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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Commission File Number: 000-29101

SEQUENOM, INC.

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code: (858) 202-9000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [    ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [    ]

The number of shares of the Registrant’s Common Stock outstanding as of October 31, 2004 was 39,691,444.

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SEQUENOM, INC.

INDEX

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PART I - FINANCIAL INFORMATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except par value and share information)

See accompanying notes.

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share information)

See accompanying notes.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

See accompanying notes.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Basis of Presentation

The accompanying unaudited consolidated financial statements of SEQUENOM, Inc. have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments and restructuring charges described below, considered necessary for a fair presentation have been included. Interim results are not necessarily indicative of results for a full year.

The condensed balance sheet at December 31, 2003 has been derived from the audited financial statements at that date but does not include all of the information and disclosures required by generally accepted accounting principles in the U.S. for complete financial statements. Certain amounts in the December 31, 2003 balance sheet have been reclassified to conform with current year presentation.

These financial statements should be read in conjunction with the audited financial statements and disclosures thereto included in SEQUENOM’s Annual Report on Form 10-K for the year ended December 31, 2003, as filed with the Securities and Exchange Commission (“SEC”).

(2) Summary of critical accounting policies

Reserves for obsolete and slow-moving inventory. The introduction of new products by us and our competitors has resulted in our inventory being rendered obsolete and required us to sell items at a discount to cost. We estimate the recoverability of our inventory by making assumptions related to our internal estimates of future product demand and product life cycles, and we record valuation adjustments to our inventory balances based upon the difference between the cost of such inventory and the estimated market value based on these assumptions. Inaccurate forecast of demand for our products or inadequate or untimely introduction of new product lines can create excess inventory. Our estimates may be inaccurate compared to actual results as they are based on the information currently available to us at the time. During the nine months ended September 30, 2004, slow-moving inventory reserves of $2.2 million were charged to cost of goods sold, and the total reserve was $2.9 million at September 30, 2004.

(3) Segment information

We terminated our internal drug discovery efforts and closed our SEQUENOM Pharmaceuticals business segment during the third quarter of 2004. Our outlicensing program for diagnostic and therapeutic product development and associated research activities, formerly within the SEQUENOM Pharmaceuticals business segment, is now reported within our total expense categories. All of our activities are now within one business segment and accordingly we report the consolidated results of our activities without segmental disclosure.

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(4) Impairment of long-lived assets

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, we examine our tangible and intangible assets when events or changes in circumstances indicate that the carrying value of the long-lived asset might not be recoverable. In relation to the decision to close the SEQUENOM Pharmaceuticals business segment in July 2004, specific long-lived assets were reviewed, and we concluded that long-lived assets with a carrying amount of $1.3 million no longer had any value, and wrote them off. Fair value was based on discounted expected future cash flows to be generated by these assets. This $1.3 million charge is included within the income statement as part of the “Restructuring charges”. These assets primarily included equipment, software and patent rights obtained in connection with the acquisition of Axiom Pharmaceuticals, Inc.

(5) Restructuring charge

We terminated our internal drug discovery efforts and closed our SEQUENOM Pharmaceuticals business segment during the third quarter of 2004, which will reduce our headcount by approximately 50 by the end of 2004 compared to our headcount prior to the restructuring. We will continue with our outlicensing program to seek to capitalize on the potential value of our disease gene discoveries for diagnostic and therapeutic product development. During the third quarter of 2004, we incurred charges of $1.9 million related to the closure of this business, and expect to incur additional termination benefit charges of approximately $0.3 million by the time we exit fully from this activity in the first quarter of 2005 for a total charge of $2.1 million. We expect that the total anticipated cost of $2.2 million will be made up of $1.3 million of impairment charges for long-lived assets, $0.1 million of contract termination costs and $0.8 million of termination benefits. The exit costs for this restructuring during the period are as follows (dollars in thousands):

Exit costs relating to the restructuring are shown in the income statement as “Restructuring charges”. The remaining accrued balance is shown within accrued expenses.

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(6) Short-term debt

At September 30, 2004, we were in breach of one of the covenants of one of our long-term loans requiring us to have in excess of $40 million of unrestricted cash and short-term investments. This loan is secured by certain of our tangible fixed assets. Under the agreement with respect to this loan, provided that the lender does not require immediate repayment, we have the ability to remedy the breach by providing the lender with a letter of credit covering the remaining balance of the loan, which was $1.7 million at September 30, 2004. We have not yet provided this letter of credit to the lender and accordingly $0.3 million of this loan balance has been reclassified to short-term debt. Should we provide the letter of credit to the lender, our restricted cash will be increased by 118% of the remaining loan balance until the loan is paid. The loan is scheduled to be paid by December 2006.

(7) Comprehensive income (loss)

SFAS No. 130, Reporting Comprehensive Income, (“SFAS 130”) requires reporting and displaying comprehensive income (loss) and its components, which, for us, includes net loss and unrealized gains and losses on investments and foreign currency translation gains and losses. In accordance with SFAS 130, the accumulated balance of other comprehensive income (loss) is disclosed as a separate component of stockholders’ equity. A summary of our comprehensive loss is as follows (dollars in thousands):

(8) Net loss per share

In accordance with SFAS No. 128, “Earnings Per Share”, basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period, including 400,000 shares held in escrow relating to the acquisition of Axiom Biotechnologies, Inc., during the three and nine months ended September 30, 2003. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and common equivalent shares outstanding during the period. Common equivalent shares are comprised of incremental shares of common stock issuable upon the exercise of stock options and warrants, and were excluded from historical diluted loss per share because of their anti-dilutive effect.

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(9) Stock-Based Compensation

We account for our stock-based awards to employees in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and the related Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation—An Interpretation of APB Opinion No. 25. We have adopted the disclosure-only alternative of SFAS 123, Accounting for Stock-Based Compensation (“SFAS 123”).

If compensation cost for stock-based awards had been determined consistent with the fair value method prescribed in SFAS 123, our net loss would have been the following pro forma amounts:

Options or stock awards issued to non-employees who are not members of our Board of Directors are recorded at their fair value and periodically remeasured as determined in accordance with SFAS 123 and Emerging Issues Task Force (“EITF”) 96-18 Accounting for Equity Instruments with Variable Terms that are Issued For Consideration other than Employee Services Under SFAS No. 123, and recognized over the related service period.

(10) Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market value net of inventory reserves. The components of inventories were (dollars in thousands):

Inventory balances are shown net of slow-moving inventory reserves of approximately $2,928,000 and $1,662,000 at September 30, 2004 and December 31, 2003, respectively.

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(11) Acquisition and integration costs

As of September 30, 2004 we had approximately $1.1 million remaining in accrued acquisition costs relating to the acquisition of Gemini Genomics, plc in 2001. The remaining acquisition liability relates to lease commitment costs. We do not know how long it will take us to sublease our remaining surplus space. The remaining amount accrued at September 30, 2004 represents approximately 49 months of remaining lease payments, net of sublease income from existing subleased space and lease costs of space occupied by us. If we do not sublease the remaining space by the end of that 49 month period we will incur additional expense of approximately $24,000 per month for 27 more months.

The activity in the nine-month period ended September 30, 2004 was as follows (dollars in thousands):

In the nine months ended September 30, 2004, we reduced the carrying value of our acquired intangibles relating to the acquisition of Gemini Genomics by $1.3 million and reduced the associated long term deferred tax liability by $0.5 million to reflect an income tax purchase accounting adjustment, in accordance with EITF 93-7 Uncertainties Related to Income Taxes in a Purchase Business Combination.

(12) Warranty reserves

Generally, we do not have any significant post-delivery obligations associated with our product sales. We accrue for warranty expenses and other allowances at the time of shipment based on historical service expense and trends. Such amounts are not generally significant.

(13) Commitments and contingencies

In August 2004, we were named as a defendant in a complaint filed by a former employee, Daniel P. Little (“plaintiff”) in the United States District Court for the Southern District of California, Case No. 04 CV 1737 J. In the complaint, the plaintiff alleges that we have violated plaintiff’s rights under a 1957 German law, known as “Law Relating to Inventions Made by Employees”, in connection with plaintiff’s activities in Germany for Sequenom, GmbH, beginning in or about October 1995. This law provides for compensation to an employee in consideration for rights to employee inventions. Although we have made several royalty

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payments to plaintiff, plaintiff alleges that the amount of royalty has been in dispute as have been the triggering events. Plaintiff asserts causes of action against us including rescission, breach of contract, quantum meruit, unfair business practices, and fraud. Plaintiff further alleges that Sequenom GmbH failed to follow the mandatory process of the 1957 German law and never provided the necessary written claim of ownership of the inventions made by plaintiff while in Germany. The plaintiff seeks unspecified monetary damages and other relief including ownership and patent rights for all inventions claimed in patents to which he contributed while employed in Germany, including U.S. Patents 6,258,538, 6,569,385, and 6,602,662, which are asserted to include coverage for key elements of our MassARRAY technology, among other patents. We filed a motion to dismiss plaintiff’s complaint. The plaintiff has opposed our motion. We deny all material allegations and intend to defend this action vigorously. No accrual has been made in relation to this claim as the monetary amount is not estimable or probable at this time.

(14) New accounting pronouncements

In March 2004, the EITF ratified its consensus related to the application guidance within EITF 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF 03-1 applies to investments in debt and equity securities within the scope of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, (“SFAS 115”) and equity securities that are not subject to the scope of SFAS 115 and not accounted for under the equity method. EITF 03-1 requires that a three-step model be applied in determining when an investment is considered impaired, whether that impairment is other than temporary and the measurement of an impairment loss. The implementation date for EITF 03-1 has been delayed and no effective date has yet been set. We anticipate that the adoption of EITF 03-1 will not have a material impact on our financial position or results of operations.

