Welcome to the Canaccord Genuity Growth Conference. I'm Kyle Mikson , cover life science tools and diagnostics for Canaccord. Please welcome me to a fireside chat with Exagen Inc. Exagen is a leader in autoimmune testing, and with the company, we have John Aballi, CEO. Thanks, John, for joining us today. Appreciate it.
Thanks for having me, Kyle.
Just to start, I guess, you know, the rheumatology market, the testing, kind of autoimmune testing market's a little bit underfollowed or appreciated by most investors, I would say. Could you just provide an overview of, like, Exagen and its, the markets that it addresses?
Absolutely. So Exagen Inc. is a diagnostic laboratory based in San Diego, California. We offer proprietary testing, which specifically addresses unmet needs in the autoimmune space. Our primary customer is the rheumatologist, and specifically, we focus on connective tissue diseases. So you may know these as systemic lupus or rheumatoid arthritis. Those would be the top two by prevalence. But we have unique offerings, which really help in the differential diagnosis of these conditions.
Gotcha. Okay. And the key differentiator with Exagen is probably the CB-CAPs technology, cell-bound complement activation products. So, I mean, is that, what exactly is that technology? Why is that so useful for, like, AVISE CTD, and is there, like, a path to, like, maybe enhance that over time or to do something different?
So diagnostics in general, I think is, can be a challenging environment. If you have unique offerings, now you really start to solidify a competitive advantage, especially when you're able to do so in conjunction with a high, level of service. Cell-bound complement, as you referenced, makes up the unique technology that Exagen offers. And it seems to be specific pathologically for lupus, specifically systemic lupus. So you have a high degree of sensitivity there. It identifies folks, when the conventional biomarkers are negative, so it has a very clear value add. On the sensitivity side, you're by conventional markers, looking at identifying roughly 45% of patients. The addition of cell-bound complement boosts you closer to two-thirds, maybe 65% of folks, and then when you algorithmically validate and weight those markers, you can actually approach 80% sensitivity.
So cell-bound complement, a highly effective tool in the differential diagnosis of autoimmune conditions, and specifically looking at lupus.
Okay. And then how do you size the lupus market, I guess, from a testing perspective? And does the CB-CAPs technology allow you to kind of, you know, really target and penetrate that full market or could you expand with other markers maybe over time?
So if you look at the intended use population of our technology, it's gonna be, female, age 25-40, typically, presents with their primary care physician with some ambiguous symptoms. So, you know, there's, malaise, headache, rash, mouth ulcers, these type of things, which in and of themselves don't confer a specific diagnosis, but start to give concern for an underlying systemic condition. In that context, the clinician, primary care oftentimes is running antinuclear antibody testing, testing for antibodies against yourself. In the event that that's positive, and that's positive in roughly 40-41 million Americans in the US, that's gonna be a referral into rheumatology, and that's where we come into play.
So when we take a look at the size of the market from a prevalence standpoint, roughly 41 million Americans living with ANA positive condition, and then trying to understand what is the genesis of that positivity is really how we play a role in this community.
Okay, that was great. And then I guess going off that into the, like, results from the second quarter that you recently announced. So how did the second quarter kind of, you know, progress for you? How did test volume kind of grow? And then also, you know, importantly, like the, the average selling price, the revenue per test, this is a metric that you wanna... You're tracking and trying to improve. How did that fare in the quarter?
Thanks for the opportunity to discuss it. You know, the second quarter, we were very excited to convey the results. It was a phenomenal quarter for the organization on many fronts. It was record revenue, we had, record average selling price, and we're really starting to gain some momentum. So from a top-line perspective, we delivered just over $15 million in revenue. We've got our Adjusted EBITDA loss below $2 million for two consecutive quarters, and for the first half of the year, we're at a loss of $3.6 million. You compare this just to two years ago when our Adjusted EBITDA loss was about $41 million. We've had substantial progress in making our organization healthier, more profitable, and at the same time, continuing to grow top line.
