Exagen Inc. (XGN) Q3 2020 Earnings Report, Transcript and Summary

Good afternoon, and welcome to the Exagen Inc. Third Quarter 2020 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Mr. Mike Cavanaugh, Investor Relations. Thank you. You may begin.

Good afternoon, and thank you for joining us today. Earlier today, Exagen Inc. released financial results for the quarter ended September 30, 2020. The release is currently available on the company’s website at www.exagen.com. Ron Rocca, President and Chief Executive Officer; Kamal Adawi, Chief Financial Officer; and Mark Hazeltine, General Manager, 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 subsequent filings. The information provided in this conference call speaks only to the live broadcast today, November 10, 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, Mike, and thank you to everyone joining the call today. As always, we appreciate your continued support of Exagen. I’d like to take a moment to inform you that our colleague and friend, Chet Burrell, has decided to retire from the Exagen Board of Directors effective December 31, 2020. Chet has been helpful in sharing his comprehensive knowledge and experience in managed markets with their entire team. During our dossier development, Chet’s guidance allowed us to avoid unnecessary activities and focused us on the most meaningful actions that would resonate with the payer community. His ability to share his time and insights enabled Exagen to be fully prepared for reimbursement and contracting meetings with major payers. We are very grateful to Chet for all he has done to assist us in being a driver for better care of autoimmune patients. We are delighted with the third quarter’s exceptional results. Our testing franchise, despite continued disruptions of patient visits to rheumatologists, our flagship AVISE CTD testing volumes came in at 26,201, which is greater than 90% of the levels we have had experienced in the first quarter before COVID-19 profoundly affected our business. We believe this is a testament to both the seriousness of autoimmune disorders as well as the value patients and that health care providers receive with AVISE suite of testing solutions. Due to the pandemic, patients must make additional efforts to visit their doctors and get their symptoms correctly diagnosed. Further, our specialized commercial team continues to support health care providers through an optimized combination of in-person and virtual calls. Along a similar vein, we achieved a record of 600 adopters in Q3 2020, a 40% increase over Q2 2020 and stickiness of 99% was terrific given the circumstances. Stickiness is defined as an adopter that writes again in the following quarter. This further demonstrates the unique utility of the AVISE franchise to rheumatologists challenged with clinically difficult to diagnose diseases. Additional value provided by our AVISE CTD test during this pandemic is the convenience and accuracy to cover multiple connective tissue disorders versus serial testing, which could take many doctor visits over numerous years. As we have said before, life-threatening diseases like Lupus and chronic disorders like rheumatoid arthritis do not stop during a pandemic and testing can’t either. With the pandemic making it more challenging for patients to see their doctors for treatment, the necessity of tests that can speed up the diagnosis and prognosis of autoimmune diseases is apparent. We believe our AVISE brands can address the need better than anything currently on the market. For SIMPONI, we recorded $1.3 million of revenue in the third quarter with 100% gross margin. SIMPONI’s unique value proposition as the only once-per-month self-injected anti-TNF biologic for rheumatoid arthritis is well positioned for today’s environment. We believe our co-promotion agreement will continue to provide meaningful revenue to the top line as we leverage our Dx/Rx model to provide differentiated value to health care providers. The third quarter was also a productive one on the reimbursement front. We are excited about our agreement signed in July with Humana Military, a managed care support contractor for TRICARE East, which makes available all of our AVISE testing as covered in network benefits to 6 million lives. We are also pleased to announce an additional agreement in September with Provider Network of America a large network of physicians, hospitals and other health care providers, which make AVISE testing available as an in-network benefit to approximately 8 million members served by the network. Additional reimbursement and coverage agreements remain a major strategic effort at Exagen, and we continue to negotiate with many large health care participants throughout the country. We recognized that the pandemic has redirected efforts of many payers to prioritize testing policy for COVID-19, delaying coverage negotiations. We continue to give reimbursement a top priority, and on the strength of our completed dossier, we are well positioned to negotiate coverage. Exagen, in collaboration with leading health care economic experts recently announced the first ever peer review publication, demonstrating economic impact of AVISE Lupus compared to standard diagnostic laboratory test. The Lupus Foundation of America recently shared that the AVISE Lupus test can diagnose Lupus patients earlier and result in significant savings in health care cost. Over a 4-year period, AVISE Lupus yields an estimate total direct cost savings of approximately $2 million or nearly $2,000 per person. AVISE testing is known to be clinically meaningful to physicians and the challenging patients they manage. Now we have peer review published data to support the economic value to payers as well. I’d like to say a few words on our R&D efforts. This is a key strategic focus as we continue to solidify Exagen’s position as a premier autoimmune-focused company, providing an extensive range of tests solutions to help rheumatologists diagnose, treat and monitor autoimmune diseases, which is notoriously difficult to do. We are focused on driving multiple sources of innovation and strengthening our intellectual proprietary portfolio. In August, we announced a collaboration with Hospital for Special Surgery, HSS in New York City for a study of antiphospholipid syndrome, an autoimmune clotting disorder, which most commonly increases the risk of blood clot and pregnancy complications as a result of antiphospholipid antibodies. This proof-of-concept clinical study will investigate complement activation markers and additional biomarkers in different subgroups of patients. In September, we launched a new test AVISE Vasculitis for the diagnosis of ANCA-associated vasculitis. Health care providers have been asking us for this test, and we were able to deliver. We continue to advance the development of further tests to add to the AVISE franchise, including our test for fibromyalgia, a disease which has a large addressable market. While not an autoimmune disease, it is often confused with connective tissue diseases and is, therefore, frequently diagnosed by rheumatologists. Adding an effective rule in, rule out test for fibromyalgia promises to be invaluable to health care providers. We believe that our AVISE tests are the most effective, complete and differentiated series of tests for autoimmune diseases, and we will remain focused on strategically enhancing that advantage. I would now like to turn over the call to Kamal to discuss our financial results.

