Exagen Inc.

Good morning, ladies and gentlemen, and welcome to Exogen Inc. Q3 25th Earnings Conference call. All participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please key in star and then zero on your telephone keypad. Please note, this event is being recorded. I will now hand you over to Ryan Douglas. Please go ahead, sir.

Good morning, and thank you for joining us. Earlier this morning, Exogen, Inc. released financial results for the quarter ended September 30th, 2025. John Abali, our President and Chief Executive Officer, and Jeff Black, our Chief Financial Officer, will host this morning's call. A recording of today's call and the press release announcing the quarterly results can be found on the company's website at www.exogen.com. As today's call includes forward-looking statements, we encourage you to review the statements contained in today's press release and the risk and uncertainties described in our SEC filings, which identify certain factors that may cause the company's actual events, performance, and results to differ materially from those contained in the forward-looking statements made on today's call. In addition, we'll discuss non-GAAP financial measures on this call. Descriptions of these non-GAAP financial measures and reconciliations of GAAP to non-GAAP financial measures are included in today's press release. I'll now turn the call over to John.

Good morning, everyone, and thank you for joining us. I'm pleased to report that Q3 was the strongest quarter in Exigent's history, driven by robust volume growth and continued execution across our commercial, scientific, and operational teams. Compared to last year, year to date, we've grown revenue by 19%, comprised of 8% growth in testing volume and 9% growth in ASP. This synergistic impact is exactly how we anticipated our top line performance would evolve when we set our strategy a few years back. These numbers highlight the power of combining volume with reimbursement growth and what effect that can have on top line when both are moving in the same direction. Our team is energized by the opportunities we continue to see in both areas, which I'll break down further in a second. But first, let's start with our recent product launch. At the end of Q3, we successfully launched assays for the detection of anti-PAD4 antibodies, our second novel set of rheumatoid arthritis biomarkers this year. While we expect the revenue impact from PAD4 to be modest, it continues to differentiate our rheumatoid arthritis offering and demonstrates our ability to bring new markers to the clinic. quickly and effectively. The feedback from clinicians has been encouraging, and we're seeing growing interest in how these markers can impact patient care. I personally saw some of this clinical interest at the American College of Rheumatology meeting in Chicago last week, where multiple physicians wanted to dive deeper into the science with our team and where we had a robust attendance at our conference presentation on these markers. We've also had several clinicians share firsthand experience with the testing, highlighting the clinical need for better biomarkers in this patient population, but also several examples where the anti-PAD4 markers were the only serological abnormalities in clinically ambiguous patients. This is highlighting the true value of the markers in the clinic, One specific example that was shared was when a patient had anti-PAD4 positivity as the only abnormality in their serological profile. And because of this, was referred for x-rays where she had evidence of erosive changes. It's important to intensify treatment for these patients as anti-PAD4 antibodies also serve as a prognostic marker for highly erosive disease. But this pathology tends to respond better to treatment escalation. So hopefully this patient is able to get their disease under control soon and our biomarker testing led to the diagnosis and gave insight to guide the treatment in this patient. This is one of the many examples of our clinical utility these markers can bring and that we are hearing about from our customers. With the launch of these markers, we have now completed the development of one of the most sensitive serologic evaluations for rheumatoid arthritis available on the market today. I'm very proud of the work our team has done to deliver these tests to the clinic and in a field which hasn't historically seen a lot of biomarker innovation. We are setting a course to change that and better personalize care for these patients. To remind everyone of the impact our testing now has, conventional biomarker profiling for rheumatoid arthritis consists of rheumatoid factor and anti-CCP antibodies, which are positive in approximately 70% of clinically diagnosed RA patients. With the addition of RA33 antibody testing and our new assays for detection of anti-PAD4 antibodies, our serologic profiling will be positive in approximately 85% of patients, thereby capturing approximately half of the RA patient population, which would have historically been diagnosed as seronegative RA. Additionally, these patients, which are positive for RA33 antibodies, are more likely to have milder disease, which tends to respond favorably to methotrexate. Patients positive for anti-PAD4 antibodies generally have more aggressive disease, but are likely to respond more favorably to treatment escalation. This level of precision in predicting the disease course and treatment response is exciting to bring to rheumatoid arthritis patients, and it's just the start of what we're doing in this field. Lastly, and this is rare for biomarker innovation, these efforts require less than $3 million in investment, and we expect revenue payback in less than 24 months. We won't always be able to contribute to the clinic in such a valuable way with a relatively small investment and quick return, but we do believe that with our current commercial channel, we can innovate long-term with decent returns on investment. Switching to AdviseCTD testing volume trajectory, Q3 volume was the highest we've ever recorded for a third quarter period. And notably, we did not see the typical quarterly slowdown. In fact, volume remained strong into October. which is a positive trend for Q4 and indicates to me that our team is back to growing the business after helping our customer base adapt to the billing changes we implemented a couple years ago. Our expansion into new territories is also starting to pay off. We see meaningful contributions from these regions, and our per-territory productivity remains strong. Of note, two of our recent expansion territories emerged as top-performing growth territories this past month, and we have others trending similarly. Total ordering physicians and orders per clinician continue to trend upward, and we're seeing increased engagement from both new and existing physicians. This is a testament to having the right team in place and the stability and focus we've built over the past year and a half. We currently operate with 45 sales territories, up from 42 at the end of Q3. Our focus remains on profitable growth, and we will continue adding territories where we see clear opportunity. strong physician engagement, and can find the right talent. Now let's talk about ASP, which is top of mind for me. We've made significant progress over the past two years with our trailing 12-month ASP for CTD now at $441, a 9 percent increase year over year. However, it's important to acknowledge that we're not seeing the full second half of ASP expansion I had anticipated. The new biomarker reimbursement, while creative, has not ramped as quickly as I had hoped. We still believe there's a path to further ASP gains, and our efforts around appeals, revenue cycle operations, and payer education are showing incremental progress. But the reality is these gains are coming more gradually than I expected. Additionally, we lost a large high ASP direct bill account this quarter, which is weighing on our current ASP as we convert this business into standard commercial insurance payer mix. Both of these items have temporarily slowed our trajectory. But as I've constantly conveyed throughout my time here, this is why I view it critical to gauge our success relative to a trailing 12-month measure, which does continue to climb. We continue to be very diligent with our revenue cycle operations and have a strong strategy employed to secure the higher reimbursement we ultimately expect. But you are seeing a somewhat muted ASP reflected in our top and bottom lines as we work through these efforts. Turning to our pharma and CRO business, we generated nearly $800,000 in revenue this quarter, bringing our year-to-date total to $1.2 million. Our order backlog now stands at $3.5 million and continues to grow. While this revenue stream can be lumpy, it's an important and expanding part of our business. We're encouraged by the momentum we're seeing in this area. As I mentioned, I was recently in Chicago attending the American College of Rheumatology annual conference where we had a strong presence this year, highlighting new abstracts and deepening our interactions with clinicians. We submitted and had accepted six different abstracts covering the bulk of our pipeline efforts. One ultimately was chosen for a plenary talk, and in general, we continue to showcase our company as an innovative presence within the rheumatology field. It was a highly successful meeting in this regard. Looking ahead, We remain on track to deliver 65 to 70 million in revenue with the ability to be cash flow positive at the high end of our range, though the timing of sustained cash flow positivity may be pushed to 2026 as we continue to navigate the ASP challenges I just detailed. Generating cash remains a core near-term goal, and we're committed to achieving it in a disciplined, sustainable way. In closing, I want to thank our team for their dedication and execution and our partners and shareholders for their continued support. We continue to build something special at Exogen, and while the path is never perfectly linear, our progress is real and our opportunity remains significant. Thank you, and with that, I'll turn it over to Jeff for additional comments on the financials.