Last year, we had double-digit top-line growth, and we're continuing that trend this year. So our second quarter was just, again, a culmination of a lot of work, a little bit of luck, and very excited to see the progress. The main driver for this is improvement in our average selling price, the reimbursement for our test. We look at a trailing twelve-month number. I think on a quarterly basis, if you're looking at ASP, it can fluctuate for a multitude of reasons, and there's just accounting considerations that can make that number look off. But a trailing twelve-month number gives, I think, a representation of consistency as it relates to either progress or lack thereof.
For the last two years, we've improved our ASP 44%, and it hadn't moved for the prior four or five years of me joining the organization. So we've had real material progress there, and it's flowing all to the bottom line. Those costs are all baked into the operations of the organization, and you see that again represented with the progress we've had on the Adjusted EBITDA side. So very happy. It's the second time we've improved the guidance of the organization this year. We raised both top line and our Adjusted EBITDA outlook for the year, so excited on that front as well. You referenced volumes. You know, we transformed the organization last summer with making some material adjustments to the way our test is ordered with clinicians. It had an impact to volume.
This was anticipated, fully expected, but, you know, as you go through it, you're looking for when is volume growth gonna come back as well? That occurred in Q2. We had 8% volume growth relative to Q1, and so now our growth, as we see it, is really driven by a combination of ASP improvements along with growth on the volume side. So happy to see that. A little reassuring, to be honest, and then, we'll see where we go from here.
Okay, that was great. And the ASP, the trailing twelve-month ASP was, I think, just over $400, I believe, as of second quarter, and that compares to the $500 or so, maybe $525 rate that you wanna kinda get to.
Yeah.
That represents about half your Medicare rate, I believe. So, you're kind of getting there. I mean, you've gone from $300 or so, even below $300 to this $400 rate. So could you almost... I think I, you know, may have asked you this before, but could you like, you know, maybe slow down that cash collection, ASP rev cycle work and maybe reinvest in the commercial team and effort and sort of, like, reaccelerate volume?
So it's an interesting question. I mean, theoretically, yes, we could. I think the right strategy is to continue to transform Exagen into a profitable organization. I think that opens up a lot of doors for us. You know, from my perspective, certainly gains independence and allows us to look for potentially inorganic opportunities. So I like the trajectory that we're on, and I think most folks, most owners would prefer that we don't slow it, but we drive growth on both fronts, and that's what we're working to do actively as an organization. But we will prioritize gains on the ASP side, just given how sensitive that lever is in transforming our organization over the next bit of time, until we do hit our goal. And you're exactly right. We started with an ASP of about $280.
We're now at $ 400, and we're on our way to that low-to-mid-500 mark, from an aspiration standpoint.
Okay, and then, yeah, the Adjusted EBITDA and the cash burn, I guess, has gotten a lot better. EBITDA has, like, been improving. You're, I mean, you're approaching breakeven pretty soon, honestly. So what—besides the revenue, which is increasing, benefited by some of the prior period collections, what other, like, line items have helped the profitability metrics? So gross margin, as well as, like, kind of, like, the OpEx, the sales force investments. What's gone on there, like, below the revenue line to help you out with, like, profitability?
In transforming Exagen, we've heavily focused on ASP. It drives top line, but also then flows straight to the bottom. At the same time, we've been very prudent in our cost management. So from our perspective, we made some adjustments to the sales organization when I joined, about two months after I joined. This is at the very end of 2022. We've also made some adjustments from an R&D standpoint, refocused, streamlined our efforts there. I think that's highly important for the size organization we have and what opportunities exist from a science standpoint. But we're in a good spot on both fronts, the commercial organization, along with our R&D team. We're continuing to enhance our existing product, our core product, AVISE CTD. So no questions that, you know... Did the changes we make impact those two areas negatively? I don't believe so.
