All right, good afternoon, everybody, and welcome back to day three of the 45th Annual TD Cowen Healthcare Conference. I'm Kyle Boucher, an associate on the Life Science and Diagnostic Tools team here, and I'm pleased to introduce the management team from Exagen: John Aballi, CEO, and Jeff Black, CFO. So welcome, guys.
So just jumping into it, Exagen's in the midst of a very compelling turnaround story. TTM ASPs increased for seven consecutive quarters, now sit somewhere around $404 per test, and you've reduced EBITDA loss by 70% to just $4 million in the third quarter, and increased gross margins 13 percentage points since 2022. This is a lot to get done in a few years. Now that this is in the past, what do the next two years look like for Exagen?
Thanks for the recognition, and again, pleasure to be here. Really appreciate it. We good? From our standpoint, it's been about two and a half years of really hard work, and it takes a lot of energy and, to be honest, consistent work to generate that type of progress. The team, from my perspective, has been working really hard and very proud of what they're doing. From our standpoint, our next near-term goal is, and this has been the goal really since the beginning, to achieve cash flow positivity. We expect to do that by year-end on the basis of our new product launches, which we just did in January. That's our next near-term goal.
And from that, there's a big reason why Jeff joined, or at least I was excited for Jeff to join, is thinking about what we can do from here on out. And kind of the first initial goal was to stabilize the business, work to improve it, we have a great product, put that back on a growth trajectory, which we've done, and then from there on, look for other ways to develop new products, but also look from an inorganic standpoint.
Got it. So you're expecting to be EBITDA positive by the end of 2025. Are improvements from here mainly on volume leverage and revenue growth? Are there further efficiencies you see in the gross margin and OpEx structure of the business?
We're always looking at ways to improve from a cost perspective. I think it's a great mentality to have. It makes you really make tough decisions, but those constraints can be very helpful in making the right decisions. So that's just a natural tendency that the people who have joined us at this organization have. It's one I've had as an operator at other companies, and will be kind of a very stable aspect to the way we manage. That said, there's been pretty prominent inflationary pressures over the last couple of years, some of our highest inflation over the last 20 years. And so from that perspective, our COGS profile, we hope to maintain relative stability over the next bit of time so that we're relatively flat. The gains really on the margin side will come from an ASP improvement.
That's been a core tenet of our strategy the last couple of years, and we're making great progress. Our ASPs have gone up materially in the last couple of years, as you mentioned, seven consecutive quarters, and very proud of that progress. But we're still not where we want to be. We think that half our Medicare rates are a very reasonable near-term goal, and we'd still have roughly another $100 to go ASP-wise, which is very material when you're doing 130,000 tests.
Got it. So maybe moving over a little bit to the landscape in the autoimmune markets, can you speak to the landscape? How do you think about your competitive position in the landscape, market growth versus your growth at Exagen? And maybe any other high-level market-level data points we can track to get a pulse on lupus and RA?
Sure. The auto-immune space is really interesting. You see quite a bit of pharma development there, and we anticipate that continuing to grow. One of the aspects of our business that we've been excited about is the progress we're making on the biopharma side. And I highlighted that on, I think, our Q2 earnings call, but our contract size as well as structure has changed materially over the last 12 to 18 months. And so we do see business on that side continuing to pick up, and we see people investing in wanting high-profile, unique markers as part of their development efforts on the pharma side. As it pertains to our clinical business, really interesting. You have ANA positivity as a precursor, a very common precursor for utilization of our core product.
And what we've seen here is from 2000 to 2010, a doubling in terms of prevalence of that number in the U.S. Our expectation is that about every decade that number is doubling. I don't know where it'll peak, but we're now up to 41 million Americans with a positive ANA. That number was 20, again, 10 years ago or so. And we don't know the cause of that positivity. It could be environmental factors, could be a lot of things, could be higher utilization of testing, what have you. But that positivity rate increases the market from our perspective, and those patients need to be evaluated for more severe, more significant systemic disease. So that continues to grow. The labor, the rheumatology labor pool is continuing to constrict. These physicians are retiring faster than new ones are coming out of fellowship.
And so leveraging tools which make clinical practice more efficient, more effective is a value proposition which we believe we provide as part of our core product and sets us up well from our standpoint. So high-level market-wise, we think we have a few tailwinds in our direction. We'll have to see, obviously, administration-wise what any implications are there. But you have some of the NIH funding changes that may actually provide an advantage for us research-wise. It gives us an opportunity to step in with some of the KOLs and do some maybe lower-cost research with them. So we like the way the market continues to evolve from an autoimmune perspective.
