Exagen Inc.

Greetings, ladies and gentlemen, and welcome to the Exygen, Inc. First Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during this conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I would now like to turn this conference over to your host, Mr. Mike Cavanaugh, Investor Relations for Exygen. Thank you. You may begin.

Good afternoon, and thank you for joining us today. Earlier today, Exogen, Inc. released financial results quarter-ended March 31, 2021. The release is currently available on the company's website at www.exogen.com. Ram Raka, President and Chief Executive Officer, Kamala Dowie, Chief Financial Officer, and Mark Hazeltine, Chief Operating Officer, will host this afternoon's 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 fact 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 2021 guidance, the impact of COVID-19 pandemic on our business, 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 if or 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 our business, please see our filings with the Securities and Exchange Commission, including our Form 10-K and subsequent files. The information provided in this conference call speaks only to the live broadcast today, May 11, 2021. Exigen 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 Ron Rocca, President and CEO of Exigen.

Thanks, Mike, and thank you to everyone joining the call today. As always, we appreciate your continued support of Exigen. The first quarter of 2021 was an important one for Exogen, and we are very pleased with our accomplishments. One of the many highlights of the quarter was our successful follow-on offering, which raised over $69 million in gross proceeds and added significant additional liquidity to the market for Exogen stock. We plan to use the added capital to further build our business and position the company for sustainable long-term success. We are accelerating our investments to expand our robust pipeline, which includes our molecular and multiomics development initiatives, our lab expansion, and commercial organization. We've undertaken a major expansion of our laboratory facilities in Vista, California, which will significantly enhance our testing capacity and improve our efficiencies. With our increased investment in research and development, we seek to expand our advised franchise of autoimmune and autoimmune-related testing solutions. Our R&D team is working diligently on developing our fibromyalgia test. This liquid biopsy test is being developed to be the first rule-in, rule-out fibromyalgia diagnostic test. This is a very challenging disease with a very large total addressable market. Although it is not an autoimmune disorder, it is often diagnosed by rheumatologists because its clinical symptoms are so similar to those of connective tissue disease. We are also expanding our R&D capabilities to focus on multiomics by integrating molecular technology with our protein markers. There remains a significant unmet need for approximately 24 million patients suffering from autoimmune diseases. Exigen's commitment to provide novel, differentiating testing solutions with an IP-protected TB-CAPS technology will assist in the expansion of our advised testing franchise for thrombosis, lupus nephritis, and rheumatoid arthritis. These investments uniquely position us for continued growth in this large underserved market. Turning to the performance of our business, we recorded a strong quarter in our advised testing franchise. As you are all aware, due to the ongoing pandemic, many patients remained unable to freely visit their healthcare providers, inhibiting the ability of patients to be tested. Furthermore, there were severe weather conditions in Q1, which impacted our business. Despite these headwinds, Our core testing business proved to be resilient and performed very well. We achieved several records in the quarter, including 29,029 tests, 1,763 total ordering healthcare providers, and 659 adopters for our flagship Advise CTD and Advise Lupus test. We finished the quarter strong with an all-time record volume in March. we continue to achieve very high retention rates of 99% among these adopters. As we have said before, we believe retention rates this high speak volumes about the value healthcare providers place on the ability of advice testing to accelerate the historically slow and frustrating process of clinically diagnosing autoimmune disorders. Our Q1 performance in the face of ongoing pandemic and severe weather gives us real confidence around the strength and value of our advised franchise and our path forward as we continue to expand our footprint with rheumatologists, hospital systems, and payers across the country. As many of you know, autoimmune disorders are notoriously difficult and time-consuming to diagnose using traditional testing. Our CBCAPS technology is a true breakthrough that offers a promise of faster and more accurate diagnosis, enabling earlier intervention into treating these chronic and sometimes deadly diseases. This month, we announced the research collaboration with an exclusive licensing agreement with Allegheny Health Network Research Institute. The collaboration will focus on the development and commercialization of novel patented biomarkers for diagnosing, prognosing, and monitoring of autoimmune diseases. Importantly, we are happy to be working again with key opinion leaders, Dr. Joe Ahern and Dr. Sue Manzi. This is an extension of our R&D organization for the discovery and development of novel autoimmune biomarkers. Additionally, our collaboration enables access to AHN's Autoimmune Center of Excellence, which gives us insights into the latest cutting-edge academic research. We also kicked off 2021 with progress on the reimbursement front. having recently completed covered in-network agreements with Highmark, the fourth largest Blue Cross Blue Shield group in the country, and Tricare West. We remain highly engaged and focused on payers to further expand coverage and in-network status. We signed in-network agreements with two prominent healthcare systems in Q1, Tufts Medical Center in Boston and St. Charles Health Systems based in Oregon. Both health systems recognize the necessity of making more accurate testing accessible to their patients, and we are looking forward to long-term relationships with both. Advise tests are now available to approximately 67 million in-network lives across the U.S., up from approximately 59 million at the end of 2020. And we expect this momentum to continue, increasing our footprint and benefiting ASP. I would also like to touch on our commercial excellence, which is a crucial part of our strategy. In Q1, we expanded to 63 territories. We also began to supplement our sales force by creating inside sales positions in Q1. These new positions were added to perform multiple roles, such as covering white space and augmenting territories to further our reach and frequency with rheumatologists. May is Lucas Awareness Month. As you know, lupus is often overlooked relative to cancer. However, it is a very serious disease which we are bringing more attention to the timely, accurate diagnosis offered through our advised testing. I'm very proud of the ongoing support that Exogen provides to patients throughout their diagnosis and disease management journey. Whether it's through gaining clarity through their differential diagnosis with advised CTD, to regain control of the disease management with the advised SLE monitor, or to address the disparity and other obstacles to optimize care, we remain focused on providing patients and their healthcare providers with the best possible solution for their needs. I would now like to turn over the call to Kamal to discuss our financial results.

