Greetings, and welcome to the Exigen Quarter One 2020 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to Mark Hazeltine, Senior VP of Finance and Corporate Development. Thank you. Please begin.

Good afternoon and thank you for joining us today. Earlier today, Exagen Inc. released financial results for the quarter ended March 31, 2020. The release is currently available on the company's website at www.exagen.com. Ron Rocca, President and Chief Executive Officer; and Kamal Adawi, Chief Financial Officer will host this afternoon's call. Before we get started, I would like to remind everyone that management will be making statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical 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, the impact of the COVID-19 pandemic on our business, our current and future product offerings and reimbursement and coverage are based upon current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results 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 the risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission, including our Form 10-K and any subsequent filings. The information provided in this conference call speaks only to the live broadcast today, May 11, 2020. Exagen 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 Exagen.

Thanks Mark and good afternoon everyone. I'm pleased to welcome you to the call to discuss our first quarter 2020 results. To begin, I would like to comment on the COVID-19 pandemic. On behalf of the entire Exagen team, I would first like to thank all of the health care professionals and other essential workers committed to fighting the pandemic. I would also like to thank our dedicated employees who have worked with us with the highest levels of professionalism to support our customers and continue providing critical testing and therapeutic solutions for autoimmune disease patients. Despite the trying condition, Exagen employees have maintained our excellent quality standards and turnaround times that health care providers and patients expect. I'm very proud of their team and their efforts. Following the record 2019 performance, the beginning of 2020 was off to a very good start for Exagen and the company performed extremely well in the first quarter until the pandemic began to impact our business and operations in mid-March. Test volumes are the best metric of growth of our business. And we generated very strong volumes of 27,126 for our flagship AVISE CTD test in the quarter, a 13% year-over-year increase despite the COVID-19 pandemic. The trend line we were on for the first 10 weeks of the quarter would have resulted in record quarterly volumes. Importantly, we maintained a very high retention rate of 99% of our adopters who remain riders from the prior quarter. We reported revenues of $9.6 million in the quarter, an increase of 3% year-over-year as higher testing volumes were partially offset by lower average selling price. To address the lower ASP we are using the dossier for AVISE Lupus test that we completed to help navigate and negotiate the in-networks coverage and retain a high reimbursement…

Thank you, Ron. Let me lead by discussing the steps we took to rationalize our costs, once it became apparent that the COVID-19 pandemic would have a significant impact to the health care industry. First, we selectively terminated three Vice Presidents and three other full-time employees and released all temporary workers. Additionally, hiring was put on hold and we reduced staff hires wherever possible. We determined that our laboratory and other critical operations could continue unimpeded following these staff reductions. We've also scaled back marketing spend, while sales bonuses, T&E expenses and variable costs associated with volumes have dropped. We will continue to monitor demand and flex resources based on workflow. Turning to the income statement for the quarter. As Ron mentioned, total revenues were $9.6 million driven by a 13% increase in AVISE CTD testing volumes to over 27,000 compared with over 24,000 a year ago. Volume growth is due to the continued adoption of the AVISE CTD test by rheumatologists. Reflecting this trend, the number of ordering health care providers rose to 1,692 for the first quarter of 2020 as compared to 1,327 health care providers in the same 2019 period. AVISE CTD test revenues were $8 million in the quarter and other testing revenues were $1.6 million. Cost of revenue remained relatively consistent for the three months ended March 31, 2020 compared with the three months ended March 31, 2019. Our gross margin was 53% in the quarter compared to 52% in the first quarter of 2019. The slight improvement in gross margin was driven by higher testing volume. Operating expenses in the first quarter rose 33% year-over-year to $14.8 million primarily due to costs associated with the expansion of our sales force, an incremental cost of being a public company not present in the first quarter of 2019. Net loss for the first quarter was $5.6 million compared with $2.7 million in the first quarter of 2019. Looking at our balance sheet. Cash and cash equivalents as of March 31, 2020 were approximately, $68.6 million. Regarding 2020 guidance, we do not believe that it is prudent to offer formal guidance at this time in light of the COVID-19 pandemic and the resulting uncertainty in the economic climate. I'll now turn the call back over to Ron.

Thank you, Kamal. I would like to once again thank the Exagen team for their continued hard work and dedication. Exagen is in a solid financial and strategic position to weather the economic uncertainties and I'm confident that we will emerge from this pandemic in better competitive position. I will now open up the call for questions.

Thank you. [Operator Instructions] Our first questions come from the line of Doug Schenkel with Cowen and Company. Please proceed with your questions.