In October 2004, the Financial Accounting Standards Board (“FASB”) concluded that Statement 123R, Share-Based Payment, (“SFAS 123R”) which would require all companies to measure compensation cost for all share-based payments (including employee stock options) at fair value, would be effective for public companies for interim or annual periods beginning after June 15, 2005. Retroactive application of the requirements of SFAS 123 (not SFAS 123R) to the beginning of the fiscal year that includes the effective date would be permitted, but not required. The FASB has not yet issued the final standard, however the impact of adoption of SFAS 123R will be material.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

All statements in this report that are not historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements can generally be identified as such because the context of the statement will include words such as “may,” “will,” “intend,” “plans,” “believes,” “anticipates,” “expects,” “estimates,” “predicts,” “potential,” “continue,” “opportunity,” “goals,” or “should,” the negative of these words or words of similar import. Similarly, statements that describe our future plans, strategies, intentions, expectations, objectives, goals or prospects are also forward-looking statements. These forward-looking statements are or will be, as applicable, based largely on our expectations and projections about future events and future trends affecting our business, and so are or will be, as applicable, subject to risks and uncertainties including but not limited to the risk factors discussed in this report, that could cause actual results to differ materially from those anticipated in the forward-looking statements. We caution investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, the risk factors discussed below under the caption “Risks and Uncertainties Related to Our Business”. Our expectations and the events, conditions, and circumstances on which these future forward-looking statements are based, will likely change.

SEQUENOM^®, SpectroCHIP^®, and MassARRAY^® are trademarks of SEQUENOM, Inc.

Overview

We are a genetics company committed to providing the best genetic analysis products that translate genomic science into superior solutions for biomedical research, molecular medicine and agricultural applications. Our proprietary MassARRAY system is a high performance DNA analysis platform that efficiently and precisely measures the amount of genetic target material and variations therein. The system is able to deliver reliable and specific data from complex biological samples and from genetic target material that is available only in trace amounts. We have used our MassARRAY technology and our extensive collections of DNA samples from diseased and healthy individuals to identify disease-related genes that predispose significant portions of the population to major diseases. Based on our discoveries, we have developed diagnostic and therapeutic content for potential partner out-licensing and commercial development opportunities.

We are focusing our efforts on revenue-generating opportunities in the biomedical research market. In particular, we are focusing on molecular diagnostics, which encompasses clinical research and diagnostic applications. We will also continue our efforts to outlicense our disease gene discoveries (drug targets, diagnostic and pharmacogenetic markers, signaling pathways and novel biological mechanisms) for potential therapeutic or diagnostic product development by other parties and use our research results to improve the capabilities of our MassARRAY platform.

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Our goal is to leverage our technology to become a significant contributor in the development of molecular medicine, which encompasses applications often referred to as pharmacogenomics, personalized medicine, disease predisposition testing, cancer subtyping, and non-invasive prenatal testing. These fields share the need for analytical applications that define disease on a molecular level and with a high degree of reliability.

Genetic analysis is primarily conducted in two key biomedical research market segments: the academic research market, where we currently focus, and the clinical analysis market, where we are expanding. The research market makes initial genetic discoveries. It is a relatively small market and is mainly comprised of academic institutions. The clinical analysis market is significantly larger, and takes genetic analysis a step further to establish the use of genes and genetic markers.

The needs of these markets differ significantly. The research market, which requires highest data density per sample, is tolerant to inconsistencies in data and error rates, and typically has a shorter window of opportunity. Sample throughput is generally very high. This market is extremely price sensitive. The clinical analysis market focuses on a defined number of markers per sample, is not as tolerant to inconsistencies in data and error rates, typically has a longer development cycle, and is less price sensitive. Sample throughput requirements are generally not very high. As a result of the clinical analysis market’s requirements and the strengths of the MassARRAY system, including high sensitivity, specificity and reproducibility, we believe there is significant opportunity in the clinical analysis market.

We have targeted customers conducting quality genotyping and performing fine mapping studies, candidate gene studies, comparative sequencing and gene expression analysis in the molecular medicine market. We support epigenetic analysis, which is the analysis of DNA methylation, and genetic trace analysis applications, which is the analysis of smallest amounts of genetic material in complex mixtures.

We also plan to broaden the markets to which we sell our product line. We have identified five target segments for potential growth, including customers in clinical research and clinical marker validation, the emerging field of molecular medicine, diagnostic service laboratories and animal testing & food safety labs.

One of our key areas of interest is the development of analyte specific reagents (ASRs). ASRs are tests that measure biomarkers, which are intended for use in diagnostic applications, for identification and quantification of an individual substance in biological specimens. Beginning in 2005, we intend to develop ASRs in partnership with our customers. We plan to offer ASRs for established genetic tests already in the public domain, such as tests for Mendelian disorders including cystic fibrosis, and Factor V & II.

We believe there is also an opportunity to create novel ASRs based on research being conducted today using the MassARRAY platform. Leading research scientists are using our MassARRAY system as a basis to develop new applications in the field of applied genetic analysis. In the third quarter alone, we announced five collaborative research agreements with national and international research institutions focusing on such diverse areas as cancer, prenatal diagnosis and animal testing. These institutions are exploring new areas of genetic testing, with major market potential, including genetic trace analysis for prenatal testing, and early cancer detection.

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In the area of prenatal diagnostics, in conjunction with the Chinese University of Hong Kong and the genetic researcher, Dr. Dennis Lo, our MassARRAY system is used to analyze genetic disease in a fetus in a way that may replace current, expensive, technology that has a nearly unacceptable risk profile.

As of September 30, 2004, our product revenues consisted of revenues from the sales of MassARRAY consumables and MassARRAY systems, maintenance agreements for systems, and sales and licensing of proprietary software.

One of the two MassARRAY sales in the third quarter was a MassARRAY Compact. This is the fifth consecutive quarter for which revenues from consumables have exceeded revenues from hardware. Consumable revenue increased 32% from the three months ended June 30, 2004 to September 30, 2004, but declined by 12% for the nine months ended September 30, 2004 compared to the same period in 2003. The impact of our MassARRAY Compact system and other new products and product applications on future revenues, margins, expenses, and cash flows remains uncertain and depends on many factors as described below under the caption “Risks and Uncertainties Related to Our Business”.

We previously completed numerous scans of the human genome and identified over 60 candidate genes indicating association with the following diseases: breast cancer, lung cancer, prostrate cancer, melanoma, schizophrenia, type II diabetes, obesity, dyslipidemia (HDL-cholesterol), hypertension, osteoarthritis and osteoporosis. In most studies we have further analyzed our initial disease-association findings in additional independent populations followed by appropriate biological confirmation experiments where feasible. Internal development on a small number of our validated disease gene discoveries was initiated. Following the closure of the Pharmaceuticals business unit in the third quarter of 2004, we terminated all internal drug development. However, we continue to pursue outlicense opportunities for our disease gene discoveries for development and potentially for the production of therapeutic and diagnostic products. Although we incurred a charge of $1.9 million during the third quarter of 2004 related to the closure of the Pharmaceutical business unit, we expect our overall research and development expenses to be reduced by this closure.

We expect revenues from our outlicensing efforts with respect to our disease gene discoveries to be minimal for the foreseeable future. To the extent that revenues are realized, if at all, they may fluctuate significantly as revenues will be based upon out-licensing of gene and target-related intellectual property, the occurrence of certain milestones, and successful product development and commercialization, all of which are uncertain and difficult to predict. As a result, our entitlement to, and the timing and amounts of, any licensing and milestone payments and royalty or revenue sharing payments on future diagnostic and therapeutic product sales are uncertain and difficult to predict. To achieve such revenues we will likely be dependent upon the efforts, resources and success of present and potential licensees who will need to invest significant dollar amounts in research and development efforts, clinical trials, and obtaining regulatory approvals over several years.

Since our inception, we have incurred significant losses. As of September 30, 2004, we had an accumulated deficit of $409.5 million. We expect to continue to incur losses going forward at least until the end of 2005.

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Results of Operations for the Three Months and Nine Months Ended September 30, 2004 and 2003

Results of Operations

Revenues

Total revenues for the three and nine months ended September 30, 2004 declined to $5.2 million and $16.4 million, respectively, from $7.2 million and $22.3 million, respectively, for the same periods in 2003.

Product revenues were derived from the sale of consumables including our SpectroCHIP bioarray chips, MassARRAY systems, maintenance agreements, sales and licensing of our proprietary software and license fees from end-users. The decline in overall product revenues was mainly due to lower average selling prices and reduced sales volumes for our chips and other consumables. For the three months ended September 30, 2004 compared to the three months ended September 30, 2003, consumable revenues decreased from $4.6 million to $3.5 million, respectively. For the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003, consumable revenues decreased from $10.9 million to $9.5 million, respectively. This reduction in revenue was a result of a decline in our average selling prices and volumes for our SpectroCHIP bioarray chips and related consumables. MassARRAY system hardware sales declined from $0.8 million to $0.5 million in the three months ended September 30, 2003 and 2004, respectively and declined from $6.8 million to $3.0 million in the nine months ended September 30, 2003 and 2004, respectively. MassARRAY system placements remained below our expectation. The sales cycles for our MassARRAY Gene Expression application and MassARRAY Compact system continue to be longer than planned. The sales cycles for the Gene Expression application and MassARRAY Compact system are similar to those of our higher throughput systems and other applications, not shorter as originally thought. The lower price point for the MassARRAY Compact system has not resulted in a shorter sales cycle as we had originally expected. Income from other product sales, including MassARRAY maintenance contracts, associated software, license fees and royalties, was $0.8 million and $3.0 million for the three and nine months ended September 30, 2004, respectively, compared to $1.2 million and $2.9 million for the same periods in 2003, respectively.