I think they were absolutely the right size changes for the organization. COGS improvement has not been a core tenet of the expanding margins. It's mostly been on the ASP side. You know, our goal from a COGS standpoint, we're heavily reliant on labor. We're based in San Diego, California, and, you know, our goal there is to keep up with inflation over time, and we had some pretty dramatic inflationary headwinds over the last two years, and yet we were able to keep our COGS relatively stable. So the margin expansion has come from improvement in ASP, and then OpEx has improved as a consequence of right-sizing the sales force, along with prioritizing the R&D efforts that we think will be material here over the next three to five years.
So, in both of those areas, you will have seen improvement, and I believe we're well-positioned for volume growth and in reaching our profitability marks here over the next couple of years as we stand right now. So our cost profile, I would not anticipate it materially progressing.
Okay, I think, I think you forecast profitability maybe, like, just above $70 million in revenue maybe, and then 60% margins or so, maybe a little bit higher actual margins. But anyway, how does-- You're gonna add some new biomarkers to AVISE CTD in the fourth quarter. That's the plan, and those could be incremental, you know, dollars to the, you know, to the payment rate, I guess. How long does that take to flow through to ASP, really, that calculation? And also, what has to kind of happen, what do you have to do in order to really recognize that payment and be, and for that to be honored with incremental, like, codes, I guess? Or how will the crosswalk work?
Absolutely. We're very excited about the enhancements that are coming to AVISE CTD by the end of this year. They're gonna be, first of all, first and foremost, clinically impactful. They improve the sensitivity of our offering in two distinct areas. One, further raising the bar in terms of systemic lupus diagnostics and the sensitivity there. We already have industry-leading sensitivity, and we're enhancing that by a further, our clinical studies have shown a further 8-10 points, approaching 90% sensitivity. So that's extremely exciting. On the rheumatoid arthritis side, we're narrowing the gap in seronegative diagnostics by quite a bit, and believe that we'll have best in class in terms of absolute performance there. So the clinical value proposition to a rheumatologist, to the patient, is improving and that's exactly what is at the heart of our strategy.
As it pertains to impact on the financials, both of these offerings will be attached to AVISE CTD. We did 137,000 tests, AVISE CTD last year, AVISE CTD tests last year. And so we expect volume to be somewhat consistent with that overall CTD performance or demand from the get-go, you know, given that they're enhancements to the core profile. So from our standpoint, these are established CPT codes that represent a methodology-based evaluation of these analytes. There'll be three on the SLE side related to flow cytometry, which is a higher margin but a known technology for our enterprise, and then also three ELISA-based codes. Again, methodology-based, but we have experience on the reimbursement side with each of these analytes.
We haven't put out there in terms of an individual test price impact that we foresee, but what we have said is that within 12 months of launching both of these improvements, we'll be a cash flow positive organization, which is a huge milestone for us, and again, relative to where we were 2 years ago, pretty dramatic transformation. So, hopefully that gives you a sense of the financial impact.
Yeah, that was helpful. And how about the... You know, just all the talk about like protein markers for the test and flow, and ELISA reminds me of like MolDX and the kind of the LCD that existed, as of like, yeah, as of recently and first kind of like was put on the scene like a year ago. So I think you wanted-- I think you have like this LCD in the queue, basically like for coverage. Does that still matter to you? Like, do you want to get like MolDX coverage through, I guess, Noridian, or is that, yeah, not like a priority anymore?
So a local coverage determination through the appropriate MAC is very important to our organization. Solidifies or memorializes coverage in the public domain, and then there's very explicit protocols which must be undertaken in case that were to change. The thing is our local MAC, given that we're based in California and a proteomic assay, is Noridian, and we've worked with them for coverage over the last two years. The MolDX team put out a billing and coding article in January of this past year that was highly impactful to the future LCD process as it relates to proteomics in a MolDX jurisdiction. And what they said is that they are now taking over that responsibility.