Thank you, Ron, and good afternoon, everyone. Total revenues in the first quarter of 2021 were $10.6 million, an increase of 10% over the first quarter of 2020. Total revenues were driven primarily by testing volumes for Avize CTD, including Avize Lupus, which grew 7% year-over-year to record 29,029 tests in the first quarter of 2021. This also includes an all-time record for volumes in March. As Ron mentioned, the number of ordering healthcare providers was a record 1,763 in the quarter, compared with 1,692 in the first quarter of 2020. Avai CTE test revenue was $8.5 million in the quarter. Testing revenue was $1.8 million. Revenue for Symphony was $0.3 million in the quarter. Once again, we're pleased with the performance of our core testing franchise in the face of headwinds from the ongoing COVID-19 pandemic and severe weather we saw in February. Cost of revenue were $4.7 million in Q1, resulting in a gross margin of 56%. compared to 53% in the first quarter of 2020. Operating expenses in the quarter were 16.2 million, compared with 14.8 million in the first quarter of 2020. The increase was primarily due to employee-related expenses, including sales incentives, stock compensation, and R&D initiatives. The net loss in the quarter was 6.2 million, compared with 5.6 million in the first quarter of 2020. For full year 2021, we reiterate the guidance we gave in our Q4 2020 earnings call and expect total revenues to be approximately $47 million to $49 million. This includes testing revenue of $46 million to $48 million, representing growth of approximately 27% over 2020 at the midpoint of the range. We prioritize resources for our revised testing franchise and expect $1.2 million in revenue for Symphony for the full year 2021. Looking to our balance sheet, cash and cash equivalents as of March 31, 2021 were approximately $118.1 million. With the additional capital raised in Q1, we're making further investments in R&D, including the development of molecular and multi-omic capabilities, laboratory expansion, and our commercial organization to fuel future growth. We will now open the call for questions.

At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation pin will indicate your line is in the question queue. You may press star 2 to remove your question from the queue. For participants using speaker equipment, it may be necessary for you to pick up your handset before pressing the star key. One moment while we pull for questions. Our first question comes from the line of Chris Flynn with Cowan. You may proceed with your question.

