Greetings, ladies and gentlemen, and welcome to the Exagen Inc. Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note that this conference is being recorded. I would now like to turn this conference over to your host, Ryan Douglas, Investor Relations for Exagen. Thank you. You may begin your presentation.

Good afternoon, and thank you for joining us today. Earlier today, Exagen Inc. released financial results for the quarter and fiscal year ended December 31, 2021. 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, Chief Operating Officer, will host this afternoon's call. Before we get started, I'd like to remind everyone that management will be making statements during this call that include forward-looking statements within the meaning of federal securities laws, which are made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical fact should be deemed forward-looking statements. All forward-looking statements, including, without limitation, statements regarding our business strategy and future financial and operating performance, including 2022 guidance, the impact of 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 these 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, March 22, 2022. Exagen disclaims any intention or obligation except as required by law, to update or revise any information, financial projections or 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, Ryan, and thank you to everyone joining the call. Today, I will discuss our fourth quarter and 2021 highlights as well as give updates on our payors, pipeline and growth plans. I'll then hand it over to Kamal, our CFO, for details on our financial results. As always, we appreciate your continued support of Exagen. 2021 was another record-breaking year for Exagen and one we're extremely proud of. We had record revenues of $48.3 million for the year with $12.7 million coming in the fourth quarter. Our strong performance throughout the year was fueled by growth in our flagship AVISE CTD test including AVISE Lupus, which set a record of over 128,000 tests delivered for the year and a record of over 34,000 tests delivered in the fourth quarter. From inception through 2021, we have delivered over 615,000 tests. We also achieved a record of 2,126 total ordering health care providers in the fourth quarter and a record of 739 adopters for our flagship AVISE CTD and AVISE Lupus test. We again saw a very high retention rate of 99% among adopting health care providers from the prior quarter. We believe this high retention rate and the continued increase in the number of ordering health care providers speaks volumes to the value our customers recognize and using AVISE testing. I'm very proud of our team as these records continue to show our sustained success in delivering autoimmune testing solutions that help accelerate the historically slow and frustrating process of clinically diagnosing autoimmune disorders. I would like to point out that these record milestones were achieved in a year that solved various ways of COVID-19 outbreak that impacted patient flow, which resulted in diminished testing volume. The Omicron variant impact persisted through mid-Q1 2022 where we saw the worst January…

Thank you, Ron, and good afternoon, everyone. Q4 2021 testing revenues, which are derived from our core product, grew to $12.5 million. This represents a 14.2% year-over-year growth. Total revenues in Q4 were $12.7 million, which were consistent with Q4 2020. Total revenues for the full year 2021 were $48.3 million, which was a 15.1% year-over-year increase from 2020 despite the impact from the ongoing COVID-19 pandemic. Total revenues were driven primarily by testing volumes from AVISE CTD, including AVISE Lupus, for a record 34,147 in the fourth quarter and 128,246 for the full year. As Ron mentioned, the record number of ordering health care providers was 2,126 for Q4 2021 compared with 1,690 for Q4 2020. AVISE CTD test revenue was $10.4 million in the quarter and other testing revenue was $2.1 million. AVISE CTD revenue for the full year was $39.2 million and other testing revenue was $7.9 million. Revenue for SIMPONI was $0.2 million for Q4 2021 and concludes all revenue we will recognize from the agreement. Once again, we are pleased with the performance of our core testing franchise in spite of headwinds from the ongoing COVID-19 pandemic. Cost of revenue were $4.9 million in Q4 2021, resulting in a gross margin of 61.1% compared to 65.8% in Q4 2020. For full year 2021, cost of revenue were $20.6 million with a gross margin of 57.4% compared to $16.6 million and gross margin of 60.5% for the full year 2020. The decrease in gross margin was driven by a decrease in high-margin noncore revenue resulting from the Janssen Agreement. Testing gross margin represents the gross margin of our tests and excludes the effect of the Janssen Agreement. Testing gross margin was a record at 60.5% in Q4 2021 compared to 60.4% in Q4 2020. Testing gross…

[Operator Instructions]. Our first question comes from the line of Max Masucci with Cowen.

