which help the line very tightly on that.
If one were to use the general population, I believe the overall government payors is more like a 50-50 or 60-40 commercial to government. So that’s kind of where we’ve always had been and we stayed that course.
Paul Maier
Yeah. You may have been asking about what percent of tests that we perform get reimburse and I assume that was the intent of your question in addition to where is it coming from and we don’t disclose that information and of course, because of the payment cycle sometimes can be long that those numbers are constantly changing.
And we monitor those payors pretty closely and of course with the commercial payors we are involved in dialogue and with the government related payors we’re also involved in dialogues, and getting reimbursement, and so we deal with that on a case-by-case basis, but I don’t think that we will be reporting that information to the market.
Dave Clair - Piper Jaffray
Okay. And then just a quick housekeeping one for me. How much of the North Carolina facility was in R&D, I guess what should we expect in terms of an R&D run rate going forward?
Dr. Harry Hixson
Well, I don’t know that we can give you a clear idea of what to expect. But in the second quarter, the R&D expense was for two months and then it shifted to cost of goods once it became commercially operational in the month of June which we previously announced. So going forward, all of this cost will be cost in cost of goods. But, we’re not giving guidance on what R&D expense will be or any other expense categories going forward.
Dave Clair - Piper Jaffray
But are you willing to say what the North Carolina amount was that was in R&D this quarter?
Dr. Harry Hixson
We won’t get into that level of detail. There is a little more of expense of treatment of that in the 10-Q, but we will not probably get into that level of detail.
Dave Clair - Piper Jaffray
Okay. Thank you.
Operator
Next question comes from Zarak Khurshid of Wedbush Securities.
Zarak Khurshid - Wedbush Securities
Great. Good afternoon. Thanks for taking the question guys. Could you breakout the impact from that lower expected collections from the external billing provider or you just kind of quantify that and give us a sense for if that will be recouped somehow in the near future?
Dr. Harry Hixson
Well, we will not comment on the relative proportion, if you will, from the billing vendor and then our own experience. But I would say that, as we commented earlier in the call, the slowdown that’s occurred as a result of coding changes, it was not expected. I think severity of it was greater than we expected.
We do anticipate that the payment system will become more normal in the second half of the year. It’s hard to pinpoint exactly what the timing will be of that. But with respect to moving on the billing function in house long-term we expect that to have a positive impact because we’ll have more ability to control and we’ll be focused exclusively on our own billing and collection activities.
We’ll have a more efficient process and I think as well as our contracts kick in and as additional payors are signed up, we will expect to see a faster turnaround time on the payments that we do receive.
And earlier in the year, in the first quarter, which basically reflects a lot of the testing that we did towards the end of last year, we did see an increase level of payment relating to both increased contracts and the guidelines that have been issued late last year. So there are lots of dynamics that go into the equation here and we monitor that pretty closely going forward.
Zarak Khurshid - Wedbush Securities
Got it. And I think if I heard you correctly so it sounds like on sort of an apple-to-apple basis you’re not expecting any negative impact in terms of net reimbursement per test as a result of these billing issues and things and I’m should get back to reimbursement you saw on the first quarter if not better?
Dr. Harry Hixson
Well, it’s hard to say that on a per test basis because again if we limit the tests going forward to certain payors who we feel comfortable are going to reimburse that changes the dynamics. And but I will say that we’re still seeing reasonable payment levels both in network and out of network. The timing is, I think what, was impacted the most by the coding change. And because of the home nature of the timing and payments to begin with and because we’re still on a cash basis of accounting, it’s very difficult to match all this up and calibrate exactly when it’s happening and what’s happening.
Zarak Khurshid - Wedbush Securities
Okay. And then the final question, looks like for the 50% of volume or so it appears that it is getting reimburse rather quickly. Can you just talk about what kinds of customers those are and what’s driving that improvement from 35% last quarter to the 50% level this quarter?
Dr. Harry Hixson
Well, I don’t know that you can make that conclusion because again you have several impacts going on. Some of the payment slowed down and some of them reflected test that were done in the prior quarter. And so the 50% is arithmetic more than anything and because there were several phenomena going on, I don’t think you can interpret the trend that way.
But having said that, we do monitor the payments by those in network and those out of network and we have the ability to focus our collection efforts in the individual payors. We have some payors who are paying very well and very promptly and we have others who are slower. And so now that we have our own system we can react more quickly when we see trends develop and so that should benefit us going forward.
Zarak Khurshid - Wedbush Securities
Great. Thank you.
Operator
Our next question comes from Bryan Brokmeier at Maxim Group.
Bryan Brokmeier - Maxim Group
Hi. Good afternoon. Has there been any change in the conversation that you have with payors in regards to your higher price versus competitors?
