Exagen Inc. (NASDAQ:XGN) Q4 2022 Earnings Call Transcript

Exagen Inc. (NASDAQ:XGN) Q4 2022 Earnings Call Transcript March 20, 2023

Operator: Greetings, and welcome to the Exagen Inc. Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ryan Douglas with Investor Relations. Thank you, Mr. Douglas, you may begin.

Ryan Douglas: Good afternoon and thank you for joining us today. Earlier today, Exagen Inc. released financial results for the quarter and fiscal year ended December 31, 2022. 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 2023 guidance, 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 and subsequent filings.

The information provided in this conference call speaks only to the live broadcast today, March 20, 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 fourth quarter and full year 2022 results, recent changes we have implemented and highlight our initial progress towards achieving profitability. 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. Revenue in the fourth quarter of 2022 was $12.8 million, with full year revenue of $45.6 million. This past year, we delivered a record 135,000 AVISE CTD tests, of which 33,800 were delivered in the fourth quarter. From inception, we have now delivered approximately 750,000 AVISE CTD tests. Helping provide answers for so many patients is only possible because of the fantastic folks at Exagen and I’d like to thank them for their continued dedication over the last several months and congratulate them on accomplishing these milestones.

We’ve implemented numerous changes throughout the organization, and the team has remained flexible and committed to our mission of serving patients throughout their autoimmune journey. In conducting my initial review of Exagen, it is clear that the Company has an exceptional product in AVISE CTD, which has seen strong penetration in an underserved market and has recently received improved Medicare pricing. The AVISE platform as a whole is well-known and highly regarded in the rheumatology field, shown by the consistent growth in demand. I believe there is still significant untapped potential in the AVISE platform and have tailored our strategy to focus on growing ASP and volume while reducing costs. Ultimately, this should lead to improvements in our gross margin over time.

We are working to optimize our business operations around our flagship product. And my primary focus moving forward is in steering the Company to profitability. Organizationally, we have aligned on key goals, but the correct incentives in place to achieve those goals and are focused on delivering superior products and services to our customers. Reimbursement for AVISE CTD is the most sensitive lever in driving our revenue in the short to medium-term. One of the key metrics in measuring the success of our reimbursement strategy will be the progression of ASP over time. Due to variability in quarterly ASP data, we will focus and provide regular insight on annual ASP rates. For 2022, our derived annual AVISE CTD ASP was $285 compared to $306 in 2021.

At year-end, AVISE CTD ASP was roughly 1/4 of our Medicare reimbursement rate, which we believe highlights the significant opportunity we have ahead of us. Our strategy for improving ASP encompasses optimizing our revenue cycle practices, efforts by our managed markets team to expand patient access and contracting with commercial payers at rates that reflect the value provided to the health care system. On these fronts, beginning in Q4 and continuing into this year, we have actively worked to revamp our appeals process by evaluating the workflow steps involved in making improvements. For example, we have recently revised messaging conveyed in our appeal letters to better address denials, and we’re evaluating ways to further improve processes through automation.

We continue to review our processes and will make additional changes as needed given this is a high priority for the organization. From a medical policy perspective, we adjusted the goals and incentive compensation of our managed markets team to elevate the importance of our medical policy progress over the next couple of years. And similarly to our appeals process, we are refining our messaging and being proactive in soliciting physician support with payers. As we look to make progress in securing medical policy for AVISE CTD and as contracts become available, we are committed to obtaining rates which are PAMA neutral and ideally accretive to our Medicare pricing in the long run. Regarding AVISE Lupus, our Medicare LCD application remains in process consistent with prior disclosures.

We plan to provide updates as feedback becomes available or information changes. Medicare continues to reimburse and pay as detailed last quarter. In December, we finalized the sizing and realignment exercise of our sales territories and implemented changes to the incentive compensation plan for our sales reps. I believe we’ve optimized our sales footprint while balancing our expenses with revenue potential. We now have a model, which we believe allows us to continue to expand without incurring significant carrying cost per territory. The sales force realignment was part of a total reduction in force of 42 employees that took place in December. The 42 employees were split approximately 1/3 in sales, 1/3 in R&D and a 1/3 spread throughout the general organization.