All right. Good afternoon. Thanks for taking my questions. Ron, I want to start with a comment you made during your prepared remarks. Specifically, could you elaborate on your R&D initiative to integrate molecular technologies? I'm curious what type of technology you are looking to integrate. Is it sequencing, PCR, or microarrays? Also, could you talk about the process to develop a multiomics test? Can you leverage your existing patient samples or database?

Sure. First of all, thanks, Chris. Appreciate the question. We are putting a lot of emphasis into multiomics, and the reason is that we've done such a great job with proteins, but the reality is when you add markers from RNA to proteins, you should be able to get a more sophisticated earlier diagnosis, and that's where we're putting the efforts in. While we look at targets like interferon alpha and so forth to add to our CBCAPS technology, those studies do take time. So are we looking at next-gen sequence? You're absolutely right. We are working in that direction, and we're putting a lot of effort there. The process is going to be one that you're probably used to when you're seeing other molecular-type testings. It takes sophisticated materials. You have to have geneticists and so forth. And that's why we put a lot of effort in building out our lab to be able to enable us to do this in an effective manner. So when you think about adding CB caps to a molecular test and getting to that multiomics, that really is what everybody is looking for. Because when you're talking about autoimmune disorders, it's very complicated. Your companies that deal with cancer, they're dealing with a tumor, a known event. Autoimmune is so diverse, when your body starts attacking itself, it really does lend itself to molecular-type testing because of what happens as your body turns against itself. So the process is going to be very well thought out. It actually is already, and we have some very good consultants as well as geneticists to make sure that process is tight. So when we do have our first multi-illumix product out on the market, it'll be one of high quality, and it'll enable the physicians to help us find a solution for those patients.

That's great. Very helpful. And maybe a follow-up to that, how should we think about the timelines associated with this multiomics test that we're talking about? I don't know. Any comments you want to provide on timelines? Yeah.

Now, as the CEO, I'm always pushing timelines, but I'm also very cognizant of the fact if you push scientists too much, you may not get the product you want. So I put the right amount of pressure on them, saying we have to hit these timelines that we have internally. We want to make sure we continue to progress. Now, COVID's dissipating a bit, so we're getting people enrolled in studies a lot more efficiently than we did, let's say, in January and then the end of last year. So that's one good thing is patients become more willing to participate in some of these studies. The partners we're looking at are very excited about the way we're progressing here. So while I can't give you a definitive timeline, I can tell you I'm doing everything I can to get the highest quality product on the market as fast as I can. but not to the point where I disrupt the scientists from doing the work that they do, which is so important.

Okay, that's very helpful. Maybe just going back to the quarter, I was hoping you could unpack the Q1 performance in a bit more detail. Can you detail where you are seeing the most success in driving the record of advice volumes? Is it demand coming from existing customers, or is it due to new practices coming online? And just along these lines, I'm also curious if you have seen the benefit of a catch-up in volume as patients perhaps just delay visits due to COVID-19 are returning to the office.

Yeah, I get the comment about the catch-up in March since it was a record month, but the whole quarter was a record, 29,029. So while the whole quarter really did well, and that shows the power of the solutions that these tests provide, the key metric there that you're asking was, though, how many physicians across the country wrote. And the record number of ordering healthcare providers was an indication that we grew around the country, 1,763 in the first quarter, with, again, 99% stickiness. So we grew everywhere. You remember that Texas was shut down for, what was it, like two and a half weeks in February, but those doctors came back as well as all the other doctors in the country. So what we're finding now, Chris, is that doctors understand CBCAPS technology, they understand they have a real issue giving a definitive diagnosis to especially disease like lupus, and that our tests It's a very convenient one blood draw that tells you whether they got lupus and what other connective tissues they may have that overlap. So we're hitting the doctors with a very convenient, high-caliber test for their autoimmune patients, and it's coming from all over the country.

