Exagen Inc.

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 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 risk 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 risk and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission including our Form 10-K for the year ended December 31st, 2020, and subsequent filings. The information provided in this conference call speaks only to the live broadcast today, November 10th, 2021. Exogen 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 Exogen.

Thanks, Ryan, and thank you to everyone joining the call today. As always, we appreciate your continued support of Exogen. In the third quarter of 2021, we achieved a record of 1,969 total ordering healthcare providers and a record of 714 adopters for our flagship Advise CTD and Advise Lupus tests. Our revenue for Q3 was $12.3 million, which included 31,742 advised CTD tests delivered. As our sector has experienced, sequential testing volume was impacted by decline in patient volume due to the Delta variant, patient referrals from primary care specialists, and summer seasonality. As a reminder, most patients are referred to specialists like rheumatologists from primary care physicians. Once again, we saw a very high retention rate of 99% among adopting healthcare providers from the prior quarter. We believe this high retention rate and continued increase in the number of ordering healthcare providers speaks volumes to the value our customers recognize in using advised testing to accelerate the historically slow and frustrating process of clinically diagnosing autoimmune disorders. We remain highly engaged and focused on payers to further expand our coverage and in-network status. We recently signed an agreement with Inland Empire Health Plan, or IEHP, to make advised diagnostic testing available as an in-network benefit to their 1.4 million members. IEHP is the largest not-for-profit Medicare Medicaid plan in the country, and their membership reflects a population that is at higher risk of lupus and autoimmune diseases. This win was not only significant for Exogen, but also meaningful for the new patients that now have in-network access to advise testing. Advise tests are now available to approximately 68.9 million in-network lives across the U.S. As our increasing number of ordering healthcare providers illustrates, our tests provide a much-needed service in rheumatology. We expect our in-network coverage to continue to grow, increasing our footprint and benefiting average selling price. I'm also happy to announce that we have entered into a pilot agreement to supply Advise MTX to a partnership between CVS and Aetna. The goal of the pilot is to leverage the use of Advise MTX as a critical personalized medicine tool for rheumatologists to optimize methotrexate therapy for the treatment of rheumatoid arthritis, or RA. Despite the advent of multiple new biologic therapies for RA over the past few decades, methotrexate remains a cornerstone therapy. Patients differ in regards to how they metabolize methotrexate, making the appropriate dose selection difficult. And AdviseMTX helps keep the patients in the necessary therapeutic range. While we own the exclusive rights to the intellectual property powering AdviseMTX, this quarter we also improved our future financial position by buying out the remaining royalty. I'd like to now switch over to our research and development initiatives. Over the past decade, we have successfully developed and commercialized 10 tests in rheumatology as part of our Own the Hilltop strategy. According to our market research, there remain significant unmet needs in rheumatology for advanced novel clinical tests. Through the use of proceeds raised in Q1 2021, we are focused on investments in R&D, including multiomics, to develop and deliver our pipeline products and dramatically expand our total addressable market across multiple indications. We are very proud of our world-class research and development team that had eight abstracts accepted by the American College of Rheumatology's premier annual conference, which concluded yesterday. We believe these are quality abstracts that will further inform our customers on the utility of our test. I'd like to highlight one of the key abstracts, as we believe its future contributions to the organization will be very meaningful. The abstract title, the incremental clinical utility of a multi-analyte assay panel with cell-bound complement activation product versus traditional ANA testing strategy for the diagnosis and treatment of SLE further demonstrates the clinical utility by leveraging an electronic healthcare record database consisting of approximately 22,000 advice-tested patients and 22,000 patients tested with traditional antinuclear antibody testing. In the study described in the abstract, advised lupus was shown to be significantly more clinically actionable than the traditional anti-nuclear antibody testing approach. In this paper, patients testing advised lupus positive were approximately five times more likely to be diagnosed with lupus and two times more likely to start on a lupus medication than patients testing positive with the traditional ANA testing approach. The cohort for this study was more than 100 times larger than our prior clinical utility studies and should further strengthen our position with payers as it continues to reinforce the efficacy of our testing portfolio. Our scientific team has also been hard at work on several initiatives. In regards to the launch of our fibromyalgia and thrombosis test, the better study, which we announced last quarter, is estimated to be fully enrolled by early 2022. We look forward to sharing more details with you in the future. We can tell you that the patient population for fibromyalgia has been historically underserved due to the lack of reliable diagnostic tests and consists of approximately 12 million patients, representing a massive opportunity to improve patient outcome and deliver cost-benefit savings to the healthcare system. We are also working to enhance our SLE monitoring tests with additional lupus nephritis markers to address the approximately 50% of SLE patients that progressed to developing potentially deadly lupus nephritis. Recently, GSK with Volumimab and Arrhenia with Valoxosporin received FDA approval for lupus nephritis indication. We feel enhancing our SLE monitoring test will assist the physician in regards to when to move the patient and how to monitor the patient on these expensive therapies. Our clinical lab expansion continues on schedule. and is expected to be completed by Q1 2022. And our R&D lab expansion is expected to be completed by Q2 2022. It's important to note that our clinical lab will include molecular and multi-omics capabilities, which will further increase our R&D efforts in molecular and multi-omics. We continue to grow our scientific team with exceptional talent, including the recent hire of Mingcha Li, PhD, who previously worked at ArcherDX. Dr. Lee is our Chief Technology Officer and has extensive history in developing molecular diagnostic tests. We are pleased to have Dr. Lee join us as he leads the development of our RA pipeline initiative. I will now turn over the call to our CFO, Kamal, to discuss our financial results.