Thank you, Ron, and good afternoon, everyone. Total revenues in Q3 2020 were $10.8 million, an increase of 20% over Q2 2020 and 3% over Q3 2019. The revenue growth was driven primarily by AVISE CTD testing volumes of 26,201 compared with 18,552 for Q2 2020 and 27,159 for Q3 2019. The number of order and health care providers was 1,665 for Q3 2020 compared with 1,442 for Q2 2020 and 1,591 for Q3 2019. The AVISE CTD test revenue was $7.4 million in the quarter and other testing revenue was $2.1 million. Revenue for SIMPONI was $1.3 million with 100% gross margin. Overall, we are pleased with the recovery of our testing business from the April bottom. As Ron mentioned, our test volumes in the quarter puts us at greater than 90% of our pre-COVID volume trend, which is a strong indicator of our commercial execution. While the continued spread and impact of COVID-19 is highly uncertain, with our 56 sales territories, we’re fully prepared to continue to support health care providers and patients. Positive revenue was $4.3 million in Q3 2020, resulting in a gross margin of 60%, compared to 54% in Q3 2019. The improvement in gross margin was driven by higher SIMPONI revenues coupled with the decrease in royalty costs associated with the expiration of a royalty on our proprietary CB-CAPs technology. Operating expenses in Q3 2020 were $14.6 million compared with $12.6 million in Q3 2019. The increase was primarily due to employee-related expenses, including stock-based compensation associated with the overall increase in headcount as well as increased public company expenses. The net loss in Q3 2020 was $4.3 million compared with $3.1 million in Q3 2019. Looking at our balance sheet. Cash and cash equivalents as of September 30 were approximately $61.4 million. We remain well capitalized to endure any economic uncertainty associated with the COVID-19 pandemic, while we continue to invest in key R&D and commercial initiatives to grow the business. Regarding 2020 guidance, we do not believe that it is prudent to offer formal guidance at this time due to lack of visibility caused by the resurgence in COVID-19 activity. We will now open the call for questions.

[Operator Instructions] Our first question comes from Chris Lin with Cowen.

Ron, I believe you commented that payers are delaying coverage negotiations as they prioritize COVID-19 efforts. Could you just elaborate on the length of this delay? And when do you expect this to be resolved?