Okay, great. Last question for me. I think you talked about this in your preparer remarks, but could you just provide us a bit more detail on the expanded sales force and the inside sales team? How are those tracking relative to your expectations? Thank you.

Yeah. Oh, no problem. So, yeah, we expanded the sales force. We now have 63 territories as of March 31st. And that allowed us to split actually some pretty big geographies that got a little unwieldy for one rep. And that's a high-class problem when you had to have two reps in a city. And it also shows the growth of it. Those representatives are having impact. Now, we used to say it takes five months to pay for yourself. What we're seeing now, because people know about the test, that that could be a lot faster. So in two quarters after we hire the new reps, we anticipate that they should be paying for themselves and then expanding it. So that's a really good thing about the expanded territory. It gives us enough reach and frequency out there to cover most of the territories that we wanted to cover at this point. Now, inside Salesforce is new to us. And I'll tell you, Chris, I was suspicious about how well they could be. I don't know if it's COVID or what, but they've really been able to capture a lot of physician calls, doctors that are just too busy right now with the bullets of patients coming back. Our inside Salesforce is able to reach them, make sure they have the kits, the samples, as whatever they need to be able to conduct their practice. We'll continue to monitor that, but early indications say that this probably will not go away post-COVID because they are having a great extension of our existing sales force and reaching into these white spaces that, quite frankly, you know, you're not going to put a representative perhaps in Alaska for us right now or some other places, but they can reach there, and they can reach there and hit a lot of volume call and deliver a really strong core message. So early success. We'll continue to monitor it, but I don't think it's going to go away, Chris. I think even post-COVID, companies have now learned that this is a very cost-effective way to increase the reach and frequency of your sales team.

Great. Very helpful. Thanks for taking my question. Thanks, Chris.

Our next question comes from the line of Kyle Mixon with Cancer for Jill. You may proceed with your question.

Thanks. Hi, guys. Thanks for taking the questions. Congrats on the nice quarter. So I want to start with the all-time record volume in March. Just want to understand that that's like a run rate. If you saw that in April, seeing it in May. And just like for background, what I'm thinking is like last week on a reading or in this call, they mentioned that 60% of rheumatologists intend to increase their prescribing of buccal aspirin in the next three months. And so I'm wondering if you're expecting the kind of same level of increasing activity at the back end of the year and even the second quarter as well. Thanks.

Yeah, so yes, we are seeing consistency in April. We're very pleased with our April number. I'm looking forward to being able to share that in more detail for you. So it did carry through as far as just continuing. Doctors can continue to write the product and come back into practice. The 15%, I believe you said it was for Veloxosporin. Of course, they're coming off of the zero or close to it. So the percentages are a little wonky. for them versus us that does 29,000 orders. But we are going to see more doctors coming back to work and practices opening up. I did read a report just recently that said that not all offices are open. There's one thing really important to remember about these rheumatologists, too. They have a capacity limit, you know, 10 patients per day, you know, maybe 11, but that's a capacity limit. So when these bolts of patients come back, what they really need is the most convenient way to test them and get them out of the office and render a decision as quick as possible on their disorder. And I think that's where we come in the best, because that's what the doctors really like. They can write one CTD test and get the best lupus test, 11 generic markers, instead of doing serial testing and having that patient come back over and over again. So I'm expecting us to continue to do well throughout the year. There's no doubt we have a solution here. I think the real key metric here, Kyle, 99% stickiness. That means when the doctors write our product 11 times or more, the chance of them writing again is 99%. That's an important metric because doctors don't write something that they truly do not see the value of. So we think we have the right solution, and we expect it will continue COVID or not. You know, COVID does not cure lupus. These patients will be back in the office, and they'll need a test to make sure they have the disorder before they put them on these expensive biologics.