This culminated in 40 sales territories across the U.S., down from 63 previously. Additionally, we have retained the majority of our inside sales force and are leveraging them in a more strategic manner. As we’ve conveyed previously, a key focus in our path to profitability is to reduce costs while driving AVISE CTD growth. We have set clear goals for our lab and are focusing on reducing COGS and creating efficiencies for processes that are labor-intensive. Additionally, we’re exploring options in our facilities where we believe we can reduce fixed cost and overhead. We’ve implemented a process to routinely evaluate and ensure our products meet physicians’ needs while contributing positively to the Company from a financial perspective. As a result, we may discontinue non-core product offerings that do not contribute meaningful revenue or have a negative impact on our overall gross margin percentage.

As we successfully transitioned physicians to alternative testing, we will provide updates. Regarding research and development, I felt that our initiatives have expanded beyond what we were capable of supporting and we were taking on R&D projects that didn’t have a clear return on investment. I implemented a screening process that filtered out three of our prior pipeline projects focused in fibromyalgia, interferon response and thrombosis prediction. Our R&D team is now comprised of nine employees, reduced from 23 in late Q4, who are focused on lupus nephritis therapeutic monitoring, biomarker-derived disease activity for SLE and prediction of response for rheumatoid arthritis therapy. These pipeline products mean our new screen criteria. They have the potential to solve a significant customer need within the field of rheumatology and they have a competitive advantage rooted in proprietary technology, all have internally defined paths to reimbursement.

As a quick note regarding our reporting, our total ordering physician base continues to grow and reached a record 2,419 health care providers in the fourth quarter of 2022. Moving forward, we plan to disclose ordering health care providers during the fourth quarter update only and will no longer report the number of adopters or stickiness. I’ve outlined the most important metrics I use to manage the business and don’t believe the emission of these metrics will have a material impact on one’s ability to evaluate Exagen on a go-forward basis. Finally, and before I hand the call over to Kamal, I would just like to reiterate that we’re optimizing our business operations around AVISE CTD and that my primary focus moving forward will be to steer the Company to profitability on our existing cash balance.

We have already taken numerous steps to reduce our cash burn and should start to see the results of these actions soon. We believe we can achieve cash flow breakeven with gross margins around 60% and revenue of approximately $75 million with our current cash balance. I’m excited about our opportunity this year. We have a strong foundation based on a great product, a highly motivated team and the opportunity to make a difference in the rheumatology community, especially with patients facing autoimmune disease. The path we’ve laid out internally is clear, and I look forward to providing future updates on our progress. With that, I’ll now turn the call over to Kamal to provide an update on our financial progress in the fourth quarter and for full year 2022.

Kamal?

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Kamal Adawi: Thank you, John, and good afternoon, everyone. As John mentioned, total revenues for the full year 2022 were $45.6 million. Total revenues in Q4 were $12.8 million, which was an increase of 1.2% over fourth quarter 2021. Total revenues were driven primarily by testing volumes from AVISE CTD with a record 135,210 tests for the full year and 33,819 tests for the fourth quarter. We also had a record 2,419 ordering health care providers in Q4 2022 compared with 2,126 for Q4 2021. AVISE CTD testing revenue was $11.1 million in the quarter and other testing revenue was $1.8 million. AVISE CTD revenue for the full year was $38.5 million and other testing revenue was $7.1 million. Positive revenue were $6.3 million in Q4 2022, resulting in a gross margin of 50.9% compared to 61.1% in Q4 2021.

The decrease in gross margin percentage was driven by an increase in cost, mostly attributable to inflationary pressures and a decrease in other testing volumes, both of which were slightly offset by an increase in ASP. For the full year 2022, cost of revenue were $24.2 million with a gross margin of 46.9% compared to $20.6 million and a gross margin of 57.4% for the full year 2021. This decrease in gross margin was driven primarily by an increase in COGS due to inflationary pressures, a decrease in ASP and a decrease in revenue resulting from the termination of the Janssen agreement. All of which were slightly offset by an increase in volume. Operating expenses in Q4 2022 were $27.3 million compared with $18.9 million in Q4 2021. Operating expenses in the fourth quarter include a one-time impairment in the amount of $5.5 million from goodwill associated with the purchase of the medical diagnostics division of Cypress Bioscience Inc.

in 2010. There was also a $1.2 million charge for severance payments related to a reduction in force and the CEO transition. Operating expenses for full year 2022 were $91.6 million compared with $72.4 million in 2021. Additional year-over-year increases were primarily due to the goodwill impairment and increases in employee-related expenses due to increased headcount and inflation and increase in public company expenses and marketing spend. In December, we had a reduction in force that eliminated 42 positions. The annualized savings and salary and benefits from the reduction is approximately $8.6 million. With the elimination of the R&D positions also came to the elimination of related R&D project spend, which will be additional savings. The net loss in Q4 2022 was $14.4 million compared with $7.1 million in Q4 2021.