It's Stephanie on for Max Masucci. Congrats on the Centene payor win. My first question is, do you think that the Centene reimbursement win could play a role in your conversations with other payors? And if you could give a little more color on specifically this in, for instance, what did you find as a final hurdle or factor that you needed to address in order to secure coverage with Centene?

Yes. Thanks, Stephanie, and welcome. This is an important one for us. And it's a big national plan, obviously, over $22 million. What happens now is as you gain momentum and approaching 1/3 of the country being covered, is it does put pressure on the other national payors. We feel that, that, along with the studies in the dossier we have as well as other materials we have is going to continue to push for coverage and network status. So yes, to answer your first question, it should absolutely help. You gain momentum. There's a tipping point where you just become part of the criteria for payors to enable the doctors to take care of these patients. We do have the KOL support. We have over 35 papers that are published in top journals, so we feel really good about that. As far as your second question, I actually think the disparity in treatment has really reached a fever pitch with these payors, and they're aware of it. Lupus, 9 out of 10 lupus patients are women, and it affects women of color disproportionately. And they need to take care of that. They know there's an issue with that. And by the way, we do too. We run thousands of samples. And we could see that the people that really need this women of color, Hispanic, African American and Indian who get lupus disproportionately, really need a test like this. Keep in mind that the stable test that they used to use, ANA was developed in the late 40s and anti-DCNA in the early 40s. So they didn't have a lot to choose from in the past, which is why it took 6 years to get correctly diagnosed with this potentially deadly disorder. So this has been a big breakthrough as far as testing and making sure that the patient does have the disorder, and you can put them on the proper treatment.

Awesome. If I could also ask about your guidance. So could you walk us through what your core assumptions are for your guidance range, both at the low and high end? And any color that you can provide around volume and ASPs would be great.

Sure, Stephanie. Similar to last year, we left a $2 million range on the guidance. And similar to what made the decision a year ago is the uncertainties with COVID. As we said in the prepared remarks, January was a very rough month for us. And while we did end with very strong testing volume over the 6 weeks, leading up to this call, there is a delay with us, because the patient has to go through the primary care physician to get to the rheumatologists. So when we have this rising COVID, it can cause a delay for the patient to get our test. And with the uncertainty of BA.2 in Europe and Asia and potentially coming to the U.S., we wanted to make sure that we are pragmatic with our guidance that we're providing, and that led to that similar range that we had a year ago.

Got it. And then if I could sneak in one last question. Are there any updates that you can provide on your pilot agreement with CVS to supply AVISE MTX?

Yes, absolutely. So it's kicked off. It started. We like working with Aetna, CVS. It's obviously their marquee institutions. And we're excited to see the outcome of this. So we're confident that our AVISE Methotrexate test can give the information necessary to keep people on the correct therapy at the right therapeutic range. So it just kicked off. We're really excited about it. So are they. And as we get more information, we'll be more than happy to share it with you.

Our next question comes from the line of Brian Weinstein with William Blair.

This is Griffin on for Brian. Just two on RADR to start. Can you talk about the patient journey a little bit more and where this test comes into play? Is the expectation for RADR given multiple times over this journey to answer a few clinical questions and just want to better understand that?