Sure, Chris. No problem at all. We’ve been holding virtual meetings with a lot of the payers and obviously, exchanging back and forth through e-mail and normal transitions of information. But they are definitely preoccupied with COVID. And they have -- many of the bigger payers have postponed meetings. The comments are always, we’re going to get to you, but we have something in front of us, we have to take care of right now, which is how we’re going to deal with all the different COVID tests that are coming out and so forth. So they are preoccupied. The quick answer is we’re still in queue for all these meetings. They obviously know that our dossier is out and moving forward. I anticipate that we’ll get in there as soon as possible, but we will be prioritized after the COVID testing. They should be coming to the end of that, Chris, though. I mean they’ve had plenty of time at this point to look at all the tests. So we’re hoping that within the next couple of weeks, we start hearing that they’re back on track with other things other than COVID testing.

Okay. Great. And maybe for a related follow-up, could you just also talk about how the new health economic study is impacting your efforts with payers? And does Chet’s retirement impact your reimbursement efforts at all going forward?

Yes. So first, we’re very happy with what Chet was able to do to provide us information and guidance as a former Blue Cross President. But he has always indicated that he is looking to retire. He retired from Blue, and he’s looking to settle in. So we wish him all the best and thank him for it. It doesn’t really impact us going forward because we really got the value of his insights on how to develop the dossier to best address the issues for the payers. The health care economic study is impacting us in this way. We always knew we had the better test. And in fact, most physicians and even payers have said, we realize it’s a better test. Keep in mind that what they were used to using the ANA, anti-dsDNA, Anti-Smith, it needs to go back to the ‘50s and early ‘60s. So they have recognized that it was there as far as a better quality test to get a more accurate timely diagnosis. But we didn’t have the economic study. So what the Clarks [ph] study did was round out the information. Better test saves you money. We will be -- it’s part of our dossier now. And I think it’s going to have great impact because how often do you get something better that actually saves you money.

Okay. Got it. And then for my last question, I believe you had noted that the test volume is greater than 90% of pre-COVID trends. Has that held steady even in light of the recent resurgences?

It has. And I’ll address that with the stickiness. So we have achieved record levels of stickiness, and that’s defined as an adopter that writes again in the next quarter. That’s a testimony to the value we bring to physician. There’s something else here, Chris, that’s really important. Before COVID, what a lot of physicians would do with something called serial testing. Test your ANA, you come back in a couple of weeks, they’ll test your anti-dsDNA, your Anti-Smith. And that’s why, as says, it took 6 years to get correctly diagnosed with potentially deadly disorder like lupus. Our test is not only better than what’s out there, but it’s also more convenient when you use our AVISE CTD because it combines not only the best lupus test, but the 11 generic markers of those organisms that you’re often overlap with lupus. So the convenience of one test upfront during COVID is a perfect solution for them. So I like the fact that we’re 90%. I think the adopter shows that they’re going to stick with us, and there is no cure for lupus. So we feel like we’re very well positioned during the pandemic and even after pandemic as these bolus of patients come back.

Our next question comes from Brian Weinstein with William Blair.

This is Griffin [ph] on for Brian. Maybe just want to start here. How should we be thinking about the baseline for SIMPONI heading into ‘21? And is there any update on the potential for renegotiation? That deal with Janssen?

So, we’re fortunate because Mark Hazeltine is here with me. He’s the one negotiating with Johnson & Johnson. So Mark, why don’t you address that?

Absolutely. Griffin. Nice to speak with you. Yes, we’re in negotiations with Janssen for the 2021 baseline that we committed in our 8-K at the end of June to have that done by the end of November, and we’re tracking to that date right now. We have a great relationship with Janssen. The SIMPONI product is performing well in the marketplace, and we’re very pleased with our performance in Q3. So we’re looking forward to 2021 to be another productive year for you -- for us with the Rx/Tx model.

Great. And then just maybe a follow-up there. What kind of promoting are you doing for SIMPONI? Does the quarterly revenue cap impact how you’re thinking about potential promotional efforts there?