So I've worked with the MolDX team pretty extensively throughout my career at multiple stops now, and I find them to be very regimented, and I mean that in a positive way. The advantage there is the timelines get adhered to, and there's predictability in many regards as it relates to an LCD process. So we have transitioned our LCD request, actually, Medicare has, but we've confirmed it from Noridian to MolDX, and now we're in the queue again, which is where we've been for two years. We continue to have reimbursement from Medicare for our test at our Clinical Laboratory Fee Schedule rate, which is established. So no disruption there, but it will help on the Medicare Advantage side long term. We continue to actively pursue that LCD process and engage with the MolDX team.
We'll see where we ultimately end up, but encouraged, actually by that transition. So yes, still important to us.
Okay, and then how is the company thinking about any, potential regulation by the FDA on LDTs? I know it's, like, kind of in flux, sort of, but, like, how are you... What's your current, like, perspective on that?
Current perspective is to prepare for it. I think until we're shown differently, we need to prepare for it. And so what that means is any new product enhancements need to fall under this new rule guidance. Luckily, the FDA has provided an alternative to pre-submission review, and that's a New York State Department of Health approval. We operate testing services within New York State. We're a New York licensed laboratory. All of our assays are New York State approved, and so from our standpoint, we're completely fine with the rule changes. It does require some enhancements to our quality management systems. These are relatively immaterial in the grand scheme of things. We'll see long term what the implications are.
You know, the FDA has, as they put forth this rule, laid things out on multiple timelines and, you know, the real impactful ones come in 2027, so we'll see exactly what we have to do there in terms of design control. But for now, we're in pretty good shape and intend the new product enhancements to have New York State approval as a surrogate for pre-market review, so.
Okay, that was helpful. In terms of like, I guess, future tests and future iterations that may actually need, like, FDA approval, but, you know, not really focused on the approval itself, just on the pipeline thoughts of the company. I know, like, in the past, you turned to, like, more of a concentrated or, like, more restricted sort of, like, pipeline approach, just, like, not basically waste money doing tests that's not going to contribute for years. So what's the current strategy of the company with that, and what's like, you know, the first one or two tests that, or areas at least, that Exagen is interested in kind of pursuing, you know, once you kind of get to this cash flow break-even kind of, yeah, I guess, milestone?
... So our R&D pipeline has been completely rebuilt in the last two years. Discontinued quite a bit of the efforts that we had going on before my time, and really what we anchor to is high clinical need. That's the number one priority for us. You know, if you were to talk to a rheumatologist, one of the exercises we did internally is, what are the top five needs of a rheumatologist? Ask, you know, 100-150 folks, "Where could you use additional clinical information?" That provides the anchor point for us in terms of our R&D pipeline. That was not the approach previously. So from my standpoint, that's first and foremost. Then we layer in a few other criteria, specifically around how we are going to achieve reimbursement, right?
Because, one, let's solve a clinical need that exists and is there, and then, two, let's do so in a way that's, I think, business savvy or allows us to operate effectively. And so we've revamped the R&D pipeline with those few factors. What that has resulted in is really sticking to what we do well, which is proteomic test development, and specifically within the autoimmune space. We have three efforts that we've talked about publicly. One is some technology we licensed out of Johns Hopkins for a diagnostic in lupus nephritis. Half of all patients with SLE go on to progress to some form of lupus nephritis, so it's a high need in an area that we're already serving. And then two others have to do with disease activity, one in rheumatoid arthritis and the other within SLE again.
You know, clinically, right now, a measurement of whether a patient's getting better or worse is done through clinical nomograms and clinical evaluation, and a more objective view of how the patient's doing, especially as you modulate or adjust therapy, is a high clinical need. So, all three of those efforts, we have strong science internally behind, and so I feel confident talking about them publicly. It still is a little bit of a road to get them launched commercially because I, I won't launch without at least some clear aspect of reimbursement, and so likely that, that involves Medicare coverage or reimbursement. That's typically a pretty good anchor, and then we'll go from there.