So maybe building off that a little bit, AVISE has been on the market since 2012. How would you classify market awareness of your testing portfolio? What percentage of U.S. rheumatologists use AVISE? And will more of your growth come from going deeper in your existing ordering positions or expanding to new physicians?
Yeah, that's a great question. I'll try to hit on those three areas. So from our perspective, maybe I'll just start with the last point first. So from our perspective, we just launched a new set of markers for both SLE diagnosis, systemic lupus erythematosus diagnosis, along with the seronegative rheumatoid arthritis patient population. And the launch of those markers, we believe, will have an enhanced value proposition, certainly on the RA side. We did not have unique markers as it relates to rheumatoid arthritis. We do now, and we'll continue to enhance that suite of markers throughout the year. And so we believe that greater utilization within our existing customer base is likely a consequence of that. Folks that are already using our test for the differential diagnosis of connective tissue disease, but focusing in SLE, we have the best test out there. I'm biased, but we do.
And so we're enhancing that value proposition. But if you're already using us for lupus, you're just getting a better offering. It may open new doors with physicians who aren't currently using us, but we really think that in terms of growth, it's enhanced penetration within the existing customer base because we've improved the value proposition for rheumatoid arthritis. What percentage of our customers, the rheumatologists in the U.S., are using our test? Roughly about a third is our estimate. There's somewhere between 4,500 to 5,000 rheumatologists in the U.S. Approximately 1,500 are using our tests in any given quarter as part of their routine clinical practice. Somewhere around 2,500 physicians are using our tests on a quarterly basis. And so that delta there being the referral network into rheumatology in various subspecialties. And then I think your middle question, if you don't mind reminding me.
Yeah, it was just what percentage of U.S. rheumatologists use AVISE?
Okay, so kind of hit on that is roughly a third.
Got it. Moving over to Jeff, quick question for you. You recently joined Exagen in the beginning of August from another company, more in the life science tool space. I guess so far since August, how's the ramping going? What have been your key priorities over the last six months?
Sure. Yeah, I mean, returning to an industry that I know well feels great to be home again, if you will. I feel a little like I've cheated because heavy lifting that John has done, rebuilding the team and the operational turnaround, it's a phenomenal setup. So I've stepped in super excited about the technology, the platform, impact on patients. And while there's heavy lifting left to be done, it's really more around optimization and enhancement. I have a great team. The foundation has been built. I'm really excited about being part of what's next. And just I think the opportunity is endless.
Got it. Now, maybe moving over to your upgraded assays for lupus and RA in your commercial launch. Recent headline news has been the addition of three new biomarkers for SLE and four new biomarkers for rheumatoid arthritis to the AVISE CTD test. The markers increased RA sensitivity from 70% to 85% with high 90% specificity and improved lupus sensitivity. Was sensitivity a hurdle for physicians, and can this increase adoption in your opinion, or is this just about having the best test possible and increasing patient outcomes?
Yeah. So you nailed many of those metrics there. From our standpoint, we were still missing about 20% of lupus patients, right? So if you had a clinical diagnosis of lupus, you still had no serological abnormalities, whether it was by our platform or up to about half of patients by conventional testing. So the fact that we were missing them was not okay with us. We're always looking for ways to continue to improve the personalized aspect to medical practice in this space, and it starts with the correct diagnosis. So we were raising the bar ourselves. I think really what this is going to impact from a commercial standpoint is we have not turned out anything new in the last five-plus years, certainly of significance for almost seven.
So while the product has been on the market for some time, the focus of the organization has been in other areas. And so what we've done in the last 24 months is really refocus the whole organization back on the core product, look for ways to raise the bar ourselves. It's a clinical need, improved diagnostics in this autoimmune space, and we're just trying to narrow the gap in terms of missing some of these patients. And what we're finding are there are various patient populations that are positive for certain markers and not positive for others. More studies need to occur to see what the implications are from a prognostic standpoint or treatment perspective, but we're trying to raise the bar there. I think on the RA side, it's likely to have some material impact in expanding the market.
Got it. How do you think these additional markers will affect your ASP for AVISE?
