Exagen Inc.

Greetings, ladies and gentlemen, and welcome to the Exigen Incorporated First Quarter 2022 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, then zero. Please note this conference is being recorded. I would now like to turn the conference over to our host, Ryan Douglas, of Investor Relations for Exigen. Thank you. You may begin, sir.

Good afternoon. Thank you for joining us today. Earlier today, Exogen Inc. released financial results for the quarter ended March 31st, 2022. The release is currently available on the company's website at www.exogen.com. Ron Rocca, President and Chief Executive Officer, Kamala Dowie, Chief Financial Officer, and Mark Hazeltine, Chief Operating Officer, will host this afternoon's call. Before we get started, I'd like to remind everyone that management will be making statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements. All forward-looking statements, including without limitation statements regarding our business strategy and future financial and operating performance, including 2022 guidance, the impact of the COVID-19 pandemic on our business, our current and future product offerings, distribution and availability, 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 these risks 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, 2021, and subsequent filings. The information provided in this conference call speaks only to the live broadcast today, May 11th, 2022. 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 I will discuss our first quarter business highlights and give updates on our pricing, payers, and pipeline. I'll then hand over the call to Kamal, our CFO, for details on our financial results. As always, we appreciate your continued support of Exogen. In the first quarter of 2022, we achieved a record of 2,175 total ordering healthcare providers and a record of 761 adopters for our flagship Advise CTD and Advise Lupus tests. Our total revenue for the first quarter was $10.4 million, which included 30,903 Advise CTD tests delivered. As we mentioned during our call, in March, our testing volume during the first half of Q1 2022 was significantly impacted by the Omicron variant. As the quarter progressed, we saw patient referrals from primary care to rheumatologists gradually return to normal. And in March, we had an all-time record month for advised CTD volume. This is the seventh quarter in a row since COVID began that we achieved a high retention rate of approximately 99% stickiness. Also, during these seven quarters, we sequentially increased ordering healthcare providers and achieved record adopters in every quarter. We believe this performance speaks to the value healthcare providers see in our test and further strengthens our foundation for growth. Now to provide an update on our pricing and payer reimbursement. Our strategy with payers has always been to apply for a proprietary laboratory analysis code, or PLA code, once we began approaching 100 million in network lives. I'm happy to announce that the American Medical Association has issued Exogen a PLA code of 0312U for advised lupus, effective April 1st, 2022. This is a major milestone for Exogen that we believe demonstrates the effectiveness and proprietary novel aspects of our CBCAPS technology, which drives advised lupus. We also received pricing through our Medicare administrative contractor, Noridian. Medicare reimbursement for this code is $1,085, which is a significant price increase over the prior CPT code reimbursement amount of $295. Although the PLA code applies to advised lupus, we believe it will have a positive effect on both our ASPs and revenue, as well as gross margins, since advised CTD is comprised of advised lupus. We continue to make progress with payers and added three additional payers in the first quarter, two of which take effect in the second quarter. We believe with the addition of the PLA code and the fact that we are expected to have over 90 million in-network lives on June 1st, 2022, we are well positioned to enter into additional payer agreements. We look forward to updating you on our progress throughout the year. Turning to our AdviseRadar platform, this platform combines over a decade worth of scientific research by Queen Mary University of London and our AI technology. Over the past few months, we have made several investments, including essential bioinformatics hires and support of our AI and machine learning programs and equipment to further expand on this technology-driven platform. With these continued investments, AdviseRadar development remains on schedule for a clinical experience program launch later this year. As part of our AdviseRadar launch preparation, we commissioned a market research to conduct a blind product concept study focused on Radar's utility and the use of precision medicine by rheumatologists. From the 131 responding rheumatologists, we learned the most challenging aspects of rheumatoid arthritis treatment is the inability to predict therapeutic response. Our Advise Radar molecular test will provide pivotal insights and directions on how newly diagnosed patients will respond to the DMARTs, like methotrexate, and biologics. Our Advise Radar 2 molecular test will address those patients that have been on therapies that are no longer getting the adequate control of their disease. Both of these tests add clarity to the physician's empirical evaluation when determining which of the very expensive therapies to prescribe to patients. To close out the market research, 80% of the responding rheumatologists indicated they strongly believe personalized medicine will guide RA treatment decisions in the future. This further strengthens our belief that the AdviseRadar platform is well positioned to address the demands for therapeutic drug response beneficial for both RA patients and physicians. We believe this will also address payers' concerns of the wasted $18 billion in annual RA therapeutic spend for RA treatment. For our other pipeline products, the better study for fibro continues, and we anticipate a readout next year. For the next iteration of Advise SLE Monitor, we are expanding the indication with markers for lupus nephritis and commercially launching on 2023. We continue to add necessary technology and personnel for our R&D organization to enable successful conclusion of these assets. We continue to execute on our business strategies and are looking forward to making our tests available to more patients by driving both adopting healthcare providers and expanding our payer coverage. We believe Exigent's track record will serve as a foundation for us to develop and commercialize our innovative pipeline and intersect science and technology. I now will turn the call over to Kamal.