Thank you, John, and good morning, everyone. As John mentioned, we delivered another strong quarter, highlighted by our third consecutive quarter of volume growth, continued ASP expansion, and a balance sheet that we expect secures our runway to positive free cash flow. Third quarter revenue of $17.2 million was our highest quarter in history, just beating out the second quarter and a nearly 40% increase over the third quarter of 2024. Even considering over $1 million in downside revenue adjustments in Q3 of last year, we still delivered over 25% revenue growth. And this is, again, seasonality headwinds we typically see in the third quarter. which we curtailed through growth in CTD test volume, up 15% from Q3 of last year and almost 2% sequentially. Year-to-date through the third quarter, we grew revenue 19% to roughly $50 million, with trailing 12-month ASP up over 9% and volume up over 8%. As John mentioned, we're also seeing significant momentum in our pharma services business, which generated revenue of $780,000 in the third quarter. Year-to-date through Q3, we recognize $1.2 million in Pharma Services revenue versus about $100,000 in 2024. Our business development team has done a fabulous job of securing additional contracts and developing a strong pipeline that we expect will continue to grow. Today, we have up to $3.5 million under contract in Pharma Services, representing future potential revenue opportunity. The timing of deliverables and related revenue recognition are often lumpy from quarter to quarter, so we remain cautious to guide on specific timing of this revenue. Our training 12-month revised CTD ASP grew $37 year over year to $441 per test. The training 12-month number remains our best indicator of ASP traction due to the typical ebbs and flows of reimbursement in any one quarter. As John mentioned, we're behind expectations on our ASP acceleration, but we remain confident that we'll drive further expansion through revenue cycle management enhancements, commercial payer engagement, and market access initiatives. These remain priorities for us and are core tenets to our success in driving reimbursement gains. As John also mentioned in the third quarter, our most significant ASP headwind was a loss from one of our higher volume, high ASP direct bill accounts. Importantly, we offset the revenue impact of this pullback with an overall increase in volume, which is a testament to our commercial team and ability to drive diversification of our physician base. As to the T cell and RA33 biomarkers we launched in January, We saw a moderate expansion in ASP and related accrual rate versus the second quarter, and we continue to expect over time to realize our long-term target. It's also important to note that while we launched our newest biomarker, Pad 4, late in the third quarter and began billing for it, none of this volume was reflected in revenue. At the end of Q3, we had not established a payment history on this marker, so we did not record an accrual rate. We should see a moderate expansion in ASP in the fourth quarter for Pad 4 as we establish an early payment history and related accrual rate. Gross margin in the third quarter was just over 58 percent, up about 260 basis points compared to the third quarter of 2024, excluding the impact of over a million dollars in downside revenue adjustments in the third quarter of last year. Gross margin in the quarter was down about 175 basis points from just over 60 percent in 2024. Year-to-date, gross margin was just over 59 percent and up about 60 basis points over the same period in 2024. Gross margin has been favorably impacted in 2025 by our continued AST improvements, even with an increase in COGS related to our new biomarkers. In fact, our per-test of ISCTD cost is running favorable to initial expectations offsetting some of the ASP headwinds and allowing us to maintain our gross margin profile near that 60% level. We still see a path to the mid-60s over time as we remain focused on driving further ASP expansion and aggressively managing COGS. Operating expenses for the third quarter were $13.2 million, up from $11.6 million in Q3 of 24, And this increase was in part due to increased R&D spend for Pad 4 and other pipeline initiatives, as well as SG&A associated with our first sales territory expansion since John took over, and another key commercial leadership addition to the team. We expect operating expenses to remain roughly at these levels for the next several quarters, and we'll continue to allocate resources responsibly as we've done in the past. At the same time, we remain focused on disciplined capital allocation to commercial, clinical, and R&D initiatives that we believe have a high probability of driving accelerated long-term growth. From a balance sheet perspective, we have the flexibility to make the investments needed to support these initiatives and invest opportunistically as we see fit. But equally important, we have the ability to modulate spend down or up as needed, all with an eye toward preserving our path to positive free cash flow. Our net loss for the third quarter was $7 million compared to $5 million in the same period last year. But it's important to note that the $7 million loss in the most recent quarter includes about $3 million in non-cash expenses related primarily to the fair value adjustments from our new debt facility with Perceptive, which we closed in May of this year. Our adjusted EBITDA loss in the third quarter is $1.9 million compared to $4 million in the third quarter of 2024. And year-to-date through Q3, our adjusted EBITDA loss improved $1.5 million, or nearly 20 percent, to $6.1 million for the first nine months of 2025. We maintain our focus on positive adjusted EBITDA in the near term and believe that ASP growth is the most important lever for achieving this goal. Please refer to our earnings release issued earlier today for a reconciliation of adjusted EBITDA to net loss. Turning to our balance sheet, we ended the third quarter with $35.7 million in cash and cash equivalents, up from $30 million at the end of Q2, with accounts receivable of about $11 million. Excluding financing proceeds during the third quarter, we generated net cash of $2.3 million, compared to net cash usage of $2.4 million a year ago. We also enhanced our cash position in the third quarter through opportunistic but disciplined placements under our ATM sales agreement with TD Cowen Securities. We raised just over $3.4 million at an average price of $9.83 per share, taking advantage of share price momentum and higher volume trading days throughout the quarter. We remain very well positioned from a balance sheet perspective with over $45 million in combined cash and accounts receivable at September 30th that we expect will fund our existing business to positive free cash flow and up to an additional $50 million in available future credit capacity if and when needed. In closing, we continue to deliver value to shareholders through solid operating and financial execution. We delivered another quarter of record revenue in Q3, a third consecutive quarter of volume growth, continued ASP expansion, and we remain on track to deliver from 17 percent to over 25 percent revenue growth in 2025. We will now open the call for questions.