That is the golden question, so what we've said publicly is that there's established CPT codes for these analytes. We expect from day one to have both coverage and some form of payment from the majority of our payers, insurance companies that we work with. That blended rate or incremental impact to our ASP is not something that we've quantified publicly. The reason for that is I want to be very certain when we come out with a number that we've seen cash in the door, and so we launched these enhanced markers in the end of January. We've been working hard to file claims for the testing that's been performed. As cash has come in, we're getting a feel for what that blended rate will be, and we'll have an update for that likely on our Q1 earnings call when we'll be able to specify the incremental impact.
Got it. So you said you commercially launched the end of January for the new markers. Number one, how are the initial stages of the launch going? I believe you guys met with over 50 physicians one-on-one prior to the launch, but have you been getting any more valuable feedback from physicians so far? And how is the receptiveness from both physicians and payers early on, which maybe you touched on a little, but how are talks with payers going?
Yeah. So again, it's exciting because first of all, this was not easy. So these are all lab-developed tests, and we had to get them validated both clinically and analytically and then through New York State Department of Health. And that is the current FDA surrogate with the rules that are in place. And with our current team, this was not something that they had done, right? We've actually changed all of the senior leadership in the organization in the last two years. And then at many levels within the organization, there's quite a few new players. So you got a new team working together to bring several analytes to market, past regulatory approval, and then to commercialize them. And a lot to get right here in the last 12 months, and the team's done it. So very proud of being able to accomplish that and get those markers out.
What we've seen is we are being reimbursed for the new markers. At the specific level, like I just said, we haven't come out and said exactly what, but so far, things are going to plan. Initial reception is very positive. We had, as you mentioned, talked to an extensive number of physicians one-on-one to try to get the reporting of these analytes correct and really counterbalance what we thought was the right amount of information to provide on the report. That was all done in Q4 around the time of ACR, so ACR is our annual societal meeting, American College of Rheumatology. We got some great feedback at that time. We thought that there'd be some enhanced interest on the RA side. That's really borne out post-launch, and we're seeing some clinicians where it's making a real high impact in clinical care.
There's one example where a clinician suspected fibromyalgia, and their patient was actually treating them for two years with pain management, and they were negative for all serological markers that are out there conventionally. And when we came up with the revised panel, they ran our test, and they showed up positive for two of the new markers that we've put out there. So now that patient's diagnosis has changed from fibromyalgia to RA, they're being treated with methotrexate. This was a younger female who didn't have joint damage yet. And so that's a very positive outcome. We'll see, obviously, longer term, but examples like that are why we do this.
Maybe stepping back, sort of a higher-level question here, but you've taken the steps to improve your cost structure, optimize revenue cycle management, or you're being proactive about investing and bettering your test. Do you have plans to start adding sales headcount to get a higher number of reps in the field to push the product?
Yeah. So I think some context there is important. When I joined the organization, we had 63 sales territories in the U.S. We downsized that to 40 because those 23 were not covering the cost of the rep in the field. We have since had all of our territories with the ASP gains be at least accretive from a contribution margin standpoint to our organization. And so what we've taken a look at is now where can we start to grow responsibly and in a profitable manner. And that's kind of this next phase. I fully anticipate here in 2025 that we start to expand our various sales territories, and this will be the first time since I've been here that we do that. We're likely going to get into the low to mid-40 range over the course of 2025. That'll be adding roughly 10% sales territories into our organization.
Maybe moving over to guidelines. The American College of Rheumatology recently came out with a summary guideline recommendation for lupus nephritis late last year. Is there any read-through for Exagen here? Is there a timeframe to expect guideline updates in SLE, or what do you think?
Yeah. So that was an exciting development. From a lupus nephritis standpoint, what they came out with were pretty clear treatment guidelines, not really much mention of any diagnostic aspect to those guidelines. And that's really been the story with the ACR. That's not a criticism, just more from a factual basis is they've stayed away from providing actual diagnostic guidelines for many of these diseases. What they've relied upon is the clinical gestalt of a rheumatologist to arrive at a diagnosis, but then more certainty or specificity in terms of how to treat that patient. And so that's what you saw in lupus nephritis. And I think they actually just went to expand some of the biologic uses in that space is what the guidelines accomplished. It relates to SLE specifically. I don't fully anticipate changes near term.
I think the last guidelines are updated north of 10 years ago, and these are classification guidelines as opposed to diagnostic guidelines. The distinction there being classification guidelines are useful for ensuring homogeneity in clinical trial enrollment. They don't necessarily set a threshold for when a diagnosis is appropriate, and so we've been working with the ACR. It's a concerted strategy we've put in place since I've been here. There's a very clear group that has the ability to put out diagnostic guidelines, and several of the physicians on that panel use AVISE testing in their clinical practice. It's just a question of will at this point, and we'll continue to work with them.