Dr. Harry Hixson
Let see change Bryan, one thing I think the changes is we’re tracking we think to the 120 million covered lives by the end of this year. And so the Blue Cross, Blue Shield and other payor discussions have gone well on those contracts proceeding. I think the one thing that has changed is for certain payors, somewhere national, some could center regional is a desire not to add new labs to their system.
And so those conversations are taking time, delaying things otherwise, does it mean in that assistant that we would not get paid by that payor. They have a positive coverage decision outstanding. But in terms of getting a contract, grew in place that probably delays things a bit and that would be -- I would say competitive just because they want to have certain number of labs. They don’t like to add more labs that they don’t have to. Overall I think the biggest thing has been this collection and fundamental billion change where many payors just haven’t voted to the new system -- billing them to the systems.
Bryan Brokmeier - Maxim Group
Right. So, yeah, I understand that delays, how it can take longer because they don’t want to add new laboratory system unless it’s really in their benefit but in terms of the pricing that hasn’t changed as new competitors have come on market they ended up, hey why we’re paying you more than what these guys are asking. Has there been any change in that conversation?
Dr. Harry Hixson
So on a case by case scenario Bryan it depends upon the payor and the what type of payor class they might be. Some might be more Dr. Harry Hixson managed Medicaid or others in such. And so we have seen some competition in those and when appropriately match that if not we -- I suppose we could decide not to count over that payor. But certainly our competitors some competitors are out. Different test but different prices and that’s our differentiation discussion we have to have.
Bryan Brokmeier - Maxim Group
Okay. And you’ve mentioned in your prepared remarks that some payors, they’re asking for more information and that’s also causing some of the delays. What sort of -- are you able to get into what sort of information they’re asking for. They look to pay more attention to the patient’s age and to other high risk factors. I mean, what else are they asking for?
Dr. Harry Hixson
Part of this is tied to the coding change. Just to remind us we had a number of stack codes and like a diagnostic and they did away with all those codes and brought in a Tier 1 then other types of codes. We use for MaterniT21 PLUS a miscellaneous code for molecular which were supposed to use unfortunately many, many other unrelated test also use that code. And so payors use that as an opportunity to say what is this code, can I get more information and how it’s used. Unrelated to our test or anything, within our group there is certain payors to say why see this code I see what you have but I may have more questions for you as it applies to this for prenatal care. And that could be it’s a really high risk rather things they may ask about. For these two issues, one the coding issue delay and one could be about the prenatal side.
Bryan Brokmeier - Maxim Group
And you now have 74 million covered lives here. All of the 70 million you had in the first quarter included in that $74 million or is that some come out and you’ve added more new payors?
Dr. Harry Hixson
To best of my knowledge no ones dropped out that’s all -- those includes above.
Bryan Brokmeier - Maxim Group
Okay. Thanks a lot.
Operator
Our next question comes from Brandon Couillard at Jefferies.
Brandon Couillard - Jefferies
Hey good afternoon. Harry, a follow-up, if you just step back for a second, I mean can you articulate the pathway to a resolution in terms of you getting paid for the test run. I mean what are the processes that you need to happen whether it’s discussions with payors or establishing payments levels or just the payors rolling over to the new coding system just walk us through that process?
Dr. Harry Hixson
I don’t know maybe Bill probably the best one to talk about it.
Bill Welch
Sure. In terms of how we go forward, I think we need to do two things. We need to work with the payors regarding a new coding system to identify why our test virtue to this code and working the systems. So we have that conversation.
In terms of past payments, those go for the payor based on collections that are internal group does as well as our external reimbursement collection groups work towards. If the payors has a coverage decision in place which nearly every payor does as a commercial today. And we perform the service and we followed our guidelines and it’s written [gengram] the way we perform. We expect to get paid for that.
I think that’s part of the overall discussions and this is the ticket fence. We do receive bullish payments from certain payors from time to time along those lines. I can’t tell you what we get paid for everything but certain our goals is to continue to get paid. The Medicaids are one that some may don’t have clear guidance in terms of published guidelines but they do follow a cog and others, and so on a state-by-state discussion we’re having those discussions for getting into their system and on those we’ll be asking those as well for retro payments from when we perform this under their program.
Brandon Couillard - Jefferies
Okay. And did you actually stopped selling or running any test services in for quarter as a result of the collection issue?
Paul Maier
No.
Brandon Couillard - Jefferies
Fair enough. And which test service exactly are you curtailing due to a lack of reimbursement?
Dr. Harry Hixson
I don’t think we’re going to say which test or with which payors groups at this time.