Hi. Good afternoon. This is Chris on for Doug today. Thanks for taking my question. I just wanted to confirm. Did you say there was a 56% reduction in AVISE volumes in April? I know you're not providing guidance, but as we try to triangulate Q2 volumes do you think 56% is the worst-case scenario?

Yes. We've seen it come back since then Chris so the drop in April at a low point there. Since then we are seeing the climb back. I would not say, it's a full recovery by any stretch of the imagination, but that does seem to be the low point with sometime in the second third week of April.

Okay. And maybe it's a bit early, but just given that there's a lot of rheumatologists at the stations early, which could require multiple visits to diagnose lupus. Have you seen any indications of increased interest in adopting a AVISE CTD panel once the lockdown eases? May -- can this event actually serve as a catalyst for adoption of AVISE CTD?

Chris, we think that's a logical thing to say and think because of the conversations we have since had with rheumatologists. As you know they're serial testing with connective tissue, especially, lupus where you're going to be doing perhaps three tests at a time four tests and bringing that patient back and forth. With the glut of patients that are going to surge back, a test like ours that one blood draw covers 11 connective tissue disorders that overlap with lupus that convenience factor as well as the fact it's the best lupus test, we think positions ourselves logically for extra utility post-COVID. So we agree with that scenario.

Okay. Maybe just one last question. Could you just -- update us on how you're detailing practices at this time? And are you making any changes to your sales force given the current environment? Thank you.

Right. Yes, that is a good question. It is state by state, Chris. There are certain states that are more open than others. New York is pretty shut down. So for that representative they're using telemarketing, virtual calls as well as we're calling in services -- virtual in-services. So we do those in those closed states. In other states where it's a little more wide open, I'm thinking more along the lines of parts of Florida, Arizona and Texas. Those representatives are actually getting out and about and able to deliver samples as well as kits -- transportation kits to those offices. But overall on a national level, what we're looking at is first and foremost the representatives need to adhere to whatever laws that they are living under and we don't encourage them to break those rules at all. What we do encourage them to do is stay on the phone get on the computer and call as many of the office staff as possible ensuring that they have the adequate number of kits and samples to be able to take the amount of patients that are coming through and take care of them. We will adjust accordingly every week. Kamal and I look at reach and frequency throughout the nation and we do adjust the call plan accordingly. Next question?

Our next questions come from the line of Brian Weinstein of William Blair. Please proceed with your question.

Hi Brian.

Hey guys, thanks for -- hey how are you doing? Thanks for taking the question. Starting on SIMPONI. Can you kind of explain what's going on there? I'm a little bit surprised that you guys were unable to recognize any revenue at all in the quarter here. You held your call late March and we didn't get an indication that it was trending that way. So I'm a little bit confused on kind of how things shook out in the quarter what that trend line looked like up until the last two weeks. I'll start with that and then some other SIMPONI questions after that.

Sure. No problem Brian. After the quarter ended and our projection shows that we were doing actually exactly what we said we were going to do in moving the needle, we were notified by Janssen that there were some changes in the syndicated data. The data comes from either IMS or Wolters Kluwer or IQVIA. That was not given to us to afterwards so we couldn't course-correct. And we have some disagreements there. The sand in the hour glass quite frankly ran out before this call and the quarter could end. We're still working with them to actively resolve this situation with the data, but they also introduced a term that they call the COVID factor. They obviously realized that their IV business is under a lot of jeopardy because of the amount of patients that are scared to go into an IV center especially if immunocompromised. So, they do want to talk to us more about these therapies that are at-home therapies. Those discussions are taking place. We're going back and forth. We have meetings set up with them to do additional discussions. But at this time we thought it was prudent to just say look we don't like the way the data came in after the quarter. We have some culpability here too. I'm not going to escape that. We could have been doing a much better job here Brian in pushing it and also notifying them that -- about the data the way we saw it, but really what it comes down to is that. We still believe in the Dx/Rx model. We still think RA is a great market a big market and rheumatoid arthritis is a big issue for our clients. So we are highly engaged. Janssen keeps telling us how happy they are with us and what we're doing, but we have to come into an agreement with what the database tells us, what is the baseline and how we're going to be judged on that baseline. And the fact that there's this pandemic and the IV products are getting hurt, we don't feel that we should be taking the brunt of that. In a nutshell that's the issue. We're still trying to work with this customer. Let me just add this is one year into the agreement. This product was declining. And what our job is to do is stop the decline and reverse that using our internal infrastructure of -- the economics that we did in quarter one which were substantial on the diagnostic proves that our sales reps know what to do. Now we just have to make sure we adjust this with Janssen going forward.