Thank you, sir. Ladies and gentlemen, we will now be conducting the question and answer session. Please note, for participants making use of speaker equipment, it may be necessary to pick up your handset before pressing the star keys. If you'd like to ask a question, please key in star and then one on your telephone keypad. A confirmation turn will indicate that a line is in the question queue. You may press star and then two to leave the question queue. Our first question comes from Anderson Skok of B Reilly Securities. Please go ahead.

Hi, thank you for taking the questions and congrats on all the ASP progress. So first, you mentioned the second quarter earnings call $430,000 per territory. Do you have an updated revenue per territory for the third quarter? And how should we think about the productivity ramp of these new territories?

Morning Anderson. Thanks so much for the question. So the 430 was $430,000 per territory was a record for us and just so that people have kind of the background trajectory that was from up from the high 200s. So we've made, you're right, we've made material progress in the revenue per territory all really on the back of the ASP gains that we've seen as an organization. For the third quarter, it was right around that level, slightly below. I think that's more a factor of we added the additional territories. And so you have that denominator growing and give it a little bit of time as we see those territories bearing fruit. And we do expect it to increase over time. So you're just under that 430.

Okay, got it. And then with the launch of your RA markers at the end of the third quarter, so once establishing a payment history for these, is there an incremental uplift to ASP that you're targeting similar to the $90 increase with the lupus biomarkers launched in January?

Yeah, so we've not broken this out yet, and we hesitate to proclaim a number without having a robust history of collections there. So that's what we're doing right now. We're gathering that information. developing that history, and then we'll establish it. Happy to provide an update on a future call. We expect it to be relatively modest compared to the 90 expectation that we had for the prior markers. This is a set of ELISA-based assays, two markers as opposed to three in the case of RA33 or three also in the case of the T cell analytes. So less markers, lower cost platform, build under generic codes. It's going to be, you know, in the low single digit dollars or maybe even in the double digit, but it's not going to be anything like what we had previously.