Sure. Sure, Griffin. So right now, what happens is you have something called the DAS28, this is where they feel the 28 joints to see whether or not you have rheumatoid arthritis. Obviously, a big TAM, huge area. And the journey goes usually with a methotrexate-type product. And usually from there, the doctor really tries to get you to an anti-TNF. That's just the way it is now. And these anti-TNFs are very expensive. What is shocking to a lot of people that are spending $30,000, $40,000 a year for therapy is it doesn't always work. And a lot of times, those patients fail to reach what they call the ACR 50%. They don't even get 50% better. And the reason for that, quite frankly, Griffin, is the way they use these therapeutics is very empirically, I believe this would work for you. So having a guided diagnostic like ours, and that's the key here. It's changing empiric to guided. We can add real clarity to that clinical diagnosis. RADR can inform which therapy through molecular testing would work best for that patient. And there's really -- this is a platform more than a test. So there's 2 tests coming out of here, RADR 1 and RADR 2. RADR 1, the way it's informing right now is it will tell a naive patient -- that will tell the doctor whether naive patient could metabolize methotrexate. If they can, obviously, they want to use their second test to make sure they're in a therapeutic range. RADR 2 is after they built up some resistance, maybe immunogenicity, maybe for some reason, the therapy is not working so well, instead of using the same class of products, you take our RADR 2. And because we're looking at synovial tissue, keep in mind, this is not a blood test. We can look at the actual look at the site of where the infection is happening. We can then inform on whether they're better off with an anti-TNF with a B depleting or with the IL-6 and eventually even with the JAK inhibitor. So the key here is we're moving from empirical treatment to treatment with a scientific test that can inform based by looking at the actual tissue and letting the doctor pick the right therapy for that patient. That will save a lot of money. There's $18 billion wasted in this area. So payors are very interested in our test. They're very engaged with us at this point, and we're really looking forward to launching both RADR 1 and RADR 2 as soon as possible.

And just in terms of timelines here, I mean, you talked about the late Q4 '22 KOL launch got some EU, European proof-of-concept studies out there. But what kind of evidence generation do you think is going to be needed ahead of those launches?

Yes. We're on that right now. We got our ad board, which was terrific. They gave us a lot of good information and we are going to look to have an experience program at the end of this year. An experience program is where you have your KOLs use the test for a couple of reasons. One is they'll be our future speakers. Two is they get to inform us of how that test is working in the real world before you do an actual launch. As far as the evidence, there's a lot of evidence out of Queen University out of London, but we are duplicating that and we're actually adding additional studies. We will have a complete dossier in this product, clinical utility, clinical validation, health care economics. We're putting all that together. And we're really excited with the enthusiasm we're hearing from rheumatologists that want to participate in our scientific endeavor.

Okay. And just one quick one in on volume growth expectations. Would you characterize the growth? Is the expectation for more of an increase in utilization on existing ordering clinicians? Or do you expect the majority of that to come from the just growing the ordering base? Can you talk about that mix a little bit?

Sure. The volume growth -- let's do it this way, Griffin. We rarely get any -- ever get any doctor saying that this isn't a superior way to do a work up with somebody with autoimmune in a rheumatologist office. They all agree it's the best lupus test, and with the overlapping markers that gives them the best information. The only hindrance to volume is really the payors. So getting payors on board is a key initiative of ours. Because that lets the guard down. It's not a scientific reason they don't use it. It's the reason is that the payors will usually object to it until you have a contract with them. So that's what makes the 90 -- over 91 million patients that we have under covered, is so important to us and why we have to continue to push for that. It's not the doctors of the issue. They agree this is the way to go. It's not the KOLs, it's not the 35 papers that we have published. It's whether or not it's covered so the patient doesn't have to pay out of pocket. So that's what we're working on. As we knock these down, I do anticipate volume will increase. And keep in mind, this test covers most of the autoimmune infections that rheumatologists see on a daily basis.

Our next question comes from the line of Mark Massaro with BTIG.

This is Vivian on for Mark. Just given the conclusion of the SIMPONI co-promote, can you speak to your commitment to a dual diagnostics and therapeutics sales strategy, maybe also how you've been exploring options to replace SIMPONI with other biopharma partnerships?