I just want to dig into that. And sorry for being a little bit dense on this but I want to make sure that this is clear. Are you saying that the baseline itself had changed in some way, or are you saying there's a dispute over how much your sales reps actually -- how well they performed and what they actually did in the quarter? Which of those two is there uncertainty about?

Yes. The first one is the data. The data baseline has changed due to some changes that happened on their end and not ours and we were told about that after the quarter. So we're humming along, thinking we're doing actually pretty quite well until well after the quarter, when they said that these changes happened to the data. That's something we got to work on. The part where could we have done a better job selling SIMPONI during the quarter, yeah, the disruption was taking a long time to get through, longer than, we'd like. And the competitive environment with the JAK inhibitors was definitely creating alternatives for at-home therapies. With that being said, it was a combination of both and the timing one year into this the negotiations that we said, look, we need to figure this out, recalibrate before we can move forward. We're still selling the product today. We're still promoting it. But there's an agreement between the management team. So we have to sit down and rework how we calculate baselines. And again, there's some interpretation on their side on the IV. But there's enough culpability here, to be shared. So I don't want to escape that, Brian. We could always do a better job and a better job managing our partners as well.

So, at this point, do you know what your targets are for the second quarter? And how you're going to get measured on this, or is that still up in the air?

We are working through that right now.

Okay. How are you getting support from them on, changing the marketing message here, given the advantages that SIMPONI has in the market and the pressure that they're under -- or the pressure that it's under from the JAK inhibitors? I mean you guys don't necessarily have the marketing wherewithal that Janssen does. How are they looking to support you in this?

Yeah. That's a good question, Brian. There are definitely some thoughts on their side. They see the same thing we all see, right. The immunocompromised patients not, wanting to be with a bunch of other immunocompromised patients. With that being said, that's their franchise and they want to protect it. So their support for us is going to be contingent on how these discussions go over the next couple of weeks with them. They -- this COVID factor that they've just introduced us to, which affects them on the IV side is something obviously we recognize as a big concern of theirs. So as we work with them, we will look to retain a significant part of the profits, from our activities. And we would also like for them to speed up some of the marketing efforts for these patients, that don't want to go into infusion centers. That's all work in progress. I do want to stress the fact that, on the testing side, how well we did. And still have the SIMPONI also to bring into it. Because to us, SIMPONI is a great cash flow and we want to do a lot more Dx/Rx. We think that's the right way to promote these products. But our base business the foundations of the business, I think you saw that in the first quarter were very solid in spite of all this.

How will you inform the Street, what the outcome of this discussion with your partner is? I mean, are we going to be able to have some idea, what the new metrics are that you're going to be measured on? And then, the last question I have on this is, I believe that the extension is coming up here right that you guys can choose to extend this for another I believe, it's 18 months. Can you confirm the time line on that? And when we will find out about your intentions, on that as well?

Sure. We've already extended it out into -- what did we extend it out to?

End of 2021.

End of 2021 and so we've already extended it and they've accepted that. So that's already been extended. Now as far as your other question with the metrics, yes, we will -- once we get the metrics and we agree on them, we'll let you know. And all the metrics Brian really have to do with baseline. Baseline and what they see is a potential huge windfall, because of patients moving into at-home testing. So those are the two things. So it has been extended. And we will share as many metrics, as they will allow us to share with you.

All right. And last one. Sorry for picking up so much there. But on OpEx that was a big sequential step-up there and it was more than we were thinking. Was there anything one-time in nature, or is that the kind of – I mean, I recognize that you've made some cuts. So I'm trying to understand the 14.8% in Q1 versus kind of what you're set up for – for the rest of the year.

Yes, Brian. There was a one-time expense and that came with the expense for severance for the six employees that we mentioned that we terminated on March 31. So there is that onetime expense, but keep in mind we expanded the sales force. And year-over-year, we are now a public company in Q1 compared to Q1 of last year.

So what's the right baseline that we should be thinking about for that or for kind of how we're modeling at least the spending type?

The model for spending.

So right now, we've disclosed we're at 62 on the headcount for sales reps. Is there more to your question outside of the sales force?

Yeah. I'm just wondering how we should think about the OpEx number going forward. You were at – you just put up 14.8% in the quarter. There was some onetime in there and there were some other reductions in spending. I'm just trying to understand, if we're thinking about this being on a – kind of going forward is this $10 million a quarter OpEx? Is it $12 million? Is it $7 million? Just trying to give us some idea about where the OpEx is.

Sure. So keep in mind as we are now in this pandemic, we're going to see some of the costs come down, as I mentioned with the sales rep bonus, with T&E and with variable expenses, primarily in the lab that's going to hit cost of sales. But there's going to be some variable expenses in OpEx that might have a small decline on the OpEx. But there's – when it comes to our biggest increase in OpEx expense that we've seen it was with the sales force. And as Ron mentioned, we continue to monitor what the right number is. And right now we're at 62.