Okay, got it. And then you also mentioned on the last call you're approaching your first pharma partnership with the urine platform. Are there any updates you could provide there?

So we actually completed our first statement of work related to that platform. And just so that everyone's aware, we have some fantastic technology that we've licensed out of Johns Hopkins, really with multiple intended use opportunities, really to change the way these patients are managed for the better. And lupus nephritis affects about half of all lupus patients. This technology has been shown when you look at certain proteins in the urine of lupus patients. There's the potential to diagnose the disease through a non-invasive manner. That's something we continue to pursue and have published on from an abstract perspective. We're looking at therapeutic response and then even prediction of long-term kidney function or prognosis, really. And so we have completed our first profiling effort. We're in discussions on subsequent efforts there, but it went successfully. It was a small project and look forward to doing more.

Okay, got it. Thank you for taking our questions.

The next question comes from Kyle Mikeson of Canaccord Genuity. Please go ahead.

Hey, guys. Thanks for the questions. Good quarter. So I guess on the ASP topic, John and Jeff, You know, maybe just level set and provide some more, some framework of how we should think about approaching 500 dollars because that was the target before and you had that 90 dollar incremental from the new biomarkers that was just referenced in the last question. So maybe just like, if there's a way to kind of think about the progression going forward and maybe just like to think of this more realistically when you could get to 500 again, or maybe there's some other trail in 12 months metric that we should kind of, you know, model out and kind of think about as we look at 2026, the quarters and so forth. Thanks.

Morning, Kyle. Thanks for the question. So I guess first and foremost, there's no other metric, and I'd be skeptical if I did provide a different metric, you know, as people change targets when they get hard. So That's not the approach we take here at Exogen. From our perspective, 500 is still very realistic. It's really just a timing thing. And so we outlined a couple contributing factors in Q3. We actually had a large client bill account that, for purely financial reasons, it's a hospital system in the Northeast. They made the determination to no longer, to cancel that contract. That had some ASP headwind. We believe over time we can build it back through the commercial, the standard commercial insurance route, but it takes a little bit of time. We haven't had as much history with some of those payers, those regional payers in the Northeast, given that we've built through the hospital system through a client bill arrangement. Related to the new markers, you're exactly right. You're right on there. $90 was our expectation at the start of the year. We had mentioned on the Q2 call that we were coming in the low 70s, around $72. We're up from there, actually continue to go up almost on a daily basis, but expected to be at the 90 now, and we're not. So I still believe that we're on the path to 90. through our standard revenue cycle operations that we'll get there, we believe we'll get there. Additionally, we've launched these new PAD4 markers and we haven't recognized any revenue there because we don't have a good track record for an accrual rate to establish an accrual rate. So those will be lifts over, call it the coming quarter or two or three is progress in converting that client bill account, which You know, have some reasonable volume associated with it, continue work on the new biomarkers that we launched at the start of the year, establishing a cool rate for the current product launch, and then just our underlying groundswell of efforts that we've continued to work on. So I think you'll see over time that trailing 12-month number continue to rise. I just had expected the trajectory to be a little bit more steep at this point in time. Nine percent year over year is still reasonable, but we'd like it to be faster. So that's the right metric, and we'll continue to work at it.

Okay, perfect. And then just being simple on volume, it seems like that was kind of sequentially flat, I think, like quarter over quarter, if I'm doing the math right. And I think that's actually stronger than your typical seasonality, so that's good. So maybe just confirm if that's true. Then if we should think about a drop-off, a step-down in the fourth quarter, just given ACR and the other kind of seasonal factors. And on that point, given the ASP as you characterize it, the challenges, would you like kind of pull back on, you know, rep expansion at this point, or are you still kind of building on the team going into next year?

Those are great questions. So just to be clear, volume is actually up in Q3 relative to Q2, a couple of percent. So from that perspective and looking at historical seasonality, that's a meaningful change. And so we're very proud of that. I think the teams worked extremely hard. That was really with about the same number of sales territories. We had 42 at the end of the quarter here. So contributing territories in Q3 was somewhere still around that 40 level. So from that perspective, I think it was a very strong quarter. We've also seen the volume increase into Q4. October was a fantastic month for us. We've now understand what that final volume number is, and it was our highest month in several years. So from that perspective, I think we've got our team with the right incentive structure, we've got the right team, and we're highly focused in delivering the clinical value and the messaging and education around that that is driving business and adoption. So I think as it relates to the sales expansion question, There's no reason why we wouldn't continue to expand if we have the right opportunities in front of us. Right now, we're making sure that the five territories we've added in the last four or five months are well supported, well educated, and are set up for success. And we'll continue to add as as those opportunities arise. We did add to our sales leadership side. That was more opportunistic. Someone I had worked with previously became available and I think very highly of that individual. So we took advantage of the opportunity to bring them on board. And again, it just sets us up for future growth. So we did go up in Q3. I would expect somewhat of a step down in Q4, just mostly a function of business days. I think in Q4, you've got some pretty significant holidays. We had ACR, the week-long conference that actually occurred in October. So our October performance was in light of ACR occurring in this month. So we're on the right trajectory. I would still expect a slight step down, but overall, we're setting ourselves up very well for continued growth through two mechanisms, ASP and volume.