We continue to develop our market for clinical genetics and molecular medicine where the testing accuracy and broad DNA analytical capabilities of our MassARRAY system are well suited. We expect that future revenues for our business will be affected by, among other things, MassARRAY product and application demand, the acceptance of our MassARRAY Compact system, customer budgets, new product and application introductions, competitive conditions and government research funding.

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Service revenues in the three and nine months ended September 30, 2004 were $0.0 and $0.2 million, respectively, declining from $0.6 million and $1.4 million, respectively, in the same periods in 2003. We derived these revenues from the completion of significant phases of genetic validation projects. The reduction in service revenue primarily has resulted from our decision to pursue internal discovery genetics programs and to discontinue pursuit of low-margin collaborative genotyping services. We do not expect service revenue to be significant in the foreseeable future. We expect revenue from present and future outlicensing of our disease gene discoveries to be minimal for the foreseeable future.

Research revenues increased to $0.4 million and $0.7 million for the three and nine months ended September 30, 2004, respectively, from $0.0 million and $0.3 million for the same periods in 2003, respectively. The timing of research revenues depends upon our expenditure on grant research and the receipt of the grant funding from the sponsoring agencies. We performed more work on grant-funded research in 2004 than in 2003.

Cost of product and service revenues and gross margin

Cost of product revenues for the three and nine months ended September 30, 2004 were $2.5 million and $8.8 million, respectively, compared to $3.4 million and $11.3 million, respectively, for the same periods in 2003. Gross margins on product sales for the three and nine months ended September 30, 2004 were 49% and 43%, respectively, compared to 48% and 45%, respectively, for the same periods in 2003. Gross margins increased by 1% for the three months ended September 30, 2004 and declined 2% for the nine months ended September 30, 2004, compared to the same periods in 2003 due to increased inventory reserves for slow-moving components reducing margins by 10% and 9%, respectively, compared to the same periods in 2003. This increase in gross margin in the three months ended September 30, 2004 was a result of higher-margin consumables sales making up a greater proportion of total revenue in 2004, offsetting the increased inventory reserve charge. The decline of 2% over the nine months ended September 30, 2004 was a result of the higher margin consumables not fully offsetting the increased inventory reserve charges.

We believe that gross margin in future periods will be affected by, among other things, pricing reductions in the selling price for systems and consumables, the mix of products sold, competitive conditions, sales volumes, discounts offered, inventory reserves required and royalty payment obligations on in-licensed technologies.

Cost of service revenues for the three and nine months ended September 30, 2004 were $0.0 million and $0.2 million, respectively, compared to $0.4 million and $1.2 million, respectively, for the same periods in 2003. Gross margins for the three and nine months ended September 30, 2004 were 0% and (3)%, respectively, compared to 23% and 17%, respectively, for the same periods in 2003. Gross margins are dependent on the particular contract terms of the work undertaken in each quarter.

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Research and development expenses

Research and development expenses decreased to $4.0 million and $16.1 million, respectively, from $6.1 million and $18.4 million, respectively, for the three and nine months ended September 30, 2004 and 2003. These expenses consist primarily of salaries and related personnel expenses, improvements to our existing products and validation of products under development, and, prior to the termination of our internal drug discovery activities in July of 2004, expenses related to our disease gene discovery and development programs, and expenses relating to work performed under research contracts. In the three and nine months ended September 30, 2003, $3.9 million and $11.6 million, respectively, of research and development costs were allocated to the SEQUENOM Pharmaceuticals business segment.

The decrease in expenses of $2.3 million for the nine month period ended September 30, 2004 from the same period in 2003 primarily relates to reduced operating supply costs of $1.3 million, $0.5 million lower headcount expenses, $0.5 million lower establishment costs, reduced depreciation charges of $0.9 million, $0.2 million of other cost reductions, and $0.4 million of sales taxes related to operating supplies and capital equipment, offset by reduced absorption into cost of goods sold of $1.5 million. The decrease in expenses of $2.1 million for the three month period ended September 30, 2004 from the same period in 2003 primarily relate to reduced operating supply costs of $0.7 million, $0.5 million lower headcount expenses, $0.3 million lower establishment expenses, reduced depreciation charges of $0.8 million, and $0.3 million of sales taxes related to operating supplies and capital equipment, offset by reduced absorption into cost of goods sold of $0.5 million.

Sales, general and administrative expenses

Sales, general and administrative expenses for the three and nine months ended September 30, 2004 were $4.8 million and $16.2 million, respectively, compared to $5.7 and $17.5 million, respectively, for the same periods in 2003. These expenses consist primarily of salaries and related expenses for sales and marketing, customer support, business development, legal, finance and human resource personnel, and their related functions expenses. In the three and nine months ended September 30, 2003, $1.5 million and $5.0 million, respectively, of sales, general and administrative expenses were allocated to the SEQUENOM Pharmaceuticals business segment.

The $1.3 million decrease for the nine months ended September 30, 2004 from the same period in 2003 was due to a reduction in legal-related expenses of $0.6 million, insurance expenses of $0.3 million due to premium reductions and depreciation of $0.3 million as an increasing proportion of our asset base is fully depreciated, reduced costs in our overseas operations of $0.6 million, and other net operating savings of $0.1 million, offsetting an increase in sales-related headcount expenses and selling expenses of $0.6 million as we strengthened our sales function. The $0.9 million decrease for the three months ended September 30, 2004 from the same period in 2003 was due to a reduction in legal-related expenses of $0.2 million, insurance expenses of $0.1 million due to premium reductions and depreciation of $0.1 million as an increasing proportion of our asset base is fully depreciated, reduced costs in our overseas operations of $0.3 million, other general savings of $0.3 million, offset by increased Sarbanes-Oxley Act compliance costs of $0.1 million. Headcount and selling expenses remained consistent with 2003 as an adjustment to bonus accruals based on revised estimates offset increased headcount cost.

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Although our SEQUENOM Pharmaceuticals business unit was closed during the third quarter of 2004, certain selling, general and administrative expenses will continue to be incurred going forward in connection with maintaining and promoting our gene target discoveries and our outlicensing activities related to those discoveries. We expect headcount and related expenses to increase during the remainder of 2004 as compared to those incurred during the third quarter of 2004 as we strengthen our sales operations.

Asset impairment and restructuring charges

We terminated our internal drug discovery efforts and closed our SEQUENOM Pharmaceuticals business segment during the third quarter of 2004, which will reduce our headcount by approximately 50 by the end of 2004 compared to our headcount prior to the restructuring. We will continue with our outlicensing program to seek to capitalize on the value of our disease gene discoveries for potential diagnostic and therapeutic product development. During the third quarter of 2004, we incurred total charges of $1.9 million related to the closure of this business, and expect to incur additional charges of $0.3 million in the future. Of the $1.9 million charge, $1.3 million relates to non-cash charges from the write-off of equipment taken out of service and intangible assets of no value to our ongoing business, and $0.6 million relates to employee severance costs and other contractual obligations.

Amortization of acquired intangibles

In connection with the acquisition of Gemini Genomics, plc in 2001 we acquired approximately $18.7 million of intangible assets, including clinical data collections and patent rights. In connection with the acquisition of Axiom Biotechnologies, Inc. in 2002 we acquired approximately $0.5 million of intangible assets, including patent rights, human cell banks, and assay technology. In the nine months ended September 30, 2004, we reduced the carrying value of our acquired intangibles relating to the acquisition of Gemini Genomics by $1.3 million to reflect an income tax purchase accounting adjustment. As a result of the closure of our SEQUENOM Pharmaceuticals business unit in during the third quarter of 2004, we wrote off approximately $0.3 million of intangible assets acquired from Axiom Biotechnologies that have no future alternative use. Our amortization expense was reduced from $2.6 million to $2.4 million in the nine months ended September 30, 2003 and 2004 and from $0.9 million to $0.7 million in the three months ended September 2003 and 2004, respectively, as a result of the lower value of our intangibles. The remaining intangible assets are being amortized over three to five years.

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Amortization of deferred stock-based compensation

Deferred stock compensation represents the difference between the estimated fair value of our common stock and the exercise price of options at the date of grant. During the three and nine months ended September 30, 2003, we recorded amortization of deferred stock compensation of approximately $43,000 and $149,000, respectively. Amortization was completed during 2003, resulting in no charge for the three and nine months ending September 30, 2004. These amounts all relate to stock options granted prior to our initial public offering in February 2000 and were amortized over the vesting periods of the individual stock options in accordance with FASB Interpretation No. 28.

Net interest income

Net interest income was $0.1 million and $0.2 million, respectively, for the three and nine months ended September 30, 2004, compared to $0.2 million and $0.9 million, respectively, for the same periods of 2003. The decrease from 2003 to 2004 resulted from lower average balances of interest-bearing investments and lower interest rates, offset by lower interest expense due to the decrease in the amount of debt outstanding during the two periods.

Deferred income tax benefit

The deferred tax benefit of $0.9 million and $0.9 million for the nine months ended September 30, 2004 and 2003, respectively, and of $0.3 million and $0.3 million for the three months ended September 30, 2004 and 2003, respectively, is due to the tax effects related to amortization on the intangible assets, including clinical data collections and patent rights, acquired from Gemini Genomics. In the nine months ended September 30, 2004, we reduced the long term deferred tax liability by $0.5 million to reflect an income tax purchase accounting adjustment relating to the acquisition of Gemini Genomics.

Liquidity and Capital Resources

As of September 30, 2004, cash, cash equivalents, short-term investments and restricted cash totaled $43.8 million compared to $67.5 million as of December 31, 2003. Our cash reserves are held in a variety of interest-bearing instruments including investment-grade corporate bonds, commercial paper and money market accounts.