Thank you, Ron, and good afternoon, everyone. Total revenues in the first quarter of 2022 were $10.4 million. Total revenues were driven primarily by testing volumes for Avive CTD, including Avive Lupus, which grew to 30,903 tests delivered in the first quarter of 2022, despite the disruption caused by the Omicron variant through mid-February 2022. The increase was partially offset by a decrease in average reimbursement per Avai CTD test due to payer mix. As Ron mentioned, the number of ordering healthcare providers was a record with 2,175 in the quarter compared with 1,763 in the first quarter of 2021. Avai CTD test revenue was 8.7 million in the first quarter of 2022 compared with $8.5 million in the first quarter of 2021. Other testing revenue was $1.7 million in the first quarter of 2022, compared with $1.8 million in the first quarter of 2021. Positive revenue were $5.8 million in Q1, resulting in total gross margin of 44%, compared to 55.5% in the first quarter of 2021. The decrease in gross margin percentage was primarily due to an increase in cost per test, a decrease in average reimbursement per by CTD test related to payer mix, and a decrease in revenue resulting from the Janssen Agreement. The testing gross margin was 44% in the first quarter of 2022 compared to 54.2% in the first quarter of 2021. Operating expenses were $20.1 million in the first quarter of 2022, compared with $16.2 million in the first quarter of 2021, due to increases in employee-related expenses from headcount growth, including stock-based compensation and recruitment expenses, cost of revenue due to the increase in testing volumes and cost per test, research and development costs, as well as overall increases due to inflationary factors. For the first quarter of 2022, our net loss was $10.3 million. compared to a net loss of $6.2 million for the first quarter of 2021. Looking at our balance sheet, cash and cash equivalents as of March 31, 2022 were approximately $89.8 million. As Ron mentioned, we're expecting to see a positive impact on our ASP revenue and gross margin from testing through Medicare going forward. This was due to obtaining the PLA code and subsequent reimbursement amount which was effective April 1st. Medicare Advantage has adopted the code, but we will not see the benefits until they fully integrate the new pricing. As with all PLA code transitions, there is a potential for disruption when working with non-Medicare payers to adopt our new code. This may have a short-term impact on non-Medicare reimbursement, which could offset any positive impact that we would realize from an increase in ASP for Medicare. For full year 2022, we are raising our guidance. We now expect revenue to be in the range of $53 to $55 million.

We will now open the call for questions. Thank you. We will now begin the question and answer session.

To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then 2.

And at this time, we'll pause momentarily to assemble our roster.

And our first question will come from Brian Weinstein with William Bleer. Please go ahead.

Hey, good afternoon, guys. Thanks for taking my questions. How are you doing? So congrats on the POA code. Just trying to, again, go through, Kamal, what you were saying sort of at the end there. I just want to understand the practical impact of this increased pricing. So what percentage of your business is CMS now that it would eventually, that would benefit from this? And I'm also curious about you know, how this pricing impacts discussions that you have with other payers going forward. And Kamal, can you just repeat what you were saying about, again, the practical impact here? I understand that as you're transitioning that there could be a little bit of disruption, but are you suggesting that you will not see any kind of net benefit from this this year, or is that the reason for the guidance raise? It wasn't clear to me. So just a few questions on that, and then I'll have some more after.