All right. Thanks, Ron. That was helpful. And I wanted to also ask two questions about the Allegheny partnership. First of all, I was wondering if basically just why those patents weren't originally acquired by Exogen from Royalty Pharma in Cyprus a few years ago. I'm just kind of thinking, like, what is that lab in Pittsburgh just working on these patents, like, the whole time and just kind of independently? And then a second note I wanted to ask was, Are these potential assays, they're going to be developing, are they going to be run using flow cytometry, or is that kind of like part of the multi-omics strategy, or could another detection platform be used for those?

Great question. We are really excited to work with Allegheny. They are a huge center of excellence. for autoimmune. So you want to partner with these huge centers of excellence. And for us, Allegheny is ideal. Dr. Ahern is just an amazing scientist. Dr. Sue Manzi, again, just a key opinion leader for around the world, really. So being able to partner with these thought leaders and with an institution that is so focused on autoimmune is really key for us. These new markers that he's finding, because he's always tinkering finding new things, have different utility. We are examining each one of those for what these fragments will mean. And whether we use flow cytometry or some other technology or even something even more advanced, that's all the things we're looking at at this point with these assets. Will it be part of the multi-omic processes that we're putting together? Could be, Kyle, because what we're looking at is adding the RNA marker to any of our protein markers. RNA tells you what's going to happen. Protein makes it happen. So when you have the two together, it just gives the doctor a more complete story of where that patient is. So Center of Excellence, outstanding. Key opinion leaders, love it. And the fact that they have new technology, and they're always tinkering with new stuff. So it's good for us to be with the Center of Excellence because we're getting the first look of everything that's new that's coming. One more thing that comes out of Allegheny, which I got to tell you, We live with well-characterized blood bank samples. That's important for any diagnostic company you cover. So working with Allegheny, we feel we'll get very pristine biobank samples for us to run our test on and have the most accurate test with the highest sensitivity and specificity needed for the doctors.

That was great. That was awesome, Ron. Thanks a lot. Two really quick questions for me. So continuing with the multiomics theme, should we be expecting any milestones this year, like studies or partners potentially announced? Obviously, I don't get too detailed. I don't want you to go there. But should we be on the lookout for anything upcoming?

Well, we're pushing to get a lot done. You're right. I can't share every detail with you. I can tell you that our team, we've ramped up our R&D team. We've got all the right equipment. We're working with the right partners. And stay tuned, Kyle. You're going to hear good news. While I can't lunar land on a day, I'm really confident with everything I'm seeing there. And if you want to think of a time frame where maybe some of this stuff will come out, you know, ACR, the American College of Rheumatology, is one possible area. The other possible could be early next year. And while I can't lunar land on a day, again, I'm not going to force my scientists to do anything that's going to hurt the asset. I'm pushing as fast as I can without hurting the asset, but I'm really excited about the team we put together and what I've seen so far. So stay tuned, Kyle. You'll get more information on that as it rolls out.

Perfect. Thank you, Ron. And Kamal, on the test and revenue guidance, how are you thinking about the mix between the Via CTD and other test revenue, just to the extent that you could share?

Yeah, Via CTD continues to be our flagship product. It makes up approximately 85% of the testing revenue. So going forward, we anticipate Monitor to continue to grow because that's an annuity. So that one might grow at a little bit of a faster pace because you have patients that might take it four, six, eight times a year. But CBD continues to be our flagship, especially with new writers that we bring on board. So as you know, we did add, we had a record for a number of ordering healthcare providers. They usually start off with our by CTD test.

Okay, that was great. Thanks, guys, for taking the questions. Thanks, Kyle.

Our next question is a functional one of Mark Massaro with DTIG. You may proceed with your question.

Hey, guys, this is Vivian on for Mark. Thanks for taking the questions. So kind of off of your payer wins last quarter, just wanted to see if you could touch on any updates on commercial payer traction and what it is that some of the big outstanding plans need to see, perhaps new papers or publications?