Short-Term

We consider the material drivers of our cash flow to be sales volumes, inventory management and operating expenses. Our principal sources of liquidity are our cash, cash equivalents and short-term investments. Cash used in operations for the nine months ended September 30, 2004 was $18.1 million compared to $25.9 million for the same period in 2003. The use of cash was a result of the net loss of $28.1 million for the nine months ended September 30, 2004, adjusted for non-cash depreciation and amortization of $8.3 million, $0.9 million of deferred income tax benefit and reductions in accounts receivable balances of $1.7 million due to lower sales activity and reduced time taken to collect receivables, reductions of $5.0 million in inventory levels from inventory management and valuation reserves, increases in other liabilities of $0.6 million, and reductions in accounts payable and deferred income of $5.3 million. At our current and anticipated level of operating loss, we expect to incur an operating cash outflow on a quarterly basis. We anticipate that this will continue in the future as we continue to invest in new product research and development, regulatory approval, and sales, marketing and support activities. As a result, our cash, cash equivalents and marketable security balances will decline. If the current trend of cash use continues, we will need additional capital at the end of 2006 to support our activities, as described in our discussion under the heading “Long-Term” below. If our restricted cash balance does not decline as planned we may need additional capital by mid 2006.

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Investing activities, other than the changes in our short-term investments and restricted cash, used $2.8 million in cash during the first nine months of 2004 due to leasehold improvements and purchases of additional laboratory equipment.

Net cash used by financing activities was $2.9 million for the nine months ended September 30, 2004 compared to $1.7 million used by financing activities for the same period in 2003. Financing activities during the first nine months of 2004 included net payments of $3.1 million for long-term debt and capital leases and the receipt of proceeds from the exercise of stock options and employee stock purchase plan purchases of $0.2 million.

At September 30, 2004, we were in breach of one of the covenants of one of our long-term loans requiring us to have in excess of $40 million of unrestricted cash and short-term investments. This loan is secured by certain of our tangible fixed assets. Under the agreement with respect to this loan, we have the ability to remedy the breach by providing the lender with a letter of credit covering the remaining balance of the loan, which was $1.7 million at September 30, 2004. We have not yet provided this letter of credit to the lender and accordingly $0.3 million of this loan balance has been reclassified to short-term debt as the lender has the right to request immediate payment of the amount outstanding. When we provide the letter of credit to the lender, our restricted cash will be increased by 118% of the remaining loan balance until the loan is repaid. The loan is scheduled to be repaid by December 2006. We do not anticipate that the lender will requre immediate repayment of this loan.

Long-Term

The following table summarizes our contractual obligations as of September 30, 2004 (dollars in millions):

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Future operating lease commitments have not been reduced by future sublease rentals aggregating $1.4 million.

Based on our current plans, we believe our cash, cash equivalents and short-term investments will be sufficient to fund our operating expenses, debt obligations and capital requirements through 2006. However, the actual amount of funds that we will need will be determined by many factors, some of which are beyond our control, and we may need funds sooner than currently anticipated. These factors include but are not limited to:

We have a $15.1 million bank line of credit provided by the Union Bank of California, of which $6.8 million is outstanding and $8.3 million is available for borrowing and expires on January 31, 2005. We have no commitments for any additional financings. When we require additional funds, general market conditions or the then-current market price of our common stock may not support capital raising transactions such as an additional public or private offering of our common stock or other securities. If additional funds are required and we are unable to obtain them on a timely basis or on terms favorable to us, we may be required to cease or reduce further commercialization of our products, to cease or reduce certain research and development projects, to sell some or all of our technology or assets or to merge all or a portion of our business with another entity. If we raise additional funds by selling shares of our capital stock, the ownership interest of our stockholders will be diluted.

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Risks and Uncertainties Related to Our Business

The following is a summary of the many risks we face in our business. You should carefully read these risks and uncertainties in evaluating our business.

We have a limited operating history.

We are a relatively new company and, for the most part, our technologies, particularly our internally discovered disease gene discoveries are at an early stage of discovery and development. We have experienced limited success in partnering with collaborators to further research, develop, and commercialize our disease gene discoveries. We may not be successful in researching, developing, or commercializing these targets under our present collaborations and we may not be successful in entering into any new collaborations involving our disease gene discoveries. We also have a limited history of product sales and we continue to commercialize new products and create new applications for our products. You should evaluate us in the context of the uncertainties and complexities affecting an early stage company developing products and applications for the life science industries. We need to make significant investments to ensure our products perform properly and are cost-effective and we will likely need to apply for and obtain certain regulatory approvals to sell our products for diagnostic and therapeutic applications and it is uncertain whether such approvals will be granted. Even if we develop products for commercial use and obtain all necessary regulatory approval, we may not be able to develop products that are accepted in the genomic, diagnostic, pharmaceutical or other markets and that can be marketed and sold successfully.

We have a history of operating losses, anticipate future losses and may never become profitable.

We have experienced significant operating losses in each period since our inception. At September 30, 2004, our accumulated deficit was approximately $409.5 million. These losses have resulted principally from expenses incurred in research and development, from selling, general and administrative expenses associated with our operations and the write-down to the carrying value of acquired goodwill and intangibles. We expect to incur operating losses in the future as a result of expenses associated with research and product development, production, marketing and selling, and general and administrative expenses as well as expenses associated with consolidating and completing the integration of any business or technology that we may acquire in the future. Our general and administrative expenses are likely to increase as we seek to comply with evolving standards for corporate governance and public disclosure. To achieve profitability, we would need to generate significant additional revenue with positive gross margins. It is uncertain when, if ever, we will become profitable, or cash-flow positive. Even if we were to become profitable, we might not be able to sustain or increase profitability on a quarterly or annual basis.

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Our operating results may fluctuate significantly.

Our revenues and results of operations may fluctuate significantly, depending on a variety of factors, including the following:

Further, our revenues and operating results are difficult to predict because they depend on the number, timing and type of MassARRAY system placements that we make during the year, the number, timing and types of software licensed or sold, and the quantity and timing of consumables sales for the installed base of systems. Changes in the relative mix of our MassARRAY system and consumables sales can have a significant impact on our gross margin, as consumable sales typically have margins significantly higher than MassARRAY system sales. In recent quarters, our sales mix has been comprised of a greater proportion of higher-margin consumable sales. Our revenues and operating results are also difficult to predict because they depend upon, for example as is the case with our collaboration with Procter & Gamble Pharmaceuticals, the completion of milestones and the duration of and progress made under collaborative research and commercialization programs with partners. The absence of or delay in generating revenues could cause significant variations in our operating results from year to year and could result in increased operating losses.

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We believe that period-to-period comparisons of our financial results will not necessarily be meaningful. You should not rely on these comparisons as an indication of our future performance. If our operating results in any future period fall below the expectations of securities analysts and investors, our stock price will likely fall.

We have a history of generating a large percentage of our revenue at the end of each quarterly accounting period.

Due to the way that many customers in our target markets allocate and spend their budgeted funds for acquisition of our products, a large percentage of our sales are booked at the end of each quarterly accounting period. Because of this timing of our sales, we may not be able to reliably predict order volumes and our quarterly revenues. A sales delay of only a few days may significantly impact our quarter-to-quarter comparisons. If our quarterly revenues fall below the expectations of securities analysts and investors, our stock price may decline. Similarly, if we are unable to ship our customer orders on time, there could be a material adverse effect on revenues for a given quarter.

We will need additional capital in the future to support our growth, which will result in dilution to our stockholders.

Based on our current plans, we believe our cash, cash equivalents and short-term investments will be sufficient to fund our operating expenses, debt obligations and capital requirements through 2006. However, the actual amount of funds that we will need will be determined by many factors, some of which are beyond our control, and we may need funds sooner than currently anticipated. These factors include but are not limited to:

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When we require additional funds, general market conditions or the then-current market price of our common stock may not support capital raising transactions such as an additional public or private offering of our common stock or other securities. If additional funds are required and we are unable to obtain them on a timely basis or on terms favorable to us, we may be required to cease or reduce further commercialization of our products, to cease or reduce certain research and development projects, to sell some or all of our technology or assets or business units or to merge all or a portion of our business with another entity. If we raise additional funds by selling shares of our capital stock, the ownership interest of our stockholders will be diluted.

A reduction in revenues from sales of MassARRAY products would harm our business.

The continued decline in the demand for MassARRAY systems and consumables, despite the increase in consumable sales from quarter two to quarter three of 2004, continues to reduce our total revenues and harm our business. We expect that sales of MassARRAY systems and consumables will account for most of our total revenues for the foreseeable future. We continue to see the number of new account opportunities for our highest throughput MassARRAY system for the high throughput genotyping market, declining. We have experienced reduced demand over the past several quarters for our highest throughput and largest capacity versions of the MassARRAY system. The sales cycles of our new MassARRAY Gene Expression application and MassARRAY Compact system are longer than planned and are consistent with the sales cycles for our other products. Also, over the past year, competitors have offered low priced fee-for-service genotyping services and technologies to the DNA analysis marketplace. These factors and the following factors, among others, would reduce the demand for MassARRAY products:

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Our revenues are subject to the risks faced by pharmaceutical, diagnostic, and biotechnology companies and governmental and other research institutions.

We expect that our revenues in the foreseeable future will be derived primarily from MassARRAY system products provided to pharmaceutical and biotechnology companies, laboratories, and governmental and other research institutions. Our operating results could fluctuate substantially due to reductions and delays in research and development expenditures by these customers. These reductions and delays could result from factors such as:

None of these factors are within our control.

We depend on sales of our consumable chips and other MassARRAY consumables for a significant portion of our revenues.