Sure, Brian. I'm going to take the first part of that question, and then Ron's going to take the second part of that question. So approximately 20% of our revenue is coming through Medicare. And so Ron will talk about the short-term disruption and the long-term positive impact this will have. And to answer the last part of your question, yes, this is part of the reason why we're taking our guidance up from 51 to 53 to 53 to 55 million. Yeah, so the

The disruption of a PLA code is well established. What it is, Brian, it's a unique identifier on your asset. So where you're doing CPT code stacking, which is what companies should do until they get to a third of the nation, and we followed that pretty much to the letter. We're approaching 100 million lives, so now is the time to get that PLA code, and we've rapidly got a significant price of $1,085. Now, this is what happens while you get into the Medicare, strict Medicare. The advantage Medicare takes longer. You have to do basically hand-to-hand combat. You have to go to each payer and talk about the carve-out and get them to increase the price there. But you now have a unique identifier for any payer. And if you can keep in mind what happens there is the bill goes in, some administrator sees the code 0315. and says, well, we don't pay for that. They'll pay for all the other markers that we have that we stack, but not for that one. Our job, of course, is to get more payer coverage with this. This is an important factor, though, because even though you ebb, the long-term success is there. Obviously, with a price over $1,000, it's significant, and it really speaks to the value that Neridian put on the asset when you see that. But we'll have to keep in mind that when any company does this, the first thing that's happening is you've got a unique identifier for payers to target you for non-payment. That will go away over time and adjust, but it really is an ebb and flow. Anything else you need there, Brian?

No, I think, and there's no question that CTD is covered in this because the lupus markers are kind of buried inside of that, so there's no issue on that, correct?

Correct, yeah. The other markers get paid. The lupus product itself with the algorithm we'll have the $1,085. And of course, that is inside and surrounded by the other 12 markers that surround the asset for CTD.

Okay. And then you guys continue to make progress with ordering clinicians and adopters. All those are turning in the right decision. Just curious if you have any insight on how kind of the share that you're getting inside of clinicians' offices is at this point. So, you know, you're adding new docs, you're getting better adoption, but, you know, what type of overall penetration do you see on average, typical, or, you know, if you want to talk about the extremes at the high end, at the low end, what kind of penetration are you getting inside of these offices at this point?

Yeah, great question. Now, unlike pharmaceuticals, there is no market research syndicated data I can buy from Walters Clore or IMS. It just doesn't exist for testing. And the reference labs, of course, are not going to share that with you either. But what we do know is that we've done well over 600,000 orders since launch, and that's substantial. So we know that nobody does, you know, 600,000 of anything, especially in a tight market like rheumatology, unless you're adding significant value and you are being adopted. The second part of this is that not every rheumatologist is created equal. There is a group within that 4,500 that's self-anointed them lupologists. Now, there's no such thing as an AMA lupologist, but they That's all they want to do is see those lupus patients. We feel like we have the adopters because there's such strength, over 35 peer-reviewed published studies on our asset and a lot of KOL support. So I can't give you a market share number because one does not exist that I can actually stand behind on a day-to-day basis from syndicated data. I can tell you that we are a dominant force within the lupologists and we are really growing in the general rheumatologists as well. Now, there is also that group that, you know, all they want to do is infusions and RA, and we'll be able to address them with their advised radar asset.

Understood. Okay. And then, last one for me. Kamal, we have revenue guidance, but can you give us some thought about how we should be thinking about spending through the year in cash burn? Thank you.

Yeah. So, as Ron mentioned in the prepared remarks, we have a lot of exciting stuff in the pipeline. So, R&D expenses. will continue to increase quarter after quarter sequentially as we continue to invest in the personnel and other items in R&D to advance these products through the pipeline. For SG&A, we really do have the infrastructure built. As we've mentioned on the past several calls, we're at 63 territories, and we did supplement that with an inside sales team. That's been in place for a while, and those costs have been fully annualized. So, if you look at current quarter, you can pretty much use that for the next few quarters. So, it's just the inflationary increases that are going to occur this year for SG&A.

Okay, thank you. Thank you, Brian.

Again, to ask a question, please press star, then 1. Our next question will come from Kyle Mixon with Canaccord. Please go ahead.

Hey, thanks, guys, for the questions. Congrats on all these updates today, and congrats on the quarter. Maybe just thinking about the guidance, I guess. I mean, just was wondering any commentary on, like, year-over-year volume of revenue growth in March specifically. I know it was, like, a record month. Just looking at the guide, it implies year-over-year growth of like 18% for the period between the second quarter and the fourth quarter. And obviously, the first quarter has that 15% growth, so clearly impacted by Omicron. It would just be helpful if you could provide any commentary on, like I said, year-over-year volume or revenue growth exiting March or maybe for the full month itself. Thanks.

