Exagen Inc. (NASDAQ:XGN) Q1 2023 Earnings Call Transcript May 15, 2023

Exagen Inc. beats earnings expectations. Reported EPS is $-0.44, expectations were $-0.56.

Operator: Good day, ladies and gentlemen, and welcome to the Exagen Q1 2023 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ryan Douglas of Investor Relations. Please go ahead.

Ryan Douglas: Good afternoon and thank you for joining us today. Earlier today, Exagen Inc. released financial results for the quarter ended March 31st, 2023. The release is currently available on the company’s website at www.exagen.com. John Aballi, President and Chief Executive Officer; and Kamal Adawi, Chief Financial Officer, will host this afternoon’s call. Before we get started, I would like to remind everyone that management will be making statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements.

All forward-looking statements, including, without limitation, statements regarding our business strategy and future financial and operating performance, including guidance for the ended June 30th, 2023, potential profitability, our current and future product offerings, and reimbursement and coverage are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results to differ materially from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with the business, please see our filings with the Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 2022 and subsequent filings.

The information provided in this conference call speaks only to the live broadcast today, May 15th, 2023. Exagen disclaims any intention or obligation, except as required by law, to update or revise any information, financial projections or other forward-looking statements, whether because of new information, future events, or otherwise. I will now turn the call over to John Aballi, President and CEO of Exagen.

John Aballi: Thanks, Ryan, and thank you to everyone joining the call. Today, I will discuss our first quarter results and give updates on our strategic initiatives, path to profitability, and research pipeline. I’ll then hand it over to Kamal, our CFO, for details on our financial results. As always, we appreciate your continued support of Exagen. When I arrived at Exagen, we put together a plan to reduce expenses across the organization and grow the business to profitability. Now, that I’ve been leading Exagen for seven months, it’s great to see that the changes we’ve implemented are starting to have a meaningful impact on the business and are reflected in our commercial results and reduced operating expenses. For the first quarter, I’m happy to report that total revenue was $11.2 million, driven by a record volume of 37,300 AVISE CTD tests.

Volume increased 10% over last quarter and 21% year-over-year. I’m excited about the momentum our commercial team has created as they remain focused and highly motivated throughout the implementation of these changes. My strategy has been to orientate the company on a path to profitability and the results in this quarter give us our first opportunity to convey the impact of our initiatives. For the first quarter, SG&A and R&D expenses decreased to $13 million, which is an improvement from an average of $15.5 million per quarter throughout 2022. The decrease was primarily due to the reduction in force that took place in December. The assumptions we made in planning the reduction have proven to be on target. And we now believe that we have the right people in place and are operating at the optimal size.

Kamal will elaborate on the financial performance. But in short, I’m very pleased with how we have started the year. Increasing ASP through changes to our operations and revenue cycle management is a key component of our strategy. Trailing 12-month ASP through Q1 was $279, which we anticipate improving in nine to 12 months as our efforts begin to materialize. Keeping in mind that first quarter ASP numbers, include the effects from deductible resets and final Medicare pricing on the clinical laboratory fee schedule, we feel ASP trended in line with expectations for the first quarter. As we’ve consistently detailed, we aim to improve ASP through multiple initiatives, both in the short and long term. These initiatives include steps taken recently to improve our revenue cycle operations by increasing our required documentation at time of test order and revamping our appeals process.

Additionally, we’ve been aggressive with appeals, filing more than we did for the entirety of 2022. As a reminder, the appeals process can take upwards of a year depending on what level of appeal is reached, and we should see the results reflected in higher ASPs. Over the long term, we believe this approach will be an effective way to educate insurance companies regarding the value of AVISE CTD and expect these efforts to improve coverage with plans. As part of our initiative to improve revenue cycle management, we made a strategic decision to hold first quarter claims until the second quarter, while we optimized our appeals process. This additional time enabled us to focus on process improvement without the pressure of triggering timely filing deadlines.

As anticipated, this resulted in a temporary increase in our accounts receivable balance by $3.2 million and subsequently impacts the cash balance, the effects of which will diminish as the year progresses. We recently refinanced our term loan to better align with our strategic focus and to alleviate performance covenants that restricted our pursuit of profitability. In a tightening debt market, we had the opportunity to refinance from a position of strength to obtain terms we found advantageous. This benefits the company in multiple ways. The new loan provides flexibility in the performance covenants, it deleverages the organization and resets the interest-only period to three years, all of which allow us to focus on achieving profitability in the medium term.

Additionally, our monthly payment is lower, and we were able to make a $10 million principal payment without penalty. There are a few other details Kamal will cover, but in general, we found this to be a very positive development, which better aligns with our strategy. Moving to R&D. After a thorough review, I’ve decided to end our RADR program, including associated clinical trials. While there remains a strong clinical need for a predictor of drug response in rheumatoid arthritis, and RADR has many promising aspects to meet this clinical need, we believe the commercialization hurdles are significant and therefore, prohibitory given the current strategy of the organization. We continue to develop products for monitoring of disease activity in lupus, along with a predictor of drug response for lupus nephritis.