Thank you, Ron, and good afternoon, everyone. Total revenues in the third quarter of 2021 were $12.3 million, an increase of 14% over the third quarter of 2020. Total revenues were driven primarily by testing volumes for VICE CTD, including Avizalupis, which grew approximately 21% year-over-year to 31,742 tests delivered in the third quarter of 2021. As Ron mentioned, the number of ordering healthcare providers was a record, with 1,969 in the quarter compared with 1,665 in the third quarter of 2020. Avai CTD test revenue was $9.9 million in the third quarter of 2021 compared with $7.4 million in the third quarter of 2020. Other testing revenue was $2 million in the third quarter of 2021 compared with $2.1 million in the third quarter of 2020. Other testing volume generally correlates with Avai CTD volumes. However, year over year, other testing products did not have the same positive ASP impact that we saw with Avai CTD. As Ron stated, we're working on adding lupus nephritis markers to the Avize SLE monitor test, which we believe will increase the reorder rate for monitor patients and increase the ASP of the annuity product. Our Avize CTD and other testing revenue resulted in testing revenues of $11.9 million in the third quarter of 2021, compared with $9.5 million in the third quarter of 2020. In accordance with mutual termination of the Symphony Agreement, Revenue related to Symphony was $0.4 million in the third quarter of 2021. Costs of revenue were $5.5 million in Q3, resulting in total gross margin of 55% compared to 60% in the third quarter of 2020. The decrease in gross margin percentage was primarily due to the decrease in the Symphony co-promotion revenue recognized in Q3 2021 as compared to Q3 2020. Operating expenses in the quarter were $18.8 million compared to $14.6 million in the third quarter of 2020. The increase was primarily due to the employee-related expenses, including stock-based compensation associated with the overall increase in headcount, an increase in the cost of revenue due to the increase in testing volumes, and an increase in R&D expenses. The net loss in the quarter was $7.2 million compared with $4.3 million in the third quarter of 2020. Looking at our balance sheet, cash and cash equivalents as of September 30, 2021 were approximately $106.8 million. We continue to make investments into the company to fuel growth. We recently announced a refinancing of our debt with Innovatus Capital Partners. The amended agreement refinances our existing $27.2 million of debt to a loan at 8% interest of which 2% is paid in kind and extends the term for five years. This lowers our interest rate and extends out the interest-only payments. As previously stated, we mutually terminated the Janssen Agreement for Symphony and have a remaining $0.2 million in revenue to be recognized in Q4. For full year 2021, we reiterate our revenue guidance of approximately $47 million to $49 million and now anticipate coming in at the lower half of the range. We will now open the call for questions.