Perfect. And then finally, I would love to ask about the pharma business. So that was 800,000 in revenue in the quarter compared to 100,000 for all of last year. That's pretty impressive. So I guess why so strong now this year? And then could that be even more material in 2026? Could that be like a real business line that you could actually start to kind of break out? And kind of additionally, is that an area you would partner or acquire in given the unmet need in autoimmune diseases?

Yeah. Um, that's a very interesting set of questions. So from my perspective, excited about the progress on the farmer revenue side, you know, to deliver 800,000 far and above what we've done historically as it relates to, um, testing services. Um, and so, um, very proud of that, proud of the team and took a lot of energy and effort, but, uh, well worth it. And I think we've delivered for our farmer partners, you know, they have time constraints, they have quality requirements, they want flexibility. And in all of those facets, clearly we're demonstrating our ability to differentiate ourselves in the market. And it's working out for us. So where could this go? I mean, the pharma services in general tends to be a lumpy business. As you know, you complete a project and you tend to get recognized revenue consistent with that project when the work's completed. And so there'll be certain quarters with outsized performance versus others. But for the year, or on an annual basis. I do expect this to continue to grow. There's a lot of opportunity, a lot of pharma development. You see new diseases getting approved for biologics in this space. Sjogren's, for example, is one that just came with Novartis. There's other diseases as well that people are looking for biomarkers and better diagnostic biomarkers and better markers of disease activity, and we believe we're well-positioned or well-suited for that. Also, given that our base methodology within Advise is flow cytometry, I think that we're well-positioned to offer something unique there as well. So we'll continue to refine our business plan, our business model, understand how we can add value. I'll just give you one example, but when a pharma organization comes to service provider, what they're looking for is speed. At times, what they're looking for is speed to get some of these assays validated and available for them in clinical trial testing at a high quality level. We generally meet the quality thresholds. Given our commercial pipeline and the fact that we have access to so many patients and so many different samples, our ability to validate assays and develop new assays, I think, is is really substantial and a huge competitive advantage for us. So that's part of the differentiation we're able to offer amongst many other things. But we'll have to see how it progresses. But yes, it's turning in the right direction.

Awesome. Appreciate the call, John. Thanks.

Thanks, Kyle.

Our next question comes from Mark Massero of PTIG. Please go ahead.

Hey, guys. This is Vivian on for Mark. Thanks for taking the questions. So just one on the Salesforce expansion. I understand that you just hired these reps, but could you just remind us how you're thinking about targets in terms of rep per rep and kind of the time that it takes for them to reach maturity and hit their stride? Thanks.

Yeah. Morning, Vivian. Hope you're doing well. So from our perspective, we set profitability targets. on a per territory basis. And that has to do with both the compensation structure, so once you reach a certain scale, there's profitability bonuses that end up coming into play. But then as it relates to opportunity, we're looking for a minimum level of profitability or contribution margin that at least sustains the price of having a field-based presence in that area. And so that naturally relates to number of tests, but it also changes as our ASP changes. So from our perspective, we tend to split our largest territories, provided we still believe or have done enough research to believe that there's substantial opportunity there. And so that's really the mechanism that we're approaching the cells expansion. process with. And it generally takes, I mean, it's always tough to generalize, but it generally takes around nine months for six to nine months for someone to start to contribute. There's multiple exceptions of that. And then I tried to highlight that in the prepared remarks, but we've got two in the Southeast where two territories where they were our highest growth by percentage. And two of our top five nationally were some of these expansion territories. So that's exciting for us. I guess it reinforces that we made the right choice from a personnel standpoint. We found the right person to join our team, but we're also doing a really nice job evaluating the opportunity there. So we'll continue to do that, but somewhere in the six to nine month range. So I would expect by year end, heading into 26, we start to really realize the full potential of now this 45.

Okay, perfect. Thanks for the color. And then just to follow up on the kind of slower than expected traction with ASP list for the new biomarkers, can you just help us think about steps you can take in terms of driving payment for these biomarkers or what it is exactly that's holding up payment here? Thanks.

Yeah, great question. So, as it relates to extra color on the ASP side, from our perspective, some of the denials that we're seeing are related to basically medical policy for these new markers. And it's, you know, the diagnostic code in conjunction with the procedural code being used is not approved from a payer standpoint. We believe that through an appeals process, a robust appeals process that we've architected and implemented now here over the last couple of years, that we can be successful long term. But initial denials are higher than I had originally expected. So that's really the basis for it. There's some other nuances there that we think we can improve upon, for example, out-of-network denials and things like this, but these are unique markers, and we're the only lab that's offering them. And so there is no in-network alternative, especially for this suite of of analytes. So from our perspective, it has to do with revenue cycle operations probably being the most effective lever in this space. Still working on some physician advocacy along with patient advocacy, but those will be secondary or tertiary tactics that we employ. And then we'll have to take it from there.

Perfect. Thanks for taking the questions.

Our next question comes from Ross Osborne of Cantor Fritz Gerald. Please go ahead.