Sales of our consumable chips and other consumables for the MassARRAY system are an important source of revenue. Revenues from MassARRAY consumables totaled approximately $15 million or 53% of our total revenues in the year ended December 31, 2003 and approximately $9.5 million or 58% of our total revenues for the nine months ended September 30, 2004. Factors which may limit the use of our consumable chips and other consumables include:

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If our customers are unable to adequately prepare samples for our MassARRAY system, the overall market demand for our products would decline.

Before using the MassARRAY system, customers must prepare samples by following several steps that are subject to human error, including DNA isolation and DNA amplification. If DNA samples are not prepared appropriately, or the proposed assays are too complex, the MassARRAY system may not generate a reading or a correct reading. If our customers experience these difficulties, they might achieve lower levels of throughput than specified for the system. If our customers are unable to generate expected levels of throughput, they might not continue to purchase our consumables, they could express their discontent with our products to others, or they could collaborate with others to jointly benefit from the use of our products. Any or all of these actions would reduce the overall market demand for our products. From time to time, we have experienced customer complaints regarding data quality and difficulty in processing more complex assays.

The sales cycles for our products and for licensing our SNP and gene target discoveries are lengthy, and we may expend substantial funds and management effort with no assurance of successfully selling our products or services or licensing our SNP and gene target discoveries.

The sales cycles for our MassARRAY system products are typically lengthy, and for our Gene Expression application and MassARRAY Compact system, the sales cycles have been longer than originally planned. It now appears that the sales cycles for the Gene Expression application and MassARRAY Compact system are similar to that of our other products, rather than being shorter, and that the lower price point for the MassARRAY Compact system has not resulted in a shorter sales cycle as we had originally expected. The sales cycle for licensing our SNP and gene target discoveries is also typically lengthy. Our sales efforts and our licensing efforts require the effective demonstration of the benefits, value, and differentiation and validation of our products, services, and discoveries, to, and significant training of, multiple personnel and departments within a potential customer. We may be required to negotiate agreements containing terms unique to each prospective customer or licensee which would lengthen the sales cycle. We may expend substantial funds and management effort with no assurance that we will sell our products or services or license our discoveries.

We may not be able to successfully adapt our products for commercial applications.

A number of potential applications of our MassARRAY technology may require significant enhancements in our core technology. If we are unable to complete the development, introduction or scale-up of any product, or if any of our new products or applications, such as gene expression analysis, do not achieve a significant level of market acceptance, our business, financial condition and results of operations could be seriously harmed. We may fail to sustain the market acceptance of our products that have been already established, such as our MassARRAY systems, or of new products and applications. Sustaining or achieving market acceptance will depend on many factors, including demonstrating to customers that our technology is cost competitive or superior to other technologies and products that are available now or that may become available in the future. We believe that our revenue growth and profitability will substantially depend on our ability to overcome significant technological challenges and successfully introduce our newly developed products, applications and services into the marketplace.

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We have limited commercial production capability and experience and may encounter production problems or delays, which could result in lower revenue.

We partially assemble the MassARRAY system and partially manufacture our consumable chips and MassARRAY kits. To date, we have only produced these products in moderate quantities. Our customers require that we comply with current good manufacturing practices that we may not be able to meet. We may not be able to maintain acceptable quality standards as we continue or ramp up production. To achieve anticipated customer demand levels, we will need to scale-up our production capability and maintain adequate levels of inventory while manufacturing our products at a reasonable cost. We may not be able to produce sufficient quantities to meet market demand or manufacture our product at a reasonable cost. If we cannot achieve the required level and quality of production, we may need to outsource production or rely on licensing and other arrangements with third parties. This reliance could reduce our gross margins and expose us to the risks inherent in relying on others. We might not be able to successfully outsource our production or enter into licensing or other arrangements with these third parties, which would adversely affect our business.

We depend on third-party products and services and limited sources of supply to develop and manufacture our products.

We rely on outside vendors to supply certain products and the components and materials used in our products. Some of these products, components and materials are obtained from a single supplier or a limited group of suppliers. Our MassARRAY system is comprised of several components, of which the following are currently obtained from a single supplier: Bruker Daltonics, Inc. supplies our mass spectrometers, Samsung Electronics Co., Ltd. supplies our nanodispensers (also known as pintools), and Majer Precision Engineering, Inc. supplies the pins for the pintools. Amersham Biosciences Corp. is the sole supplier of an enzyme called Thermosequenase. Our consumable chips are supplied by Samsung Electronics Co., Ltd. and also by Process Specialties, Inc. Other than our agreement with Bruker Daltonics, Inc. which expires in 2006, we do not have long-term agreements with these vendors. We have experienced quality problems with and delays in receiving wafers used to produce our consumable chips, and also had technical difficulties with our pin-tool nanoliter dispenser device. We have also experienced software and operational difficulties with our MassARRAY Compact system. Our reliance on outside vendors generally and a sole or a limited group of suppliers in particular involves several risks, including:

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We may not derive any revenues from our gene discovery programs.

Our gene target discoveries are very early stage discoveries and we may not be able to license them and even if we do license them, they may not result in revenues for us and may not result in marketable products. Our technologies and approach to gene discovery may not enable any licensee to successfully identify the specific genes that cause or predispose individuals to the complex diseases that were the targets of our efforts. The diseases we targeted are generally believed to be caused by a number of genetic and environmental factors. It may not be possible to address such diseases through gene-based therapeutic or diagnostic products. Even if specific genes are identified, our discoveries may not lead to the development of commercial products, or otherwise generate revenue.

We and our licensees and collaborators may not be successful in developing or commercializing therapeutic, diagnostic or other products using our products, services or discoveries.

Development of therapeutic products by our licensees and development of diagnostic or other products by us or our collaborators are subject to risks of failure inherent in the development and commercial viability of any such product, such as demand for such product. These risks further include the possibility that such product would:

If a licensee discovers therapeutic products or we or a collaborator discover diagnostic or other products using our technology, products, services or discoveries, we may rely on that licensee or collaborator (hereafter referred to as “partner”) for product development, regulatory approval, manufacturing and marketing of those products before we can realize revenue and some or all of

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the milestone payments, royalties or other payments we may be entitled to under the terms of the licensing or collaboration agreement. If we are unable to successfully achieve milestones or our partners fail to develop successful products, we will not earn the revenues contemplated. Our agreements may allow our partners significant discretion in electing whether to pursue any of these activities. We cannot control the amount and timing of resources our partners may devote to our programs or potential products. As a result, we cannot be certain that our partners will choose to develop or commercialize any products or will be successful in doing so. In addition, if a partner is involved in a business combination, such as a merger or acquisition, or changes its business focus, its performance under its agreement with us may suffer and, as a result, we may not generate any revenues or only limited revenues from the royalty, milestone and similar payment provisions contained in our agreement with that partner.

We may not successfully obtain regulatory approval of any therapeutic, diagnostic or other product which we or our licensing or collaborative partners develop.

The Food and Drug Administration, or FDA, must approve any drug product before it can be marketed in the United States. A drug product must also be approved by regulatory agencies of foreign governments before the product can be sold outside the United States. Before a new drug application can be filed with the FDA, the potential product must undergo preclinical testing and clinical trials. Commercialization of any therapeutic, diagnostic or other product that our licensees or collaborators or we develop would depend upon successful completion of preclinical testing and clinical trials. Preclinical testing and clinical trials are long, expensive and uncertain processes, and we do not know whether we, our licensees or any of our collaborators, would be permitted or able to undertake clinical trials of any potential products. It may take us or our licensees or collaborators many years to complete any such testing, and failure could occur at any stage. Preliminary results of trials do not necessarily predict final results, and acceptable results in early trials may not be repeated in later trials. A number of companies in the pharmaceutical industry, including biotechnology companies, have suffered significant setbacks in advanced clinical trials, even after promising results in earlier trials. Delays or rejections of potential products may be encountered based on changes in regulatory policy for product approval during the period of product development and regulatory agency review. If our projects reach clinical trials, we or our licensees or collaborators could decide to discontinue development of any or all of these projects at any time for commercial, scientific or other reasons.

If the validity of the consents from volunteers were to be challenged, we could be forced to stop using some of our resources, which would hinder our gene discovery outlicensing efforts and our diagnostic product development efforts.

We have attempted to ensure that all clinical data and genetic and other biological samples that we receive from our subsidiaries and our clinical collaborators have been collected from volunteers who have provided our collaborators or us with appropriate consents for the data and samples provided for purposes which extend to include our gene discovery outlicensing activities and diagnostic product development activities. We have attempted to ensure that data and samples that have been collected by our clinical collaborators are provided to us on an anonymous basis. We have also attempted to ensure that the volunteers from whom our data

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and samples are collected do not retain or have conferred on them any proprietary or commercial rights to the data or any discoveries derived from them. Our clinical collaborators are based in a number of different countries, and to a large extent we rely upon our clinical collaborators for appropriate compliance with the voluntary consents provided and with local law and regulation. That our data and samples come from and are collected by entities based in different countries results in complex legal questions regarding the adequacy of consents and the status of genetic material under a large number of different legal systems. The consents obtained in any particular country could be challenged in the future, and those consents could prove invalid, unlawful or otherwise inadequate for our purposes. Any findings against us or our clinical collaborators could deny us access to or force us to stop using some of our clinical or genetic resources which would hinder our gene discovery outlicensing efforts and our diagnostic product development efforts. We could become involved in legal challenges which could consume a substantial proportion of our management and financial resources.

If we cannot obtain licenses to patented SNPs and genes, we could be prevented from obtaining significant revenue or becoming profitable.