Yes. That’s a really good question. So we want all the -- extract all the value we can out of all of our assets. So being that there is a cap in Q3 and Q4, we want to get all that cap, which, as you can tell from the numbers in Q3, we were right there. What it also did was allow us to put a little bit more energy in some of our secondary products as well and we did that with the incentive comp. And by that, I mean, our monitoring products as well as prognostic products. So what it allowed us to do was to continue to drive forward with our entire portfolio of assets. Keep in mind that SIMPONI doesn’t distract us from AVISE CTD. We’re fully leveraged. All these assets are assets that our core audience of rheumatologists use on a daily basis.

Great. That’s helpful. And just one more for me. Any updated thoughts on sales force size? I think you trimmed that a bit earlier into pandemic. So where do you want to see that go in both the near and long term?

Yes. No problem. So we believe it’s good corporate hygiene to look at balancing the territories once a year, which is what we do. So we’re in the process right now to look at reach and frequency of our target audiences throughout 2020, and we’ll adjust accordingly in 2020, ‘21. One of the good things about being well capitalized like we are, if we need to expand, it’s not that big of an issue. What will probably happen as we look at this, we’ll keep an eye on COVID to see if the states are still open. But we have no problem in expanding in areas where we need to extract more value, more reach and frequency with physicians. At this point, we’re doing the alignment checks right now to make sure the balancing is correct. So thank you for that question, Griffin.

Our next question comes from Kyle Mikson with Cantor Fitzgerald.

Can you just elaborate on how AVISE testing in the geographies that had those COVID license with you kind of rebounded or progressed throughout the quarter? We’re just trying to understand how to think about the volume recovery in areas that have COVID surges, like is that generally like a 4- to 6-week cycle. I guess in other words, how long did it take these test orders to kind of normalize in one of these markets?

Yes, it’s a good question. So we actually saw a pretty interesting phenomenon and still seeing it now with New York. A lot of the New York state patients and by a lot, I don’t mean all by any stretch, they’re showing up in New Jersey and in Florida and in South Carolina. So those patients because we have the monitoring product, we can track that. So I think one of the phenomena on your question is that they may not be seeing them in a closed state, but patients that have the means are going outside the state to see their doctors and get their refills, for example, in our monitoring product. How long does it take to get back? That’s a very good question. There is no cure for lupus and a lot of these autoimmune disorders that we treat. So we know those patients are out there waiting for an ability to see the doctors. As things tighten up, we do get phone calls in here saying, can you direct me to a physician and so forth. What’s nice about some of these doctors, they’ve gotten really good with virtual calls. When you’re diagnosing, you do need a clinical visit. But the virtual calls has given them ability to say whether or not we should send that patient directly a test kit or not, which is, again, a new phenomenon that came out of this. Did that address your question, Kyle?

Yes, that was perfect. And just kind of moving on here. So great to see that study you’re doing with Brigham and Women’s, but there has been some preliminary evidence that kind of suggests that the -- a fairly large portion of COVID patients are actually developing autoantibodies similar to those in lupus and RA, obviously. So I just wanted to kind of give you the opportunity to dive a bit deeper into how you intend to use the results of the study and maybe the longer-term potential opportunity that you’re seeing here as well. I know it’s super early, but would appreciate any color you can provide there?

Yes. We are really happy to be partnering with Brigham and Women’s, a major milestone, a keystone institution, really smart people working with our really smart scientists to do this. And it’s exactly what you said. We’re going to use our complement testing to see if these COVID patients exhibit autoimmune disorders at a faster rate or a more severe rate than those that didn’t have COVID-19. The results of this is we’re measuring our caps. We’re going to measure EC and BC4d as well as PC4d. So we’re going to be measuring caps on these patients. So the results of this, if it’s what we think it is, which is the complement cascade from a virus, we’ll be able to say that hopefully, our test can predict whether or not the patient will get an autoimmune disease faster than if they didn’t have COVID.