Hey, guys. This is Matt on for Ross today. Thanks for taking the questions. I guess just one from me. You know, you reiterated a path to mid-60s gross margin over time. I guess can you kind of expand on what the key unlocks are to get there, whether it's further automation, volume scale, repair mix normalization, and how you're thinking about that timeline to start seeing incremental leverage?

Sure, yeah. How's it going? This is Jeff. I'll take that. I think multiple levers. I think we continue to say and believe that ASP expansion will be the best way to accelerate margin into that mid-60 range. And so, as John laid out, there is a strategy to continue to expand ASP with just better revenue cycle management and continued improvements there. We also, as I mentioned, are seeing our COGS per test on a VICE CTD actually well below target, which is very encouraging. And that's been a function primarily of just better optimization of labor. And we really haven't had to make the significant investment in labor that we would have expected to keep up with the volume, particularly with the new biomarkers. All of that has come before any real optimization we've made. in either assay development or lab operations. So we do think there is real opportunity for further optimization and workflow, but I would say the biggest driver is going to be the ASP expansion. And just to add some more color to that, John mentioned that we did see a pullback and we lost a pretty high volume, relatively high volume, high ASP account. If you were to normalize for that, we would already be above the 60% gross margin for the quarter. So, we're still tracking and we're really encouraged because our COGS profile is much below where we expect it to be.

Super helpful, Collier. Thanks for taking the questions, guys.

Thanks, Matt.

The next question comes from Andrew Brackman of . Please go ahead.

Hi, guys. Good morning. Thanks for taking the question. Maybe just on the volume front, you know, accelerated volume growth again here in the quarter. A lot's been asked sort of on rep productivity, but as you sort of think about the drivers of that volume growth, how should we sort of parse out the sort of leverage between the expanded commercial team or efficient rep productivity, but then also just a lot of markers from earlier this year, and then there's still just the massive penetration that you have in front of you, the penetration potential that you have in front of you. Thanks.

Good morning, Andrew. Thanks a lot for the question. So, maybe more of a qualitative answer. It's always tough to pinpoint or, you know, address this with precision, but from my perspective, having something innovative and clinically useful to discuss with our client base is reinvigorated our sales team for sure, but also the interest on the customer side. So I think the fact that we launched these new markers is very much a positive, and we're seeing that energy I guess, kind of rekindle here in the second half of the year with the recent launch of these additional markers. Especially now that we've got a unique marker set specific to rheumatoid arthritis, it really does open up the clinical conversation and provide that additional value for folks. So that's where I would rank that at the top. We've talked at length about having stability and such a high caliber team in our organization. And I really believe that that's a significant contributing factor to our growth right now. We've got groups of folks who really take learning the science seriously, really work hard. And you're seeing the results of that. I mean, as long as you pretty consistently stay customer-centric, work to satisfy the needs of your customer, and are generally concerned with adding value to their clinical practice, I think you can be relatively successful. And this area of medicine is highly driven by relationships. It's very clear that even the patient-clinician approach here, it's chronic disease management. The relationship there is very key, and it is with our organization as well, and we've we've really worked to build trust and establish that trust. We want testing performed where it's going to be useful and not widely. Our test is not useful in every clinical context when you're trying to diagnose a connective tissue disease. So we really want to understand how clinicians, where they're struggling, and where this can add value. And our team, I think, has mastered is probably too strong of a word, but come close and continue to improve in this area. And I think we're seeing the results of that. So the new markers, I think a very strong contributing factor, the stability in the team, along with a heightened focus in the clinical messaging, and that's what you're seeing here.

Okay, that's great color. And then just on the loss of that large direct bill customer, any more color you can maybe give on the magnitude of the headwind that caused ASTs in the quarter? And then as you look at that entire book of business for direct bill, any other risks out there that you might see popping up in terms of other customers going down this route?

Thanks. Yeah, so maybe I'll just share a little bit of how I think about the direct bill opportunity. I think it's an interesting opportunity. It's approaching 20% of our revenue. It's on the order of 8% to 10% of our volume. So it gives you a sense of that relationship there. I think it's an interesting part of the business. in the sense that the people or the entity that you're negotiating with from a pricing standpoint also handle medical policy for all intents and purposes, right? So it's a combination negotiation, if you will, and it allows those entities to get access to more innovative technology sooner. You know, in that sense, they can determine when and if they want access to certain technology. But it also tends to put that offering or that relationship at risk at times because they can decide to switch just as quickly. And so our understanding of this transition was it was a financially motivated decision. It didn't really take into account the clinical impact or, to be honest, the desires of the rheumatology group at this organization. But nevertheless, it was made. And from their perspective and their best interest, but they're still offering our test, using it in clinical practice. We're just converting more to commercial insurance. And so we know that that's a little bit longer road in terms of getting back to the ASP that we ultimately aspire to, but it's one that we're well-versed in and know the appropriate tactics. So the clinical opportunity is interesting. I think we're probably at close to the max level of client-built business that I want to take for organization. We'll see if other opportunities arise, but long-term, I think it's better that we work with insurers. I think it's a better relationship in that regard. It can be tougher short-term, but longer-term, I think that's a better competitive advantage and a more reliable approach.