Both efforts remain active, and we plan to give updates when we have meaningful outcomes from our development. We ended the first quarter with $1.1 million in R&D spend, which was light due to the timing of pipeline projects and trials. And for the full year, we anticipate our R&D spend to be around $6 million. Lastly, I really value in-person connections with our customers, and I’d like to share an opportunity I had to spend a day in the field with a top rheumatologist in Los Angeles, who sees in excess of 20 patients per day. These types of opportunities are incredibly rewarding. As I was able to experience firsthand how our test is used in clinical practice and the positive impact it has on patient care. First and foremost, what was really insightful and motivating was seeing the clinician serving patients.

And it’s very clear that clinicians in the subspecialty have a unique bond with the patients in their practice given the types of challenges they face in their journey to achieve a correct diagnosis. The physician I shadowed really connected with their patients on a personal level, and this was the motivating part to be welcomed into the clinician patient interaction and observe firsthand how our test was being positioned and utilized as the definitive solution to answering a patient’s prior ENA positive finding. The office environment is fast paced and clinicians trust Exagen and the AVISE brand to deliver superior quality and service in helping them solve the differential diagnosis of their referred patients. This was the first of several visits, I hope to have in the coming year.

And as I saw firsthand, in combination with the record AVISE CTD volume we demonstrated this quarter, clinicians find the AVISE platform extremely helpful in their everyday clinical practice as the brand they can trust. Overall, I’m extremely proud of the progress made by the Exagen team this past quarter. Our strategy has been highly targeted, as we’ve gone through every aspect of the organization, and it’s exciting to see the progress reflected in the quarterly results. We still have a significant amount of work ahead of us regarding the reimbursement of AVISE, which we’re working on, and we’ll continue to provide regular updates. But so far, what we have set out to accomplish is starting to take shape. I’ll now turn the call over to Kamal

Kamal Adawi: Thank you, John, and good afternoon, everyone. Total revenues in the first quarter of 2023 were $11.2 million, compared with $10.4 million in the first quarter of 2022. Total revenues were driven primarily by testing volumes for AVISE CTD, which, as John mentioned, was a record 37,300 tests delivered. Other testing revenue was $1.4 million in the first quarter of 2023, compared with $1.7 million in the first quarter of 2022. The trailing 12-month ASP was $279 per test compared to $285 per test in Q4 of 2022. Cost of revenue were $5.9 million in Q1, resulting in a total gross margin of 47%, compared to 44% in the first quarter of 2022. The increase in gross margin percentage was primarily due to an increase in AVISE CTD volume, which resulted in favorable impact of absorption of COGS and lower royalty expense due to holding claims.

Operating expenses were $18.9 million in the first quarter of 2023, compared with $20.1 million in the first quarter of 2022, primarily driven by a decrease in employee-related expenses due to a reduction in force in early December 2022. For the first quarter of 2023, our net loss was $7.7 million compared to a net loss of $10.3 million for the first quarter of 2022. Looking at our balance sheet, as John mentioned, we refinanced our debt on April 28. The refinance was through our existing lender who we have a very relationship with and have been working with for six years. After the prepayment, the balance of the loan is $18 million. As disclosed in the 8-K, the terms of the agreement include a floating interest rate, which is the greater of 10%, or prime plus 2%, resetting the interest-only period to three years, the implementation of a new management plan and improved covenants.

Cash and cash equivalents as of March 31, 2023 were approximately $52.2 million. As John mentioned, with our revenue cycle management strategy, the claims held from Q1 until Q2 contributed to the AR balance increasing by $3.2 million, which is offset by a lower cash balance. Our cash burn of $10 million includes the $3.2 million of AR that was a result of holding claims. If the AR increase was excluded, the cash burn would have been around $7 million. While there is always risk to the execution of our strategy, we expect cash burn to improve throughout this year. Post refinancing, our debt and cost-cutting measures, we believe we are well capitalized to continue executing on our strategy. Given the breadth of the changes that are in progress, we remain prudent in our approach to guidance.

And for Q2, we are projecting revenue in the range of $10.7 billion to $11.2 million. For year-over-year comparisons, please remember that in 2022, payments for Medicare were delayed from Q2 to Q3. Finally, as these strategies materialize, our revenue growth will be a composite of both volume and ASP improvements. We will now open the call for questions.

Q&A Session

Operator: Thank you very much, sir. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] Our first question is from Mark Massaro of BTIG. Please go ahead.

Operator: Thank you. Next questions from Kyle Mikson of Canaccord. Please go ahead.

Operator: Thank you. The next question is from Andrew Brackmann of William Blair. Please go ahead.

Operator: Thank you. The next question is from Dan Brennan of TD Cowen. Please go ahead.

Operator: Thank you. The next question is from Paul Knight of KeyBanc. Please go ahead.

Operator: Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to John Aballi for closing remarks.

John Aballi: Great. We started 2023 off strong as a team and are seeing initial results from a plan we’ve put in motion. We’ve successfully reduced meaningful costs in the organization, driven record demand for AVISE CTD, and have reshaped our operations in a way, which I believe will continue to improve the business going forward. We hope you find the clear articulation of our goal is useful in measuring our progress and look forward to updating everyone on future calls. Thank you for your support of Exagen and I sincerely thank the Exagen team for their efforts this past quarter. Thanks for joining the call today

Operator: Thanks very much sir. Ladies and gentlemen, that then concludes today’s conference. You may disconnect your lines at this time and thank you for your participation.