The U.S. Patent and Trademark Office has issued and continues to issue patents claiming SNP and gene discoveries and their related associations and functions. If certain SNPs and genes are patented, we will need to obtain rights to those SNPs and genes to develop, use and sell related assays and other types of products or services utilizing such SNPs and genes. Required licenses may not be available on commercially acceptable terms. If we were to fail to obtain licenses to certain patented SNPs and genes, we might never achieve significant revenue from our gene discovery outlicensing efforts or from diagnostic product development.

If the medical relevance of SNPs is not demonstrated or is not recognized by others, we may have less demand for our products and services and may have less opportunity to enter into diagnostic and therapeutic product development and commercialization collaborations with others.

Some of the products we hope to develop involve new and unproven approaches or involve applications in markets that we are only beginning to explore. They are based on the assumption that information about genes and SNPs may help scientists better understand complex disease processes. Scientists generally have a limited understanding of the role of genes and SNPs in diseases, and few products based on gene discoveries have been developed. We cannot be certain that genetic information will play a key role in the development of drugs and diagnostics or other products in the future, or that any genetic-based findings would be accepted by diagnostic, pharmaceutical or biotechnology companies or by any other potential market or industry segment. If we or our customers or collaborators are unable to generate valuable information that can be used to develop these drugs and diagnostics or other products, the demand for our products and services will be reduced and our business will be harmed.

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We may not be able to form and maintain the collaborative relationships that our business strategy requires and such relationships may lead to disputes over technology rights.

We form research collaborations and licensing arrangements with collaborators to operate our business successfully. To succeed, we will have to maintain our existing relationships and establish additional collaborations. Our current strategy includes pursuing partnering opportunities with larger companies interested in or involved in the development of pharmaceutical and diagnostic products to potentially advance our disease gene discoveries and related targets toward drug or diagnostic development. We cannot be sure that we will be able to establish any additional research collaborations, licensing arrangements or other partnerships necessary to develop and commercialize products or that we can do so on terms favorable to us. If we are unable to establish these collaborations or licensing arrangements, we may not be able to successfully develop any drug or diagnostic products and generate any milestone, royalty or other revenue from sales of these products. If our collaborations or licensing arrangements are not successful or we are not able to manage multiple collaborations successfully, our programs will suffer and we may never generate any revenue from sales of products under these collaborative or licensing arrangements. If we increase the number of collaborations or licensing agreements, it will become more difficult to manage the various relationships successfully and the potential for conflicts among the collaborators and licensees will increase. Conflicts with our collaborators or licensees, or other factors may lead to disputes over technology rights which may adversely effect our business.

In addition, our government grants provide the government certain license rights to inventions resulting from funded work. Our business could be harmed if the government exercises those rights.

If we do not succeed in obtaining development and marketing rights for products developed in collaboration with others, our revenue and profitability could be reduced.

Our business strategy includes, in part, the development of diagnostic and other products in collaboration with others, or utilizing the technology of others, and we intend to obtain commercialization or royalty rights to those products. If we are unable to obtain rights to those products, or are unable to do so on favorable financial terms, our revenue and profitability could be reduced. To date, we have initiated limited activities towards commercializing products developed in collaboration with, or utilizing the technology of, others. Even if we obtain commercialization rights, commercialization of products may require resources that we do not currently possess and may not be able to develop or obtain, or commercialization may be financially unattractive based upon the revenue-sharing terms offered by potential licensors or provided for in the relevant agreement.

Ethical, privacy or other concerns about the use of genetic information could reduce demand for our products and services.

Genetic testing has raised ethical issues regarding privacy and the appropriate uses of the resulting information. For these reasons, governmental authorities may limit or otherwise regulate the use of genetic testing or prohibit testing for genetic predisposition to certain

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conditions, particularly for those that have no known cure. Such concerns may lead individuals to refuse to use genetics tests even if permitted. Any of these scenarios could reduce the potential markets for our products and services, which would seriously harm our business, financial condition and results of operations.

If we breach any of the terms of our license or supply agreements, or these agreements are otherwise terminated or modified, the termination or modification of such agreements could result in our loss of access to critical components and could delay or suspend our commercialization efforts.

We have sourced or licensed components of our technology from other parties. For example, Bruker Daltonics supplies our mass spectrometers, Samsung Electronics supplies our pintools, Majer Precision Engineering supplies the pins for the pintools, and Samsung Electronics and Process Specialties both supply our consumable chips. Our failure to maintain continued supply of such components, particularly in the case of sole suppliers, or the right to use these components would seriously harm our business, financial condition and results of operations. Other than our agreement with Bruker Daltonics which expires in 2006, we do not have long-term agreements with these vendors that provide for a continued supply of these components for fixed terms that extend beyond one year. With respect to our agreements with suppliers, our agreements with Samsung have indefinite duration but may be terminated without cause by either party at any time, provided the terminating party has provided the other party 12 months advance written notice, and our agreement with Bruker Daltonics may not be terminated without cause by either party prior to its expiration in 2006. Changes to or termination of our agreements with these parties could result in the loss of access to these aspects of our technology and could impair, delay or suspend our commercialization efforts. While we negotiate for agreement periods or notice of termination periods that provide us reasonable periods of time to secure alternative supplies (such as 12 months advance notice of termination under our agreements with Samsung Electronics), and require that such agreements may not be terminated without advance notice arbitrarily or without good reason, such as uncured breach or insolvency, such provisions may not provide us with adequate time to secure alternative supplies or otherwise provide us with adequate protection.

If we breach covenants in our equipment lease or other credit facilities or are otherwise in default under these credit facilities, our lenders may accelerate the maturity dates of our outstanding indebtedness or take other actions under these facilities which would have a material adverse effect on our financial condition and operations.

We had an aggregate of $8.7 million of outstanding indebtedness under our bank line of credit, equipment lease and other credit facilities as of September 30, 2004. These credit facilities include positive and restrictive covenants such as requirements that we maintain certain levels of unrestricted cash and net tangible asset balances. At September 30, 2004, we were in breach of one of the covenants of one of our equipment loans. As a result of this breach, we are required to provide the lender with a letter of credit covering the remaining balance of the loan, which was $1.7 million at September 30, 2004 or the lender may request immediate payout of the loan. If we breach certain covenants in our equipment lease or other credit facilities or are otherwise in default under these credit facilities, our lenders may accelerate the maturity dates of our outstanding indebtedness, impose restrictions on our cash balances or take other actions under these facilities which would have a material adverse effect on our financial condition and operations.

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We may not successfully integrate acquired businesses.

We may acquire additional businesses or technologies, or enter into other strategic transactions. Managing acquisitions entails numerous operational and financial risks, including:

We may not be able to successfully compete in the biotechnology industry.

The biotechnology industry is highly competitive. We expect to compete with a broad range of companies in the United States and other countries that are engaged in the development and production of products, services and strategies to analyze genetic information and strategies to develop and commercialize therapeutic and diagnostic products. They include:

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Many of our competitors have much greater financial, technical, research, marketing, sales, distribution, service and other resources than we do. Our competitors may offer broader product lines, services and have greater name recognition than we do. Several companies are currently making or developing products that compete with our products. Our competitors may develop or market technologies or products that are more effective or commercially attractive than our current or future products, or that may render our technologies or products obsolete.

We may potentially compete with our customers, which may adversely affect our business.

We have sold over 100 MassARRAY systems worldwide to pharmaceutical companies, academic research centers and government laboratories. Some of our customers use our DNA analysis products to perform genetics studies on their own disease populations for potential diagnostic and drug target identification in the same or similar manner as we have done. Although there are many potential disease applications, our customers’ target diseases may overlap with those that we have chosen to pursue. In such cases we may potentially compete against our customers. Competition from our customers may adversely affect our or our collaborators’ ability to successfully commercialize therapeutic or diagnostic products.

Our ability to compete in the market may decline if we lose some of our intellectual property rights.

Our success will depend on our ability to obtain and protect patents on our technology and to protect our trade secrets. Our patent applications may not result in the issue of patents in the United States or other countries. Our patents may not afford meaningful protection for our technology and products. Others may challenge our patents, and as a result, our patents could be narrowed or invalidated or become unenforceable. Competitors may develop products similar to ours that do not conflict with our patents. Others may develop products for use with the MassARRAY system in violation of our patents, or by operating around our patents or license agreements, which could reduce sales of our consumables. To protect or enforce our patent rights, we may initiate interference proceedings, oppositions, or litigation against others. For example, in December 2001, we filed a complaint for declaratory judgment of patent non-infringement and invalidity against Myriad Genetics, Inc., in response to letters received from Myriad and its attorneys in which Myriad asserted its belief that we were engaging in activities that infringed Myriad’s purported patent rights under a specific U.S. patent. In March 2002, we entered into a settlement agreement under which we acquired ownership of such patent rights and all parties agreed to dismiss the lawsuit with prejudice, and such dismissal was subsequently ordered by the court. As a result of the settlement, our products and services were not affected. However, these activities are expensive, take significant time and divert management’s attention from other business concerns. The patent position of biotechnology companies generally is highly uncertain and involves complex legal and factual questions that are often the subject of litigation. No consistent policy has emerged from the U.S. Patent and Trademark Office or the courts regarding the breadth of claims allowed or the degree of protection afforded under biotechnology patents. There is a substantial backlog of biotechnology patent applications at the U.S. Patent and Trademark Office, and the approval or rejection of patent applications may take several years.

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Our success will depend partly on our ability to operate without infringing on or misappropriating the proprietary rights of others.