Great. Thanks, guys.

Yep.

Our next question comes from Bill Bonello of Craig Hallam. Please go ahead.

Hey, guys. I just want to follow up on the question that Andrew was just pushing on to just make sure I understood what you said. So in terms of that client, they are still ordering the test? They simply moved from being client bill to third-party bill? And then, if that's correct, was there sort of any associated impact on volume at that client, or are you seeing steady volumes and just the change in ASP?

Yeah. Good morning, Bill, and thanks for the question and opportunity to expand a little bit more. So specifics related to this account, which I'm happy to go into, probably won't go into as much detail with each of these instances, but with this account specifically, when the contract was terminated, and we were given fairly short notice here, talking about a few days, when the contract was terminated, access to the testing was suspended. So the hospital system froze the EMR and actually paused access for their clinician base. They actually stopped drawing it with their in-house laboratory as well, drawing the blood, etc. So really everything came to a halt initially. Given our close relationships with the rheumatology division there and their desire to continue to have access to this test, They pursued an alternative route and we worked with them on logistics to revive that. So where we're at now is the volume has returned because we've been able to logistically provide phlebotomy access for them along with helping them establish a new ordering process, et cetera. Not back exactly to where we were, but it's certainly trending in the right direction and much better than when we were informed of the transition. So you did have some suspension related to volume. I believe we're trending back in a very positive way there with optimism on the trajectory, and then most of the impact has been ASP.

Okay, that's really helpful and nice to see the acceleration in volume growth even with that situation. So the second thing, because to me volume growth really seems like the exciting story here, the uptick, but ASP obviously matters. So just on the higher denials than you had expected, A couple of questions. Why do you think that's happening? Why do you think you're seeing greater denials than you had expected? And then is that dynamic exclusively related to the new markers, or are you seeing an uptick in denials across the board?

Yeah, that's a great question. So our base business, no notable changes in payer behavior that are worth going into level detail on this call, right? So we remain on a positive trajectory for the base business. It is related to the new markers as to why we're seeing a higher level of scrutiny than I expected. Well, I think it comes down to incentives for the most part. You know, insurers are oftentimes profitable organizations, and they're looking for ways to curtail utilization. And this is one way, either through prior authorization or implementations, medical record requests. They throw a lot of hurdles in place to see if the clinicians truly, really want this type of offering. And that's what we're seeing. So some of it's related to the ICD-10 code, you know, the diagnostic code being used in conjunction with billing. But this is what we're provided by the client. So not a lot that we can do there. Just tough to simulate all these situations ahead of time. I think we did a reasonable job on our end in estimating this and still believe that long-term that $90 aspiration is within reach. We're climbing to it. I think we're in the mid to high 70s now. We were in the low 70s a quarter ago. So even over a three-month period of time, you've seen a almost a 10% change in that new marker reimbursement for the positive. It just is going to take us a little bit of time to work through this, and ultimately where do we land? Not entirely sure. Is it 85? Is it 95? I don't know. But I just think it's important and prudent to be transparent with this, and that's kind of what we're working on.

That's really helpful. And then just the playbook, is it radically different what you're trying to do here in terms of working through denials and eventually getting these additional markers paid for than sort of what you've done over the past two years where you've driven a sort of massive increase in ASP through revenue cycle management. Just trying to understand how unique this particular situation might be relative to what you've done in the past.

Yeah. Tactically and procedurally, it's very similar. And so that's why I feel confident that from an architecture standpoint, from a process standpoint, we have the infrastructure in place to address this at scale. On the content, now that's obviously going to change because most of what we've been doing is having discussions around advised lupus and what the body of evidence is behind that in terms of clinical validity and utility. Now, these are new markers, and so the body of evidence is not as deep, although with the rheumatoid arthritis markers, they've been studied for many years. RA33, body of literature out there for 20-plus years. The PAD4 autoantibodies, body of literature out there. So we're able to leverage some of that science that's been conducted by other institutions and infuse that into our appeals process. But it does require us to update the appeal letters and to structure that content a little bit differently. And there's going to be a learning curve naturally with some of that. But the process and tactics remain the same.

All right. Thank you very much. Really appreciate that additional color.

Thanks, Bill.

The next question comes from Matthew Parisi of KeyBank.

Please go ahead. Yes, this is Matt Pariseon for Paul Knight at KeyBank. Congrats on the quarter. You've previously mentioned ALJ hearing wins during the prior quarters, and I was wondering if there's been any further ALJ hearing wins for Exogen in 3Q. Thanks.

Yeah. Hey, Matt. Good morning, and thanks so much for the question. None that we disclosed publicly. We have continued a robust appeals effort. We are, I think, making some material progress there. We've This past quarter, we actually presented in front of multiple medical directors at various plans. And so we're getting the attention and the audience and the opportunity that we've sought out strategically. And we'll continue to make incremental progress there. We have filed for future ALJ hearings, but no notable update in that regard.

Sounds great. Thank you.

Our next question comes from Dan Brennan of TD Cohen. Please go ahead.