All right. That’s awesome. And I know it’s a small contributor to the revenue line right now, but I want to ask for the other testing revenue. So I just was wondering if you treat any specific test yet you’re seeing quorum especially well. How we be capillary test like a bias touch performed during COVID so far? And on a related kind of note, does the televised service generally run faster or slower than the typical process of rheumatologists ordering test?

Yes. I don’t think there’s anything as fast as a rheumatologist seeing you clinically and then deciding rendering the decision to send the test. That’s just -- it’s quick, it’s efficient, it’s traditional. But they have gone to these virtual type of meetings. And I can’t tell you with assurance whether it’s quicker or slower. But I’m glad it’s happening because these patients do need to see a doctor. So I can’t imagine it’s any faster, but I don’t know if it’s any slower than a clinical visit. Your first part of your question was as far as the secondary products, while we don’t disclose these in the earnings call, we know we have significant products here that are meaningful for the doctors. I also want to see if Kamal, my CFO, wants to comment on that?

Yes. Thank you, Ron. So in Q3, our other testing revenue did approach $2.1 million, which was significantly higher than we’ve seen in the past 2 quarters, of $1.5 million in Q2 and $1.6 million in Q1. This was primarily driven by our prognostic testing and monitor testing, which have both been performing exceptionally well.

Okay. And I guess just sticking with you, Kamal, I wanted to ask about the kind of the spending recently. It’s good to see that you expanded the campus and you’re picking up the hiring, but what areas are you guys hoping to strengthen as you kind of grow the efficiency now? And then, Kamal, can you just kind of walk through what we should be thinking about for 2021 and maybe 4Q operating expenses?

Sure. So our biggest area of focus on increasing the spend is going to come from the R&D department. We have a world-class R&D department, and Ron mentioned a lot of the projects that they’re working on. And that’s going to be our biggest percentage increase quarter-over-quarter and year-over-year. As Ron already mentioned, with our sales force, that is something that we look at very often. And we do anticipate to add territories over the coming quarters. And then outside of OpEx and the laboratory, we do continue to make investments into automation to improve our gross margins.

Our next question comes from Mark Messaro with BTIG.

This is Vivian [ph] on for Mike. Congrats on the quarter. So just an initial question for me. Given the pandemic, how much visibility do you have into your sales funnel relative to 1 year ago? And approximately what percent of your sales reps are in the field?

Yes. Good question. Well, the stickiness, I think, is really something you got to look at. The fact that 99% of the doctors that write our products and adopters will write it again. And we hit a record level of adopters in Q3, 600 adopters was an all-time high for us. So that was a really important number. And I think that really shows you the value that this test brings. Again, serial testing versus one test with the best lupus markers inside is something that really appeals to rheumatologists. As far as reps in the field, we do have the 56 territories. Most of them are there. But we are very clear that if your state or ZIP code shuts down that, first and foremost, you listen to the local laws that are in your community. But if you’re not shut down, we do recommend that you follow the office policies, and they’re all different throughout the country. And be able to go in there and see the doctors. The reason we’re a little different than some other companies is we deliver a de-identified test report to engage the doctor, and we have to deliver the transportation kits. So we have reasons to be in there rather than just delivering a core message. And of course, when we drop off the kits or the SIMPONI sample, or even talk about the capillary test that was mentioned earlier, that also opens up a window for our representatives to engage in a meaningful discussion of how one test they can do it all might be a perfect solution for the doctor under this current environment.

Okay. That’s helpful. And just another one, just to quickly follow up on the planning for the fibromyalgia dossier and the expectation of a potential launch time line there?

Yes. We’re very excited to be working with Ohio state on the fibromyalgia test. Our target is to have the first rule in, rule out fibro test. Nobody has ever done that. We always had the rule in lupus test, which is often confused with fibro, but this will be the complete test we think the markets are looking for as well as the payers. While I can’t give you a time line, I can tell you I’m pushing heavy to do whatever we need to, we’ll get more sites, more equipment, whatever we need to do to get the product up and ready for the market. It’s got a big TAM, and it’s got a huge need. So we’re excited about the product. I don’t want to rush it to the point where I do anything that disrupts the scientists from building the quality test that we’re known for.