Do you think the new biomarkers and the related abstracts you presented at the ACR societal meeting, does that increase the chances that AVISE can be included in the next guideline update?
Certainly increases awareness, so from that perspective, very positive. Also, the physicians associated with many of those abstracts are very prominent KOLs in the field, and that's also been part of our strategy over the last 18 months is to get the KOL community informed and familiar with our offering so that as these guidelines are formed or contemplated, we'll have a better chance of consideration. Again, I don't think this is an organization that moves fast or that is interested in rapid evolution of their guidelines, such as NCCN would be in the cancer world, but I think, again, probably the best thing to characterize it is we'll continue to work with the body, and we know the prominent players and they have experience with our offering. It's just a question of does ACR want to go as far as to create diagnostic guidelines.
Got it. Okay. Well, maybe moving over to financials now. Much of the revenue growth in recent periods has been driven by ASP gains, which we touched a little bit on earlier. The volume environment has been a bit more modest on that side. What are you doing to recharge orders and really get some acceleration over the coming quarters and years?
So, perfect question. From my standpoint, we had to reset the expectation within our physician base over the last year and a half. And what I mean by that is in order for us to have an effective communication or engagement with the payer, we needed our ordering physicians to provide us with information to be effective there. So for example, all tests now require medical records from the ordering physician. They require a signed requisition, which you would think is a relatively trivial thing, but it's actually a pretty significant thing. We require that physician to be enrolled with Medicare and credentialed such that we can get reimbursed. We changed our patient fee patient responsibility on average. So all of those things, especially when you make kind of a rapid change like we did in July of 2023, has a reset effect on our customer base.
We've had to work through that. We had a 20% volume decline between 2023 Q2 and Q3 of 2023. Since then, we've been building back from that level, and we've actually seen, in my opinion, pretty reasonable volume growth over a year's worth of time. I'm very energized by the way the team's performing now. We've changed the caliber and quality of our sales team. Our new head of sales joined in June of 2024, and this was an individual that I've worked with for five years at a prior organization. Various sales reps within the individual territories have been changed. Previously, the company was heavily focused in co-promoting a pharmaceutical product. We've gone more for diagnostic experienced reps.
They're seen more as consultants within the field, and they have a more consultative discussion with clinicians. That's very different than a pharma side where you're doing a lot more marketing and dropping off materials as opposed to engaging in problem-solving. So I think we have the right team. We certainly have continued to enhance the value proposition. I think 2025 will be a really critical year for evaluating that metric.
Got it. So you've talked about in the past that there's a goal to get to at least 50% of the CMS list price or $525 per test. That's somewhere around 25% higher than where your ASP sits today. What are the milestones here that we should be watching?
I think that is the milestone. The trailing 12-month number is the most critical number from our perspective. We've intentionally not pointed people to quarterly moves in that metric because various accounting things can have an outsized impact. Prior period collections, for example, either way, lack of or additional collections. I think looking at the trajectory of that trailing 12-month number will really give you an indication of if we're making progress strategically and whether that's a mix of revenue cycle optimization or managed care market access type progress. I'm happy to provide a qualitative overlay, but it really comes down to for 130-something thousand tests, what's your average cash in the door?
And that's the number we give you. And that number's moved up about 40% over the last two years after being stagnant for the four or five years prior to me coming. So we are making progress in that area. I fully expect it to continue.
Got it. Okay. Moving over to the capital structure. How do you see your capital structure evolving over the next few years? Are you comfortable sitting on, I believe, about $22 million of cash with break-even expected by the end of the year? How do you see things evolving over the next year or 18 months?
Yeah, there's a couple of things there, and maybe Jeff can chime in too, especially around the debt. But if you take a look at cash used last year, we had cut that burn significantly, right? Our Adjusted EBITDA loss in 2022 when I joined the company was $45 million and around there. And last year, our pre-release before JP Morgan was about $10 million. So we've had some material improvement in cost reduction at the organization. Cash used was about $14 million for last year. We have $22 million in cash at year-end. We expect to be cash flow positive by Q4.
So from our perspective, we feel very comfortable that we have the cash on hand to reach cash flow break-even, and then we'll take it from there from a strategic standpoint. But there's other components, especially related to debt and what have you, that maybe you can talk about, Jeff.