We may be accused of infringing on the patent rights or misappropriating the proprietary rights of others. From time to time, we receive letters from companies regarding their issued patents and patent applications alleging or suggesting possible infringement. Generally these letters are offers to license and fail to provide adequate evidence or state the basis for a reasonable claim that we are engaging in any infringing activity. The most recent letter of this type was received by us in April 2003. Intellectual property litigation is costly, and, even if we prevail, the cost of such litigation would adversely affect our business, financial condition and results of operations. Litigation is also time consuming and would divert management’s attention and

resources away from our operations and other activities. If we were not to prevail in any litigation, in addition to any damages we would have to pay, we could be required to stop the infringing activity or obtain a license. Any required license might not be available to us on acceptable terms. Some licenses might be non-exclusive, and our competitors could have access to the same technology licensed to us. If we were to fail to obtain a required license or were unable to design around a patent, we would be unable to sell or continue to develop some of our products, which would have a material adverse affect on our business, financial condition and results of operations.

The rights we rely upon to protect the intellectual property underlying our products may not be adequate, which could enable others to use our technology and reduce our ability to compete with them.

We require our employees, consultants, advisors and collaborators to execute confidentiality agreements and in certain cases, assignment or license agreements. We cannot guarantee that these agreements will provide us with adequate intellectual property ownership or protection against improper or unauthorized use or disclosure of confidential information or inventions. In some situations, these agreements may conflict with or be subject to the rights of others with whom our employees, consultants, advisors or collaborators have prior employment or consulting relationships. In some situations, these agreements or relationships may conflict with or be subject to foreign law which may provide us with less favorable rights or treatment than under U.S. law. Others may gain access to our inventions, trade secrets or independently develop substantially equivalent proprietary materials, products, information and techniques.

If we cannot attract and retain highly-skilled personnel, our growth might not proceed as rapidly as we intend.

The success of our business will depend on our ability to identify, attract, hire, train, retain, maintain, and motivate highly skilled personnel, particularly sales, scientific, medical and technical personnel, for our future success. Competition for highly skilled personnel is intense, and we might not succeed in attracting and retaining these employees. Over the past year, we have experienced a number of employees in our sales department leaving the company and we have been and continue to hire new employees in this capacity. We expect that there may be some delay before we see successful sales results from these new hires, and if so, our sales revenues may decline. If we cannot attract and retain the personnel we require, we would not be able to expand our business as rapidly as we intend. In particular, if we lose Antonius Schuh, PhD, our President, Chief Executive Officer and a director, Charles R. Cantor, PhD, our Chief Scientific Officer and a director, or Andreas Braun, MD, PhD, our Chief Medical Officer, or other members of our management team, we may not be able to find suitable replacements and our business may be harmed as a result. We have employment agreements with each of our officers. However, we do not carry “key person” insurance covering any of our officers or other employees.

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If we do not effectively manage our business as it evolves, it could affect our ability to pursue opportunities and expand our business.

Evolution in our business has placed and may continue to place a significant strain on our personnel, facilities, management systems and resources. We closed our SEQUENOM Pharmaceuticals business during the third quarter of 2004 and expect to reduce our headcount by approximately 50 by the end of 2004 compared to our headcount prior to this restructuring. We will need to continue to improve our operational and financial systems and managerial controls and procedures and train and manage our workforce. We will have to maintain close coordination among our various departments. If we fail to effectively manage the evolution of our business, it could affect our ability to pursue business opportunities, expand our business, and sell our products and applications in new markets.

We are subject to risks associated with our foreign operations.

We expect that a significant portion of our sales will continue to be made outside the United States. Approximately $15.7 million or 52% of our revenues and $7.9 million or 49% were generated from sales outside of the United States in the year ended December 31, 2003 and in the nine months ended September 30, 2004, respectively. A successful international effort will require us to develop relationships with international customers and collaborators. We may not be able to identify, attract, retain, or maintain suitable international customers or collaborators. Expansion into international markets will require us to establish and grow foreign operations, hire additional personnel to run these operations and maintain good relations with our foreign customers and collaborators. International operations involve a number of risks not typically present in domestic operations, including:

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Our international operations are also subject to the risks associated with the imposition of legislation and regulations relating to the import or export of high technology products. We cannot predict whether tariffs or restrictions upon the importation or exportation of our products will be implemented by the United States or other countries.

If our production and laboratory facilities are damaged, our business would be seriously harmed.

Our only production facility is located in San Diego, California, where we also have laboratories. Damage to our facilities due to war, fire, natural disaster, power loss, communications failure, terrorism, unauthorized entry or other events could prevent us from conducting our business for an indefinite period, could result in a loss of important data or cause us to cease development and production of our products. We cannot be certain that our limited insurance to protect against business interruption would be adequate or would continue to be available to us on commercially reasonable terms, or at all.

Responding to claims relating to improper handling, storage or disposal of hazardous chemicals and radioactive and biological materials which we use could be time consuming and costly.

We use controlled hazardous and radioactive materials in the conduct of our business, as well as biological materials that have the potential to transmit disease. The risk of accidental contamination or injury from these materials cannot be completely eliminated. If an accident with these substances occurs, we could be liable for any damages that result, which could seriously harm our business. Additionally, an accident could damage our research and manufacturing facilities and operations, resulting in delays and increased costs. Such damage and any expense resulting from delays, disruptions or any claims may not be covered by our insurance policies.

We may not have adequate insurance if we become subject to product liability or other claims.

Our business exposes us to potential product liability and other types of claims. We have product and general liability insurance that covers us against specific product liability and other claims up to an annual aggregate limit of $5 million. Any claim in excess of our insurance coverage would have to be paid out of our cash reserves, which would have a detrimental effect on our financial condition. It is difficult to determine whether we have obtained sufficient insurance to cover potential claims. Also, we cannot assure you that we can or will maintain our insurance policies on commercially acceptable terms, or at all.

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Our stock price has been and may continue to be volatile, and your investment could suffer a decline in value.

The trading price of our common stock has been volatile and could be subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including but not limited to:

The stock market in general, and the Nasdaq National Market and the market for life sciences companies in particular, have experienced extreme price and volume fluctuations that may have been unrelated or disproportionate to the operating performance of the listed companies. There have been dramatic fluctuations in the market prices of securities of biotechnology and pharmaceutical companies. These price fluctuations may be rapid and severe and may leave investors little time to react. Broad market and industry factors may seriously harm the market price of our common stock, regardless of our operating performance. Sharp drops in the market price of our common stock expose us to securities class-action litigation. Such litigation could result in substantial expenses and a diversion of management’s attention and resources, which would seriously harm our business, financial condition and results of operations. For example, in November 2001, we and certain of our current or former officers and directors were named as defendants in a class action shareholder complaint filed by Collegeware USA, which alleged that the underwriters in our initial public offering, certain of our officers and directors and we violated the federal securities laws because our registration statement and prospectus contained untrue statements of material fact or omitted material facts regarding the compensation to be received by and the stock allocation practices of the underwriters. Similar complaints were filed against hundreds of other public companies that conducted initial public offerings of their common stock in the late 1990s and 2000. Additional information regarding this complaint and the settlement pending before the court is included under Item 1 of Part II of this quarterly report.

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Our Stock May Be Delisted From The Nasdaq National Market

The NASDAQ National Market imposes, among other requirements, listing maintenance standards as well as minimum bid and public float requirements. In recent months our common stock has traded below $1.00 per share and, the closing bid price of our common stock has often been below $1.00 per share. If the closing bid price of our common stock falls below $1.00 per share for 30 consecutive trading days, Nasdaq automatically sends a non-compliance informing us of the details of non-compliance. Once the warning letter is received, we have 180 days to return to compliance, or we may request listing on the NASDAQ Small Cap Market. We may then be granted an additional 180 days to return to compliance. If we do not return to compliance after the second 180 day period, NASDAQ will issue a letter informing us that NASDAQ will delist our common stock from the NASDAQ Market. We can then request a hearing with NASDAQ to discuss the issue. If our stock were delisted, the ability of our stockholders to sell their common stock would be negatively affected.

If we are unable to complete our assessment of the effectiveness of our internal controls over financial reporting or our independent auditors are unable to attest to our assessment of our internal controls over financial reporting in a timely and satisfactory manner, investor confidence and our stock price may be adversely effected.

We have been working to complete our assessment of the effectiveness of our internal controls over financial reporting by the time we are required to file our next Annual Report on Form 10-K, as required by Section 404 of the Sarbanes Oxley Act of 2002. Our auditors have likewise been working to evaluate our assessment and to test the design and operating effectiveness of our internal controls over financial reporting. Because this is the first year of the new Section 404 requirements, it is difficult for us or our auditors to predict how long it will take to complete the assessment of the effectiveness of our internal controls over financial reporting, including the final evaluation of the significance of control deficiencies. This results in a heightened risk of unexpected delays and obstacles to completing the project on a timely basis, as well as a lack of certainty with respect to the results of the assessment and testing process. Although we are diligently reviewing our internal controls over financial reporting to comply with the new Section 404 requirements, if our independent auditors are not satisfied with our internal controls over financial reporting or the level at which these controls are documented, designed, operated or reviewed, or if the independent auditors interpret the requirements, rules or regulations differently than we do, then they may decline to attest to management’s assessment or may issue a report that is qualified. We cannot assure that our management or our independent auditors will not find a material weakness in connection with its assessments. Through this evaluation and assessment, we have identified certain internal control issues that we are in the process of remediating. However, we cannot assure you that we will successfully remediate any such deficiency or weakness to allow our management to assess the effectiveness of our internal control over financial reporting as of December 31, 2004 in time to enable our auditors to attest that such assessment will have been fairly stated in our Annual Report on Form 10-K to be filed with the Securities and Exchange Commission or attest that we have maintained effective internal control over financial reporting as of December 31, 2004. If we do not satisfactorily or timely complete the assessment or testing process, possible consequences could include sanction or investigation by regulatory authorities such as the Securities and Exchange Commission or The NASDAQ National Market, incomplete or late filing of our Annual Report on Form 10-K, civil or criminal liability, a decline in investor confidence and our stock price and business could also be adversely affected.