For full year 2022, the net loss was $47.4 million compared to $26.9 million in 2021. Looking to our balance sheet. Cash and cash equivalents as of December 31, 2022 were approximately $62.4 million, leaving us ample opportunity to bridge to positive cash flow. As John mentioned, we are focused on driving a company to profitability. Many of the changes we made late in the fourth quarter will reduce our cash burn, the results of which we expect to see starting in Q1 2023. Previously, we provided Q1 revenue guidance of $8.2 million to $9.2 million. The strong momentums seen in Q4 have continued, and we are increasing our Q1 revenue guidance to a range of $9.2 million to $9.7 million. We will now open the call for questions.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. Thank you. And our first question is from Mark Massaro with BTIG. Please proceed with your question.

Mark Massaro: Maybe the first one, Kamal. Maybe can you share what prompted you to increase your Q1 revenue guide, whether it’s revenue cycle management, billing and collections, clarity on coding? And I recognize we’re in mid-March here, but just can you just give us a sense for what your visibility looks like when it comes to ASPs? And volumes have been pretty steady, but just your thoughts around how we should think about pricing trending throughout the year?

Kamal Adawi: Mark, yes, thank you. I appreciate that question. So as you know, previously, our guidance for Q1 was $8.2 million to $9.2 million, and we increased it to $9.2 to $9.7. The reason for this is how strong Q4 ended. So, we had great momentum on our volume in Q4, ending in Q4, starting in Q1, that momentum continued. So that was one of the main reasons why we took our guidance up. I’m going to let John talk a little bit more about the revenue cycle management and his strategy there.

John Aballi: Certainly. Good afternoon, Mark. Thanks for the joining the call and question. Just to add a little bit more color on the volume side. We’ve continued to make changes to the organization, one of which has been a reduction in the size of our sales force. We did not know exactly the impact from that over time. And so, we anticipated some impact to our volume numbers. And yet that has continued to be strong into Q1. So that’s the primary driver there. On the revenue cycle side, this is a very intentional process, but it takes a little bit of time. The period of time from when a claim is filed to — when you start to appeal that claim and subsequently when you can change some of the impact from a change in appeal process that may take up to nine months or longer.

And so, ASP-wise, you heard in the remarks as well, and we take a look at this, trailing 12-month trends. And I think it’s important to do so, you just have the inter-quarter variability with some of the accounting aspects with the ASP. And so, I think if we take a look at how that progresses over time, that will be more indicative of our progress on the revenue cycle side, but nothing substantial on ASP-wise yet, continuing to hold strong.

Mark Massaro: Okay. That’s helpful. And then you didn’t specifically call it out, but I think you alluded to it. As we think about therapy selection for rheumatoid arthritis, can you just confirm that the AVISE RADR program is still in development? Or is that something you’re looking to continue to evaluate, just where does that stand relative to some of the other projects that you’re working on in R&D?

John Aballi: Yes. So one of the things I’ve tried to do since I got here was really put processes in place that provided a little bit more standardization and then subsequently prioritization. So, you see this in our general operating strategy as it pertains to the sizing of our sales force and the prioritization of some of the products and the evaluation of our portfolio. But especially on the R&D side, as it relates to prioritizing development of projects and then subsequently commercializing those projects. So from an overall pipeline standpoint, I know your question was related to RADR, but I think it’s important just to note the overall pipeline in general has been under evaluation and have applied the scene process that we set internally, that’s eliminated a few projects that we’ve disclosed publicly.

One, the fiber biology project, other rooted in thrombosis. And so and we have our interferon signature as well, which we stopped development on. Those we’ve disclosed. The others remain in some various form of development. Specifically regarding RADR, we have pared it down or narrowed the focus. So originally, this was to provide prediction in signatures in both first-line as well as second-line therapy, methotrexate as well as some of the biologics in the second line area. And we’ve been more specifically focusing on second-line prediction, specifically looking at biologic And so, we do still have that program up and running, but have narrowed it in and continue to evaluate exactly the path to commercialization, what our clinical utility requirements will be.

So that’s probably as much as I can dive into on the call.

Mark Massaro: Okay. That’s helpful. And then if I can sneak one last one in. I think you’re down to 40 territories from 63. How do you know that 40 is the right number? Maybe can you just walk me through how you decided to arrive at that number? And then maybe can you share if you’ve had your national sales meeting yet this year. But what some of the new metrics might be for the reps to ensure that volumes can continue to grow this year?