Yes, thank you. At this time, we will begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster. And the first question comes from Kyle Mixon with Canaccord.

Thanks. Hi, guys. Thanks for taking the questions. Congrats on the nice results. So, Ron, I just wanted to start with a bigger picture question. If you could think back to, you know, the years before COVID, so 2019, 18, 17, 16, could you just reflect on how activity and behavior among rheumatologists has changed, I guess? And specifically, I'm wondering... if you've seen any, you know, systemic kind of long-term changes due to the pandemic that may have affected ordering of your test and how you might market going forward, I guess. Thanks.

Great question, Kyle. And we did a survey which really illustrates what I'm about to share with you. Pre-COVID, if you will, the doctors would, the primary care doctors would refer their patients to specialists like rheumatologists. And I think every specialist that you cover The diagnostic company will say the same thing. With COVID, the primary care became a bottleneck. In other words, if 90% of the patients that go to rheumatology are from referrals for primary care, it slowed down at the primary care level. It's important to note, COVID does not cure lupus or connective tissues. Those patients are still there. They were just separated in time as they didn't want a lot of people in their waiting room and they were putting a lot more time in between seeing patients. So I would say the difference between 2019 and during the pandemic year would be that bottleneck of primary care on those referrals. Again, it's once those patients come in, as you saw with their adopter level, they write our test. But it is a patient flow activity that we noticed was most impacted by the pandemic. Okay.

Makes sense. Thanks for the color. And I had a few questions about the new partnership with the pharmacy chain and Dolores Payer. Congrats on that. I guess CVS said that. First, can you just remind us how you view that market opportunity for the Avize MTX test? And then I guess if you could provide any more details on how CVS and Aetna will interact, I guess, in this collaboration. And then assuming the pilot is successful, would you shift your strategy away from DXRX and maybe you'll focus on these types of partnerships going forward rather than therapeutics?

Yeah, I'll take the last question first. I don't think these are mutual exclusive. We're built to be able to do them both. It's not one or the other. We've got the capital. We're well capitalized. We've got the products to do both. On the first part of your question, we love this pilot. It's with Aetna Cigna. It's terrific. They're looking to control cost of these expensive biologics. And obviously, our methyltrexate, which keeps patients in the therapeutic range, is a great vehicle for them to accomplish their task. It is a one-year pilot, but we already kind of know how good this test is. And by the way, so do the people at CVS. They fully recognize that they just need to train the doctors better to be able to use MTX appropriately. This is truly personalized medicine, Kyle. Our test will tell you whether or not you can metabolize this product in the right way. And if you can, for really a couple pennies a day, you can take care of that patient adequately. for quite a long time before you have to or even need to put them on a biologic. So really excited about this. The downward stream success of this is really nice because as the pilot opens up, obviously Aetna being a very, very big HMO, there's going to be a lot of patients that will be attributable to this. Also, the doctors that are in a pilot are really getting familiar with the asset. What makes us even better is we don't have to worry about the phlebotomy charge. We're just doing the test. And as well as the fact that this also is an entry into a whole different population within CVS and Aetna for the MTX product. So excited about it, see a lot of upside, but we will not shift strategy. We can do both.

Okay, great. No, it sounds really promising. And I guess just one last question for me, staying on this kind of payer front. It was great to see that the number of recovered lives now, I guess the networked lives is at 70 million or so. Just looking ahead a bit, do you think that you'll add any more at the end of the year here? Or maybe you could comment on the payer pipeline or funnel heading into 22. And reimbursement decisions obviously seem to slow down in 21. I'm just wondering if you thought there could be a bounce back next year.