Yeah, thanks for the question, Kyle. We feel great about the volume trend. As we mentioned, March was an all-time record. So with guidance, it really becomes more of a ASP story because the long-term impact from the PLA code is a great opportunity. But we're going to have that short-term disruption potentially from the insurance payers. We're going to work with those payers to minimize the disruption in the short term. Because long-term, this is a great outcome. But there are many organizational systems we're going to have to work through. And this might take some time. But as we mentioned, long-term, this is a good outcome. And this is a big part of the reason why we're taking our guidance up this quarter.

All right. Thanks, Kamal. That was helpful. And I guess on that note, I actually wanted to talk about ASP and test per provider in the quarter. I mean, it looks like both declined year over year, which I guess understandable on the ASP side. You mentioned payer mix, test per provider. It's not clear to me what happened there. I guess Omicron Can you walk through why these, I guess, decreases occurred and maybe like the expeditions for the full year, like the cadence kind of as we go ahead here? And just maybe on ASP, like obviously it was like 280 in the quarter. Given all these dynamics with the new PLA and things like that, like do you think that this could remain 280 or maybe fall below? Because obviously we want to get back to like 300 or so, right? So that'd be helpful.

Sure. So in Q1 of 21, our ASP on a buy CTD was around $294.00. we saw a $13 decrease to Q1 of 22 to $281. And as you mentioned in your question, yes, this was in regards to payer mix. So there's obviously a wide range of ASP between payers. So larger volumes or smaller volumes for many payers could have that swing to cause that $13 decline. To address the second part of your question, yes, we do anticipate our ASP to increase from this PLA code. As we mentioned, the reimbursement for Medicare is going to $1,085. Medicare allowable prior to this was $295. Now, that's for the vice lupus test. Keep in mind, as Ron was mentioning, there's the 12 additional markers to make it a vice CTD, and there's still additional 200, approximately $200 reimbursement on those additional 12 markers through Medicare. So we do anticipate that in each quarter we should see our ASP increase. And the reason why I say each quarter is because of the short-term disruption with the commercial payers.

Okay. Sounds good to me. Let me just ask a final one, I guess, maybe for Ron. And you were just mentioning this a moment ago, you know, around the whole impact from the PLA code on maybe your ability to obtain new payer coverage. I think this was asked, but, like, I'm not sure if the answer was totally clear. Is this a sign of maybe like validation for Levi's lupus test, and maybe that could push you over the finish line with some of these pairs? And, you know, you've used the CBT stack for years. What makes you the most excited about the new code?

Yeah, so this is very meaningful because not only is it a PLA code, which is important, but getting priced as fast as we can from our MAC and Iridium at the $1,085 is significant and really shows It shows the value of the test when they took it to that price. And, of course, now, you know, obviously the next step is the LCD. So this is a path that we know really well, and we're monitoring it as we should. So the impact with other payers is an endorsement, but we call them payers, but they, you know, you've got to get to them. You've got to be able to get them there and have the discussion. We think that this helps us along with our current studies. Again, over 35 published peer-reviewed studies in top journals and more studies coming. We think we have all the evidence necessary to prove that when it comes to diagnosing lupus correctly and accurately, we should be part of the story for these physicians. We do have the physician support. What excites me the most about it is we're continuing to do exactly what we said we would do. And even in the face of Omnicron, which slowed us down as far as getting everything done, it did show the fact that we continued to grow volume, we hit our mark of roughly a third of the nation before we filed, and we did get a price that we really appreciate. So now as we approach these payers, We do have this going in our favor. It can only help us. They're not going to be fast to make these changes because traditionally I've witnessed this. They can get away with paying $300. They're going to try to as long as they can. But they're going to have to answer a lot of questions since we do have the pricing from Medicare.

Okay.

Perfect. Thanks, Ron. Thanks, Kamal.

Thanks, Kyle.

This concludes our question and answer session. I would like to turn the conference back over to Ron Rocca for any closing remarks. Please go ahead.

Sure. Thanks, Chuck. I'd like to point out that May is Lupus Awareness Month. Every year we partner with the Lupus Foundation of America out of Washington, D.C., and we dedicate each week of the month to a different initiative to help promote the awareness of this terrible disease and the work being done by the lupus community. I think it's always important to remember that the work we do has a patient on the back end of it, and that's really what we're focused on. We know the numbers, the dollars, and everything will follow as long as we put patients first. We are a discovery-driven company, but we're a patient-first company first. Thank you, everyone, for your time and effort. Really do appreciate your support of Exogen.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.