Brandon Couillard - Jefferies
Is it fair to say it’s spread across T21, as well as your other diagnostic tests or is it outside of T21?
Dr. Harry Hixson
It’s not exclusively T21.
Brandon Couillard - Jefferies
Got it. And would you care to qualify the expense cuts planned for the second half and in terms of where the cost will come out of, I mean, are we talking sales force, R&D, any color you can add?
Dr. Harry Hixson
Well, we are in the process of making those decisions and I think at this time it would be appropriate for us to comment. But we are looking broadly in a broad range of categories and we’ll -- if we have something to say in the future that would be in the future and we wouldn’t comment right now.
Brandon Couillard - Jefferies
All right. Thank you.
Operator
Our next question comes from Dave Clair of Piper Jaffray.
Bill Quirk - Piper Jaffray
Yeah. Hi. Thanks. It’s Bill for Dave. Sorry, I jumped up late here, so I apologies, couple of these questions have been answered, but could you guys talk about the payment level, stability or lack of in terms of MaterniT21, did we see in terms of the actually reimbursement, sequentially was relatively stable guys, are we seeing any fluctuation there? Thanks.
Dr. Harry Hixson
Well, I would just say that, we have always experience the range of payment based on those that are under contract and those that are out of network, and there is an arithmetic average of what we collect on any -- in any given month. But the trends have been relatively consistent where we are getting paid and it depends in any given period what portion of test we don't get paid and there are very few payors that are have a consistent track record on this test.
Bill Quirk - Piper Jaffray
Yeah. Got it. And then, I understood, and then just thinking of 74 million covered lives going to 120, obvious we’ve seen a pretty dramatic improvement in terms of certification medical necessity, and so, Paul, can you just talk to, I guess, how we should expect to see these plans roll in, I mean, it sound candidly like, you sitting on bullets of just contracts here certainly by the end of year it's not by the third quarter?
Paul Maier
Well, of course, part of that is driven by the master agreement that was initiated last quarter with Blue Cross Blue Shield, and as we mentioned the rollout of that just began to the affiliate. So we have a number of the affiliates under contract and we believe that will be a big driver in the ramp up for more our current covered lives are to our goal of 120 million. So it just depends on the timing of those and an additional course, we’re talking to other major payors and regional payors but we do expect as we said earlier to meet that goal for the year.
Bill Quirk - Piper Jaffray
Okay. Got it. And then just last one for me is in terms of the commentary run, just continuing some of the test, give the MaterniT21 is in guidelines, obviously you’re charging forward here to like a better term on stricter medical necessities, 55 of those which is obviously in guidelines as well. Is it reasonable to assume that most of the discontinuation, kind of, come from things like macro degeneration where it’s much earlier in terms of data payor attraction, et cetera? Thanks.
Bill Welch
Well. I think Harry, I said that we wouldn’t comments specifically on individual test. But again if you look at our testing volume for the quarter 38,000 of the 46,700 tests were T21. So it will have the biggest impact. It continues to have the biggest impact on our testing volumes. And I so I think you can conclude that that’s one that has the largest driver of our cost going forward. And so we look pretty carefully of that first but we do look at the all the other test as well.
Operator
Our next question comes from Zarak Khurshid of Wedbush Securities.
Zarak Khurshid - Wedbush Securities
Hi, thanks. Taking for the follow up. So we’re not announcing the United Health in any of the contracts. To what extent, do you think you're sort of squeezed out of some of those contracting discussions and what might that mean for the business of over the next six months? Thanks.
Bill Welch
This is Bill. I don't know of -- I can’t confirm or deny whether they’re in contracts. I know that we are working towards a variety of payors to get in network. And those conversations frankly are going well. The biggest one we’ve been opened about is the Blue Cross Blue Shield Associations represent about 100 million lives.
And this is towards the execution for to second half this year. There are many other payors that who also both have been working towards bringing on board. There are some payors were out-of network in and if we decide not to contract for them for a reason and working within out-of network as top fear provider.
Dr. Harry Hixson
I guess one thing that could be occurring and it’s hard to say from the overall marketplace, it’s clear that as an example of lab core PerkinElmer our existing large laboratory that have existing contracts with existing payors. It’s unclear whether individual laboratories actually have-cant with payors or simplify their lab partners does and whether that test it’s actually expressively called out or just added in or could be added in is little bit uncertain right now. I can tell you when we do it, we’re direct conversation with the payors for an agreement place on our test. So it’s pretty straight forward.
Zarak Khurshid - Wedbush Securities
Thank you.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Marcy Graham for closing remarks.
Marcy Graham
Thank you for joining us today on the call. If you have any further questions, please call the investor relation department 858-202-9028. Thank you.
Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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