Okay. Awesome. And a final one from me. Do you anticipate any kind of pent-up demand or backlog due to COVID 19? And if you could just provide an update on the revenue from mobile phlebotomy?

Okay. I do expect the backup because there is no cure. So these patients, you know that’s happening. And if you read the blogs on for rheumatologists, you could see they’re very frustrated, not being able to see their doctors. They’re all finding ways to do it. The one thing I’ll say about these autoimmune patients are, they are aggressive about making sure that they get their care taken care of, which is a good thing as well as all patients should be. So I do expect that there are patients sitting on the sideline. If you’re immunocompromised, you want to go to immunocompromised office with other immunocompromised patients, probably not. But they’re going to come back eventually. There are no cures for these disorders, and they have to be treated. My concern is by the time they come in, they’re very severe. And I hope that isn’t the case. That’s why we encourage them to seek help as soon as possible. As far as revenue from the mobile phlebotomists, we do have -- we have a lot of agreements with mobile phlebotomists throughout the country. And in fact, we have 1,200 mobile phlebotomy locations spread out throughout the country. They’re all a little different, and we will probably need to add much more as time goes on.

Our next question comes from Paul Knight with Janney Montgomery Scott.

Ron, could you talk to, are you done with the sales build out? And then adding on to the question about ordering physicians, can you talk about -- we’ve talked that 4,000 is probably the active number. Do you think that’s still -- based on the number of sales points you now have, do you think that’s still the number?

Yes. Good questions, Paul. The sales build out, we will look at. Our intent is to make sure we have the right reach and frequency to deliver our messages throughout the country. So we are looking at expanding, but we first have to do the work and the work is to look at rebalancing. That process is underway, even as we speak. We work with a very reputable company that takes a look at the number of doctors, the units and so forth. So the build-out will continue as needed. We’re not going to overstep. We’re not going to understep. We want to get the right number. We feel that a targeted universe of roughly 90 to 100 targets per representative is hand-able. With the exception of the Midwest, where you have a lot of windshield time, you might go a little less. In cities like Chicago, you might go, you might have bigger territories because there’s not as much windshield time. But that build out is underway, at least evaluating where to, if to build it out. 4,000 rheumatologists is the numbers that’s always kicked out. I will iterate that even though the AMA says there’s 4,000 in change rheumatologists, they don’t always clean their list as accurately as we would like. So if you’re dead, retired, work for academia or work for institution, you’re still considered part of that 4,000. We boiled that down to roughly 3,000, call it, 800 that are meaningful doctors for us to target. Now with that being said, that’s the rheumatology base, but autoimmune doesn’t only go there. There are some doctors in areas that are not rheumatologists, but act like it. I’m thinking about a physician who’s an internal medicine physician in Wyoming that the next nearest office is 400 miles away but that doctor acts like a rheumatologist. But the key here is, if you think about it, our current structure will enable us to do what we have to with the rheumatologist. And if we need to step beyond that and pick up additional accounts, we have that capability to do so.

And then regarding SIMPONI, do you believe that the COVID situation is making SIMPONI a more attractive option due to the self-administration once a month?

I absolutely do. I mean it just makes sense. Again, self-injecting at home once a month, how convenient could that be. Not having to go to an office with other immunocompromised patients. I mean, just -- I can see a scared patient saying, I’d rather do this. The great thing about SIMPONI besides its unique delivery system, is that they know anti-TNFs. Doctors know it. It is familiar. It’s been out for decades. So having them take an anti-TNF in home is not as risky as it might have been a couple of decades ago since we’re so familiar with how these work. SIMPONI is an ideal solution for the problems that we’re facing today.

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

Great. I want to thank everyone for joining the call today. I’d like to reiterate that our strong Q3 performance, which included a record number of adopters, a 99% stickiness, that’s important to know. They stick with it and you only do that when there’s a great product. And it’s a second consecutive quarter with 60% or greater gross margins. We’re honored to be able to continue to support the care of autoimmune patients during these challenging times. Thank you for your time and attention. Take care, and have a wonderful day.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.