Okay, great. Thanks, Vivian. Yeah, we continue to work on that. As you know, we got the fourth largest blue high mark. We got TRICARE now. We got TRICARE East and TRICARE West, which completes the story there. And we picked up, obviously, the Fosse's in California, as well as the deal with Sonora Quest out of Arizona. So we continue to move the ball forward. We're also doing a lot with these major hospital centers like Tufts and Brigham Women's, as well as Emory and St. Charles. So we're working on all fronts. We feel the dossier tells the story of a better test that can more timely, accurately solve diagnose these patients as well as be cost-effective. So we feel the dossier really tells the story, and we're getting in front of as many of these payers as we can this year. As you know, they have certain allotments at times where they look at different assets, so we're in queue with a lot of the payers, and we continue to push that forward. What they're really looking for for us is longitudinal studies, and we got a very good portfolio of information to share with them once we have our meetings with them. So the keys there are we're continuing to gain momentum. We have what we feel is the right asset. And something I'll share with you, Vivian, is this COVID, if you're going to look at something that came from that, was this disparity issue really got elevated as far as women and people of color. Well, eight out of 10 lupus patients are female. And lupus affects women of color disproportionately higher and more aggressively than Anglos. So we think that, along with the fact that we got the right test, should help us with these payers so they can help more patients and solve this disparity issue that's taking place right now.

Awesome. Thanks so much. And just a quick follow-up maybe for Kamal. If you could potentially unpack the 2021 guidance a little bit, Is that back half weighted at all?

Yeah, what we've said in the past is we do anticipate to continue growing. So I would anticipate that every quarter builds upon itself. So based on your comment, yes, it would be more heavily weighted towards the back half because we're going to continue growing and every quarter should be larger than the preceding quarter.

Okay, gotcha. That's all for me. Thanks so much for speaking to me.

Thanks, Vivian.

Our next question comes from the line of Paul Knight with KeyBank. You may proceed with your question.

You might be on mute, Paul. Yeah, sorry. The 67 reps, was that the total here at the end of Q1?

So that was the end of the The expansion went from 60 to 63 territories, and we have 60 – we have 66 to 63 – sorry, we're ready. 56 to 63 representatives. Territories.

Territories. 56 was the end of December, correct?

Yes, that's correct for the number of territories that we had. We announced an expansion of territories to 63 in Q1. And that was an announcement. We started to hire them in Q1. So we ended Q1 with 60 reps. Okay. Covering 63 territories.

Correct. And then with this multi-omics research that you're embarking upon, Ron, does that ultimately mean – In RA, could there be the possibility of a companion diagnostic as well, or does that make sense?

Yeah, it certainly does. I mean, there are products in the pipeline for autoimmune that are interferon-based, if you will. So could it be eventually down the road? I think what you're seeing from pharma, though, they're moving away from companion diagnostics, and they're talking about things that are complementary diagnostic, no pun intended since we're a complement company. But that means that it doesn't have to be in the package insert, but there can be studies alongside that show how our test can identify the right patients where that product will work most efficiently without having to put it in the package insert, which means you have to do the studies and go back to the FDA and so forth. So I'm seeing more companies move toward that complement rather than companion diagnostic for their test. But to answer your question, what we're going to do is we're going to develop the best multi-omic test. And as you can tell, farmers working on these highly sophisticated products do. So it should be very well doved in with their launches as we are able to identify the right stations for these expensive biologics. Okay, thank you. Thanks, Paul.

Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to send this call back over to Mr. Ron Rocco for closing remarks.

Yeah, thanks everybody for joining and calling your continued support of Exogen. We really feel like we're doing a great job here helping patients, and I think that's the part we always have to remember. Our philosophy is if you put patients first, the quarterly numbers and the dollars will come together, and that's our focus. As we always say here, if you help one autoimmune patient, you may not change the world, but you'll change the world for that one autoimmune patient, and that's what we stay focused on. We have high-quality science, great IP, And quite frankly, we have a channel here which we dominate, and that's the autoimmune channel, which is very big. And with rheumatologists really preferring us versus any other company that they work with, that makes us feel outstanding and we're in the right position. Again, thank you for the call. We appreciate it. We look forward to having this again for our Q2 earnings call. Take care. Have a wonderful day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your evening.