Yeah, again, great question, Kyle. So reimbursement, we've been in queue with a lot of the major payers, and they've gotten back to us. They haven't canceled the meetings yet. They postponed them because they have to worry about these COVID tests that they need to look at, as well as some other COVID-related assets. So, we understand that that's a big priority for the payers. But we've done everything they've asked us to do as far as fulfilling the dossier, the clinical utility, clinical validation. We have over 35 published studies and peer-reviewed journals with KOL support. there is really little or no evidence into what some of these doctors are doing today. So it's recognized by the payers that a solution to be able to control a little bit of the cost and even the behaviors that they're seeing at the physician level is to put a product like ours on there. So we're excited about it. We got the work done. I am fully confident we'll continue to move forward with the payers as we offer them a true solution for this demographic. Speaking of the demographics, what's been an upside to COVID, as you will, is the awareness of the diversity, the disparity that happens with women of color. Well, lupus 9 out of 10 are women, and it does affect women of color disproportionately high. So we want to make sure that the payers are aware of that. This is a great way to make sure that this disparity issue, at least for lupus and connective tissue, can be handled by the payer upfront and proactively buy them. So very confident we'll continue to move forward with more and more payer contracts. IEHP, by the way, was a big win for us. That was a good one. It's a Medicare, Medicaid plan, and it really illustrates the fact that this product offers a lot of value to these payers.

Yeah, it seems like you got some momentum heading into next year. Thanks for the time. Congrats again. Great. Thanks, Kyle.

Thank you. And the next question comes from Paul Knight with KeyBank.

Hey, Ron, congratulations. Thanks, Paul. We've heard from other companies and diagnostics that 3Q was a little more pronounced seasonally, do doctor holidays, et cetera. What did you see in 3Q? I mean, it was a great physician add to the total ordering, but what did you see seasonally?

Yeah, I mean, we had a good quarter. I mean, if you really look at the volume we had, our year-to-date number, you can see we're on track to really do well versus a pandemic year last year and versus 2019. I mean, we're well-positioned to do that. The seasonality that occurred this year, again, we did a survey, and what came back loud and clear was the fact that doctors for the first time in two years, or roughly two years, could take a vacation, and they did it. The patients, too. So August was a big vacation month for a lot of doctors. as they had the first time the window of opportunity to do that. But I want to, Paul, COVID does not cure lupus. Those patients are still there, and they're going to come in and see that physician. Now, they may come in a little bit more severe than they would have otherwise, but they're still there and they come in. Again, I'm very proud of our Q3 numbers, the fact that we had two pretty important records there with the number of writers and the adopter level, and that illustrates the power and the efficacy of the asset.

And then on the IHP agreement, did you say they were the biggest Medicare, Medicaid payer? And how does that cover life number compared to where we were in 2Q?

Well, it added $1.4 million, and the records show that it is the biggest Medicare, Medicaid provider. There's obviously some of the other plans have carve-outs with their plans, but IHP is important for a couple reasons. One is The Inland Empire is disproportionately Hispanic, and these are the people that could really benefit from the asset. I think they recognize the disparity in treatment, and that was good. There's also a hospital linkage there with Loma Linda, and those physicians were adamant with IHP that they needed to give coverage to this asset in order to help these patients. So, it's a bellwether plan. at $1.4 million, but more importantly, every other plan that has a carve-out for Medicare and Medicaid now knows that IEHP put it on. So what it does is it softens the road for future discussions with other payers. Thank you. Thanks, Paul.

Thank you. And this concludes the question-and-answer session. I would like to return it to Florida Management for any closing comments.

Great. Look, we've built a strong specialty franchise for sustainable success. Our current brands have proven out the ability to address connective tissue and rheumatology needs. Keep in mind that our robust pipeline will build on our current momentum as we continue to drive the science to be able to take on the challenges and issues facing doctors when they have to diagnose prognose and monitor CTD and rheumatology patients. We are pleased with the quarter and how we're doing so far this year, and we look forward to updating you in a full year during the next earnings call. Thank you for your participation and your support.

Thank you. The conference has now concluded. Thank you for attending today's presentation. May now disconnect your lines.