Okay, all right, that was great. And then, like, you know, revenue's been—hasn't been flat, but, like, growth hasn't been too exciting, too strong recently. But, you know, maybe that's due to the lupus market not being the most attractive or biggest within autoimmune. I think, like RA, rheumatoid arthritis is, like, maybe more lucrative potentially. So how important is it to the company's long-term growth, like, trajectory, I guess, to participate in these, like, larger markets within rheumatology and basically leveraging your call point currently to, like, you know, tap into bigger markets?
From my perspective, I believe the growth has been healthy. If you take a look at what we did in 2023, we grew 16%-17% top line and cut our burn in half, and this year we're on track to grow double digits and basically do about the same thing. So from my standpoint, I don't know too many organizations that are able to cut their burn as dramatically and yet still grow top line, so I'm proud of that, for sure. As it relates to the broader market, you know, we feel that if the rheumatologist is our primary customer, let's work on solving their needs, and we have a commercial channel that we've invested heavily on and continue to invest heavily in. So, let's leverage that asset and see where we go from there.
So the autoimmune space, I think, still has quite a bit of room to run. Organizationally, and you likely know this from covering the organization for some time, there's we've been defocused organizationally, and we have had efforts to co-promote pharmaceuticals in the past. We've looked at expanding our portfolio in other ways, just emphasizing different things internally. And I think AVISE CTD is a fantastic product. We're gonna run our millionth test here in Q4, and again, that's a specialty diagnostic. Not too many have had a million tests performed, so it's well adopted in the community and there's still quite a few rheumatologists who would benefit from the utilization of this test. So, I think that'll be our focus, and we'll continue to go from there.
Our growth is being driven by a combination of ASP and volume. I think we'll see where we land, but I'm encouraged.
Okay. And then the cash flow break even or maybe an EBITDA break-even metric is something for investors that they care about, obviously. But in terms of what the company, and once you hit that milestone, I mean, do you just keep, you know, expanding EBITDA, positive EBITDA, or do you sort of, like, take a break and maybe, like, you know, sit at break even, or maybe even go back to negative just 'cause, like, you actually can't sustain, and maybe you reinvest in the business or do M&A or something like that, or more strategic work or something? How do you think about, you know, maybe, like, in a year or two from now, when you are break even positive, how you kind of operate as a company?
So again, what a dramatic shift in terms of strategic thinking compared to just two years ago. But from my standpoint, want to get there first and foremost. So, starting to think about it, but at the same time, want to remain focused on actually getting there, so we don't lose sight of that. Organizationally, there's a lot of things that we could do with extra cash, and I think capital allocation is something that certainly excited about, but also something that is... You know, we made a recent change to the executive team, brought on a new CFO. Very excited to welcome Jeff Black to the organization here in the month of September. And he and I will continue to put that strategy together and take a look at what the best opportunities are for deployment of that capital.
You know, the company does have debt currently. I'm typically pretty averse to that, but so that we may look to de-leverage in some capacity, but we'll have to see. There may be other opportunities we go after, whether internal or external as well. I think hopefully what I'm showing is, in terms of our approach and philosophy of capital allocation, we'll be very prudent in how we do allocate.
And then, finally, maybe, like, for 2025, you know, things to be excited about, what's, what are like the, you know, 3-5 things that, you know, really makes you excited about 2025 being, like, a breakout year for Exagen?
Sure. Well, we are launching our product enhancements by the end of the year. The impact of that is likely, you know, everything goes to plan, is likely to be felt starting in Q1. So I think almost instantly you'll see a change in the way the organization delivers results and functions. A result of that is within 12 months, so by the end of 2025, if, again, if everything goes to plan, we're cash flow positive. So that's-- that'll be a fun year for us. I'm very excited for that, excited to get those new clinical enhancements and then transform the organization further.