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We have adopted anti-takeover provisions that may limit the ability of another party to acquire us and may prevent or frustrate any stockholder’s attempt to change the direction or management of us and that could cause our stock price to decline.

Various provisions of our certificate of incorporation and bylaws and Delaware law may discourage or prevent a third party from acquiring us, even if doing so would benefit our stockholders. In addition, these provisions may prevent or frustrate any stockholder attempt to change our direction or management. These provisions provide for, among other things, a classified board of directors, by which approximately one third of the directors are elected each year, advance notice requirements for proposals that can be acted upon at stockholder meetings and limitations on who may call stockholder meetings. In October 2001, we adopted a stockholder rights plan. Pursuant to our stockholders rights plan, each share of our outstanding common stock has an associated preferred share purchase right. The rights will not trade separately from our common stock until, and are exercisable only upon, the acquisition or potential acquisition by a person or group of or the tender offer for 15% or more of our common stock. In October 2004, we entered into an agreement with Siemens AG whereby we agreed to provide Siemens with written notice of written offers from a third party involving the sale of, transfer of, or license to, all or substantial parts of our assets or the acquisition of the majority of our shares, and agreed to consider any written bid for the same or substantially the same assets or shares submitted by Siemens for a 30 business day period following such notification. As a result of these provisions, we could delay, deter or prevent a takeover attempt or third party acquisition that our stockholders consider to be in their best interests, including a takeover attempt that results in the payment of a premium for our common stock. Our board of directors, without further approval of the stockholders, is authorized to issue “blank check” preferred stock and to fix the dividend rights and terms, conversion rights, voting rights, redemption rights and terms, liquidation preferences and any other rights, preferences, privileges and restrictions applicable to this preferred stock. The issuance of preferred stock could adversely affect the voting power of the holders of our common stock, making it more difficult for a third party to gain control of us, discouraging premium bids for our common stock or otherwise adversely affecting the market price of our common stock.

Available Information

Copies of our public filings are available on our Internet website at http://www.sequenom.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. We will supply a copy of this Quarterly Report on Form 10-Q, and any other periodic or current reports, without charge. To request a copy, please contact Investor Relations, SEQUENOM, Inc., 3595 John Hopkins Court, San Diego, CA, 92101, USA.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Short Term Investments

The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities that we invest in may have market risk. This means that a change in prevailing interest rates may cause the fair value of the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the fair value of the principal amount of our investment will probably decline. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities rated BBB or above by Standard & Poors. Our investment policy includes a minimum quality rating for all new investments. If an investment we hold falls below this level, we research the reasons for the fall and determine if we should continue to hold the investment in order to minimize our exposure to market risk of the investment. We have not experienced any significant losses in our investment portfolio as a result of rating changes. The average duration of all of our investments has generally been less than one year. Due to the short-term nature of these investments, we believe we have no material exposure to interest rate risk arising from our investments. Therefore, no quantitative tabular disclosure is provided.

Foreign currency rate fluctuations

We have foreign subsidiaries whose functional currencies are the Great British Pound (“GBP”) and the Euro (“EUR”). The subsidiaries’ accounts are translated from the relevant functional currency to the US dollar using the current exchange rate in effect at the balance sheet date, for balance sheet accounts, and using the average exchange rate during the period for revenues and expense accounts. The effects of translation are recorded as a separate component of stockholders’ equity. Our subsidiaries conduct their business with customers in local currencies. Exchange gains and losses arising from these transactions are recorded using the actual exchange differences on the date of the transaction. We have not taken any action to reduce our exposure to changes in foreign currency exchange rates, such as options or futures contracts, with respect to transactions with our subsidiaries or transactions with our customers where the invoicing currency is not the US dollar.

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The table below sets forth our currency exposure (i.e., those transactional exposures that give rise to the net currency gains and losses recognized in the income and expenditure account) on our net monetary assets and liabilities. These exposures consist of our monetary assets and liabilities that are not denominated in the functional currency used by us or our subsidiary or affiliate having the asset or liability.

A movement of 10% in the US dollar to pound exchange rate would create an unrealized gain or loss of approximately $70,000. A movement of 10% in the US dollar to Euro exchange rate would create an unrealized gain or loss of approximately $180,000.

We had no off balance sheet, or unrecognized, gains and losses in respect of financial instruments used as hedges at the beginning or end of the period ended September 30, 2004. We had no deferred gains or losses during the period covered.

Inflation

We do not believe that inflation has had a material adverse impact on our business or operating results during the periods presented.

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Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of design and operation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e)) promulgated under the Securities Exchange Act of 1934, as amended, as of the fiscal quarter ended September 30, 2004. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective as of the end of the fiscal quarter ended September 30, 2004.

An evaluation was also performed under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of any change in our internal control over financial reporting that occurred during our last fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. That evaluation did not identify any change in our internal control over financial reporting that occurred during our latest fiscal quarter and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Our management, including our principal executive officer and principal financial officer, does not expect that its disclosure controls will prevent all errors or potential fraud. A control system, no matter how well conceived and operated, can provide only reasonable and not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their cost. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons or by collusion of two or more people. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, control may become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

We have begun a detailed assessment of our internal controls as required by Section 404 of the Sarbanes-Oxley Act of 2002. We are primarily still in the evaluation of design phase and early stages of testing where we have identified control deficiencies in our system of internal controls. As we move through the testing phase of our project, we expect to validate these control deficiencies and to assess whether or not they rise to the level of significant deficiencies or material weaknesses. In the meantime, we have established a series of remediation teams to investigate these control deficiencies, and, where appropriate, to remediate them. To address these issues thoroughly, effectively, and timely, we have supplemented our internal project team with the services of several outside specialists. Although we have made this project a top priority, there can be no assurances that all control deficiencies identified and validated will be remediated before the end of the our fiscal year or that the remaining unresolved control deficiencies will not rise to the level of significant deficiencies or material weaknesses.

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

In November 2001, we and certain of our current or former officers and directors were named as defendants in a class action shareholder complaint filed by Collegeware USA in the U.S. District Court for the Southern District of New York (Case No. 01-CV-10831). Similar complaints were filed in the same Court against hundreds of other public companies that conducted initial public offerings of their common stock in the late 1990s and 2000. In the complaint, the plaintiffs allege that our underwriters, certain of our officers and directors and we violated the federal securities laws because our registration statement and prospectus contained untrue statements of material fact or omitted material facts regarding the compensation to be received by and the stock allocation practices of the underwriters. The plaintiffs seek unspecified monetary damages and other relief. In October 2002, our officers and directors were dismissed without prejudice pursuant to a stipulated dismissal and tolling agreement with the plaintiffs. In February 2003, the Court dismissed the claim against us brought under Section 10(b) of the Securities Exchange Act of 1934, without giving the plaintiffs leave to amend the complaint with respect to that claim. The Court, however, declined to dismiss the claim against us brought under Section 11 of the Securities Act of 1933.

In June 2003, pursuant to the authorization of a special litigation committee of our Board of Directors, we approved in principle a settlement offer by the plaintiffs. In June 2004, we executed a settlement agreement with the plaintiffs. The settlement is subject to a number of conditions, including action by the court certifying a class action for settlement purposes and formally approving the settlement. The underwriters have opposed both the certification of the class and the judicial approval of the settlement. Management does not anticipate that the ultimate outcome of this event will have a material adverse impact on our financial position.

In August 2004, we were named as a defendant in a complaint filed by a former employee Daniel P. Little (“plaintiff”) in the United States District Court for the Southern District of California, Case No. 04 CV 1737 J. In the complaint, the plaintiff alleges that we had violated plaintiff’s rights under a 1957 German law, known as “Law Relating to Inventions Made by Employees” in connection with plaintiff’s activities in Germany for Sequenom, GmbH, beginning in or about October 1995. This law provides for compensation to an employee in consideration for rights to employee inventions. Although we have made several royalty payments to plaintiff, plaintiff alleges that the amount of royalty has been in dispute as have been the triggering events. Plaintiff asserts causes of action against us including rescission, breach of contract, quantum meruit, unfair business practices, and fraud. Plaintiff further alleges that Sequenom GmbH failed to follow the mandatory process of the 1957 German law and never provided the necessary written claim of ownership of the inventions made by plaintiff while in Germany. The plaintiff seeks unspecified monetary damages and other relief including ownership and patent rights for all inventions claimed in patents to which he contributed while employed in Germany, including U.S. Patents 6,258,538, 6,569,385, and 6,602,662, which are asserted to include coverage for key elements of the Company’s MassARRAY technology, among other patents. We filed a motion to dismiss plaintiff’s complaint. The plaintiff has opposed our motion. We deny all material allegations and intend to defend this action vigorously.

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In addition, from time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business.

Item 5. Other information

In October 2004, our Board of Directors set the proposed date for next year’s annual meeting of stockholders as June 16, 2005. This proposed date is more than 30 calendar days from the date of this year’s annual meeting, which was held on May 14, 2004. As a result, we have extended the deadline for submitting a stockholder proposal for inclusion in our Proxy Statement and form of proxy for our 2005 annual meeting of stockholders from December 10, 2004 to January 5, 2005. The deadline for stockholders to submit proposals or director nominations that are not to be included in such Proxy Statement and proxy has also been extended from December 10, 2004 to January 5, 2005. Stockholders are advised to review our Bylaws, which contain additional requirements with respect to advance notice of stockholder proposals and director nominations. Our Bylaws are available at the Securities and Exchange Commission’s website at http://www.sec.gov or from us upon written request to Investor Relations, Sequenom, Inc., 3595 John Hopkins Court, San Diego, California 92121.

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Item 6. Exhibits

Exhibits

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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