Great, thanks for the questions, John and Jeff. Maybe just one more on the account, the direct account. I know it was asked, like, did you size it? Just so we can get a sense of, as we look forward, if that's still in the comp, kind of we can back that out. And then, like, what's the difference between the direct realized price versus the commercial realized price?

Yeah. Good morning, Dan. Thanks for the question. So in terms of in-quarter ASP impact, You know, you're talking on a blended rate a little north of $20, right? So you've got a headwind of about $20 for the end quarter ASP impact of that account alone. Volume-wise, we didn't cut it out or carve it out because we believe that volume is continuing to come back over time. And so, you know, we'll just have to see. It'll be a slight headwind near term, but hopefully returning to normal levels or even improving as we continue to add more clinical value in that context. But the ASP should also start to improve as we develop a history and a better relationship with the payers in that region. Hopefully that gives you a little bit of a feel. So it was significant, but also something for us opportunity-wise to work on. Does that help?

Yeah, no, that helps. I mean, your trailing 12-month ASP, right, still has been ticking up nicely even this quarter, another $13 or so sequentially. So I guess within the context of the $65 to $70 million guide, Is the assumption that the ASP continues to go up or is it like maybe flat because of this kind of account loss? Just how do we think about that realized price in 4Q from a trailing 12-month basis?

Yeah, we don't split it out by ASP or volume. And you can see, you know, I think one of the things is over the course of this year that 65 to 70 million guide has generally stayed about the same, you know, with a little bit improved clarity. at the end of Q1 or Q2, but generally stayed about the same. And we believe that we'll fall within that range even despite some of these headwinds. So, again, I'm proud of the team for executing in multiple ways, and I think given the fact that we do have progress on ASP and volume simultaneously, you know, put us in a good position to reach those objectives. From a Q4 specifically, I think we've got a few different ways to get there. You know, even as it relates to the year-end cash flow positivity objective, you know, from our perspective, we have some things in the works with various payers that could get us there, for sure. ASP will be the most sensitive lever to get us there, but we'll also have to see how volume comes in. I think we should be cautiously optimistic as it relates to volume progression just because of the holiday season, really, so...

And Dan, just to add to answer your question on the guide, I think think about it, the way you think about it is that the low end of the range would assume very little, if any, ASP expansion in the fourth quarter. And clearly, obviously the high end of the range would include continued and maybe some accelerated expansion, but the low end would really assume that we don't do much in the way of ASP expansion in the fourth quarter.

Got it. I got that. Um, comps, you know, you've done a really nice job obviously on the volume as you've kind of, you know, kind of optimized for the profitability and the cash burn. Um, and you've had really nice volume growth in Q3 and kind of year to date as we look ahead, like, you know, comps do get more difficult. Obviously the market's large is, I mean, is double digit growth like reasonable to think about as we go into 2026?

So we've not set up a base guide or a, objective for our top line growth. We think it'll be driven by two factors. Volume, we've said, likely to grow in the mid to high single digits, and we're seeing that, if not a little bit higher for this year, as we've really established a strong sales organization, but also with the new market launch. ASP is inherently difficult to project, and especially timing, and I think you're seeing that play out real time. here with these quarterly results. But also, you know, just in the past, we've had periods of time where we've seen pretty extreme acceleration. And I think as long as that trajectory continues upwards over time, we'll be in a pretty good spot organizationally with both factors contributing.

Got it. Maybe just one final one. You know, there's been a bunch of questions on denials and payment and your confidence, obviously, with these differentiated markers that you guys will be successful. I think in the past, like, you know, when we – a lot of diagnostic companies, including yourself, you know, commercial payers tend to really drag their heels, and investors like to look at, like, what the opportunity is over time, maybe not in the next six or 12 months, but maybe over the next two, three years. Like, what's that opportunity set for, like, you know, where can realized price get to? So I think in the past, maybe you guys have talked about something, $500, $600. Like, any way to think about it as we look ahead, you know, no timetable attached to it, but is there any change in kind of what's happened here that would dissuade you from thinking you can get to like, you know, kind of $600 plus or minus, or how do we think about the longer term opportunity on realized price capture? Thank you.

Yeah. Um, our, you know, uh, relatively near term goal remains that half of Medicare rate. I think that's still a viable objective for us to meet in that timeframe. And, and so that would put us kind of at that $600 range. Um, And as we achieve that, that continues to dramatically transform our organization. You know, we believe at current volume, we'd be a cash flow positive organization at the $500 range. So we're close, and we're close to transforming the organization in a very positive way, and I still think that's a reasonable expectation for us. Longer term, it should be higher.

Higher than the $600 or the $500?

Yes, than the $600.

Got it. Terrific. Okay. Thank you.

Ladies and gentlemen, with no further questions in the question queue, I will now hand over to John Mopali for closing remarks.

Thanks so much. Your end is coming fast, and I really just want to thank the team here at Exogen for their continued dedication and performance. We have an ambitious quarter ahead with key milestones to accomplish, and I look forward to to finishing the year strong. Thanks to everyone on the call for their partnership as we work to establish a dominant company in the autoimmune space. Thanks for your time this morning.

Thank you, sir. Ladies and gentlemen, that concludes this event. Thank you for attending, and even I'll disconnect your lines.