Okay. Thanks, guys.

Thanks, Brian.

Our next questions come from the line of Kyle Mikson of Cantor Fitzgerald. Please proceed with your question.

Hi, Kyle.

Hi, guys. Thanks for taking the question. Hey. So first I just wanted to confirm what the AVISE testing volume year-over-year was at this point or at least your last data point in I guess May or maybe late April. Is it down 20%?

The volume in Q1 or in April? Do you have it?

No. No. No. I'm saying like your last data point. Volumes were down x amount.

So what we disclosed through April, we're saying the month of April year-over-year we were down 56% with the low point coming in mid-April.

But it's ramped up since then right all of it?

Yeah. Yeah. Every day it's just come up a little bit more yeah.

Okay.

We've been showing progress Kyle since that low point. Every day it's been going up a little bit more at a time. We're not to where our level was pre-COVID, but we've made up a lot of ground since then which gives us confidence. And we're monitoring through a heat map where that's coming from and it's real obvious which states are open or closed when we look at that heat map.

Okay. No that makes sense. Another kind of related question. So obviously, yeah, the pandemic has clearly forced physicians, including rheumatologists to kind of adapt to this new normal clearly. Obviously, we've seen the increase in telehealth among providers including prescribers on medication. So I guess in this context, how are you working with your sales force or with rheumatologists to accommodate that shift to remote or mobile services? And how is this going this affect your strategy I guess after COVID?

Yeah. We are doing quite a bit of telemarketing and telehealth if you will. We're doing quite a bit of that. We're doing a lot of virtual meetings with them. The other thing we're doing is we got a fairly new CMO, Ph. D., M.D., Board-certified rheumatologist, Dr. Deb Zack, and she's been on pretty much a virtual tour talking to all the KOLs, which happened to be her friends and colleagues and in that engagement reminding them about our work with CB-CAPs and what we're doing. So actually having a new CMO, having to introduce herself to other rheumatologists has come up to be a window an opportunity for additional communication along with the telehealth, the virtual calls and all the additional things that we're doing in the field.

Okay, helpful. And then I had a therapeutics question. So from what I understand in its agreement with AstraZeneca Prometheus was not only able to promote ENTOCORT, but also distribute market even sell the product. So, is that something that your agreement with J&J or maybe another manufacturer could evolve into over time, or -- and I'm just kind of curious how a more comprehensive Dx/Rx agreement would align with your strategy. Thanks.

Yeah. That's a really good point Kyle, because with ENTOCORT, the ball was in our court. We control the marketing. We control the data. And basically on a quarterly level, we would just report back how well we did, and then we'd split the -- in somewhat of a royalty fashion with AstraZeneca. This agreement is quite different. Janssen has never done an agreement like this so there's a lot of intrepidation. So they gave us the ability to market only what they wanted us to market and they control the data the baseline. In the negotiations that we're going to be going in the future, I am going to be marching much closer to what I had with ENTOCORT, which is a lot more control on the data, a lot more control of what we can do for marketing. That's going to be my stance in the negotiation and whether it's accepted or not is another story. But it definitely would help us, if we could have more control of the way we communicate and what we communicate. As we do future Dx deals, we'll continue to look for more agreements that will line up with the way we did the ENTOCORT deal.

Okay. That's great. Thank you, Ron. And then last question around, I guess reimbursement. I mean have you been having discussions maybe virtual meetings with payers so far in 2Q? How are those going? How is the feedback? And what can you share there?

Yeah. Thanks Kyle. We actually -- we had some -- everything we were working on up until December, was to get ready with our dossier to approach the payers for coverage and increased ASP. So we got a couple of them real quick as the year started. You saw the -- what we did with the California companies as well as the Sonora Quest agreement that we had. And we've already presented to the big outlets if you will Evercore and Decision Street. We're looking to get solidified with them. Meetings have been set up. We're continuing to move forward. The dossier is solid. The feedback we've gotten from every outside consultant that's looked at it, not our own employees has said you did everything that is required for you to get in-network coverage. So everything is done there. The analytical validation, the clinical validation, some of them twice and published the clinical utility study, published the health care economic study is complete. So we feel Kyle that we're ready. We're doing virtual meetings right now. We're continuing to work with the payers, but we feel there's no reason not to be included in-network with every major payer. And as these meetings take place that's what we're going for.

Okay. That’s great. Thanks so much.

Thank you, Kyle.

That is all the time that we have left for the question-and-answer session. That does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.

Thank you.