I think, John, in terms of the setup, laid it out very well, and that is that the business will cash flow. We have no issue about continuing to be able to fund the operations. We do have debt service that will come. We have $20 million in debt. It begins amortized on April 26. We think it's important to prioritize getting ahead of that. That's number one priority. We'll be opportunistic beyond debt refinance on equity. It's a great setup for us. And I think as you think about equity, an equity raise will likely be something on the transformative side.
I guess how de-risked is that break-even or generating cash by the end of the year? I mean, is there anything specific that needs to happen to get there? I guess what are the puts and takes on the break-even by year-end?
The first critical milestone would have been launching of the new products. And if there was any hiccups there, timeline-wise or feasibility-wise, we're past both of those. As I've said, we've launched a new suite of products for systemic lupus along with rheumatoid arthritis in January of this year. That was exactly in line with what we have communicated externally. The next question is then what's your average reimbursement and the impact relative to expectations? That we will know by our Q1 earnings call, and then that will factor into our 2025 guide. But from everything we're seeing now, we are being reimbursed. I just can't comment exactly on the relative level. We don't have enough data points at this time. So we'll have to see.
All right. All right. So okay, so maybe moving in a little bit of a different direction, but the new biomarkers were just released, but what do you see your R&D pipeline looking like over the next three to five years? What do you think the biggest areas of investment are going to be?
This is a very interesting aspect for us because if you take a look at certainly diagnostics and biomarkers in the autoimmune space, there's not a ton. So from our perspective, what we've been heavily focused on and meeting is existing customer needs. So I joined the organization. We had an established R&D pipeline. I've actually since stopped every single project that was there because as I dove into it, didn't think it was going to pan out as intended. And what we've done since is conducted a pretty extensive voice of customer review with the rheumatologist base. And it becomes pretty apparent when you talk to 100+ physicians where they need help and what are some of the top clinical needs in this space are indicators of disease activity, objective measurements of if the disease is waxing or waning, progressing or improving.
The reason for that is that's all done clinically right now. If you have RA, you're evaluated based on how many joints are inflamed; is your pain increased? There are some radiographic indicators there, but that tends to be past the point of no return, if you will. You can't reverse that. You can just hope to stop it. In lupus, from that standpoint, it's have your manifestations progressed. Are you developing new ones? That has a recency bias. It's self-reported. What clinicians have said is, as I look to throttle back steroids or to intensify therapy, I want to make an objective decision in this context. Having measurements of that disease activity are of high clinical demand.
We have two programs, one in each, one for systemic lupus, the other for rheumatoid arthritis, that we're past the level of scientific risk, if you will. So we have candidate assays where we have some level of clinical validation in-house, and we're working to accumulate the data package around that for ultimate commercialization. But that's exciting for us. We're also looking. We had licensed some technology out of Johns Hopkins. This is exciting because I think it has some pharma impact before it will have clinical impact. And this is really going deeper within lupus. Half of all lupus patients have some form of kidney involvement. So the challenge there is the diagnosis requires kidney biopsy ultimately, which is unpleasant as it sounds. And then evaluating response to therapy is a 12-month odyssey that that patient's kidney potentially is continuing to degrade throughout that period.
So, we're looking at liquid biopsies in this space, urine proteomics. We have candidate signatures for both of those indications, diagnosis along with disease activity throughout that space. So excited about all three of those programs. We have a few more that I haven't spoken about just given the level of risk that still is involved with that, but working on restarting the R&D pipeline about two years ago. These new markers are the first fruits, really, and we'll continue to evolve the platform.
Got it. Got it. We're at time, but one more quick one, if I can. Clearly, a lot going on here with the turnaround story, but what are you most excited about if you could boil it all down to one thing about the story?
So, most excited is an interesting question, and this is me excited. But the most excited thing for me is you come into an organization, you come in on your own, you don't quite know exactly who you're working with or what you have to work with. And several things have been reinforced. The product is differentiated and has IP around it. It is providing significant clinical value in the space, and we can optimize the business around it. You never know if you cut off X, especially the way we've done it, how detrimental that is to top line, and we've actually continued to grow top line.
So from that standpoint, there's real opportunity here. Our R&D pipeline has meaningful projects that are addressing strong clinical needs. When you look at it, it's a prior I've done a couple of different turnarounds, and this one's just as exciting as some of the others.
With that, we're out of time. So John, Jeff, thank you very much.