Sure. Absolutely. So I've done the combination in my past life, we've done it here. And it's very important to do those when they make sense from a standpoint of this. Does it fit with our current infrastructure? In other words, autoimmune rheumatology, so I can leverage what I have. Are the economics such that are sufficient that I'm willing to do it and not lose any opportunity cost with our other assets? And 3, is the type of partner we have in the asset is in an asset that's appreciated by our customers? If it hits those criteria, we're more than willing to take a look at it. We have turned down quite a few because they didn't hit those criteria. So I'm not opposed to it. I think that precision medicine lends to it. I actually think that RADR may open up the door to some of these conversations down the road. We were happy with SIMPONI. Remember, we signed that SIMPONI agreement with a lot of accolades from Janssen as well as us before COVID. A month after we signed it, COVID hit, a worldwide pandemic and it really caused a lot of issues with a lot of things. The relationship with Janssen is still absolutely strong. We still talk to them. We still talk about possible initiatives. So that relationship is really strong. It was nothing to do with that. But we -- from here on out, Vivien, we're going to look at assets that fulfill those 3 criteria I mentioned earlier. As far as options, one of the great things about owning the hilltop, if you will, in rheumatology, anybody who wants to enter the space usually ends up calling us and having discussions. So we have multiple options to discuss as far as that's concerned. The key here is right now, I have terrific assets that are currently commercialized. And when I look at my pipeline with fibromyalgia, RADR as well as other assets, I have plenty to do here to continue the growth of the company in a very meaningful way. If and when the right therapeutic comes and fits our criteria, Vivian, we will take a look at it. And if it works, we'll put it in here. If it fits with our criteria, we'll put it in our bag.

Okay. Perfect. Just a quick follow-up. Any updates you could provide for multiomics R&D, any milestones that we should be looking out for there? And if you could also remind us on the TAM for that and how multiomics could help you expand into earlier diagnosis?

Okay. Multiomics, where the lab is now just about complete. We have AVISE RADR that will be our first multiomic test that will run through there. It is an RNA test, based test. And the TAM for that is huge. I look at -- especially on the therapeutic side with HUMIRA, REMICADE, CIMZIA, all those tests, it's just a big market in RA. So I think it's got to be 1 of the biggest testing TAMs that possibly out there that we're going to be addressing. And again, with the $18 billion wasted every year in the United States alone, we do have the payors focus on this area. So that's the TAM. The multiomics is definitely something we're interested in. We have a lot of great proteins and adding markers like, for example, an interferon alpha does make sense for us. As these products that are being developed by companies, AstraZeneca just launched a product that is an interferon alpha type lupus test, it makes sense for us to meet them there and give the quality test that you can find out if those new therapeutics are, in fact, effective.

Our next question comes from the line of Kyle Mikson with Canaccord Genuity.

Congrats on the quarter. Congrats on Centene. I guess I had like a multipart question on Centene. So it looks like you're getting all the lives excluding the PDP lives. I guess, first, could you just confirm that? And also that includes TRICARE West, just kind of curious, obviously, you had TRICARE East already. And the second part of this question was basically just like the kind of implications on the '22 guide and maybe your '23 sort of outlook based on just given Centene all these lives here. And like specifically, I guess, like, you could talk about the rate that you negotiated. Like how does that compare to your current list price or ASP? And are you, overall, just like kind of pleased with the way that you negotiated?

Great, Kyle. I'm going to answer the first 2 questions, and then Kamal is going to answer the question as far as the rate and the ASP. TRICARE West is different. TRICARE East is its own entity. TRICARE West is its own entity, and they're both basically military, military families. So Centene really isn't -- Centene, WellCare really isn't that. We cover the 22 -- over 22 million lives that they have, and it does exclude some areas, but that's why we already took that down. That's why the numbers that we gave you is the right number. So there are some plans that don't participate that they do cover, but it's not the majority. It's a rounding error, if you will. So you want to look at Centene, WellCare is covered in in-network, which is what we need. Again, TRICARE West is different. As far as the ASP and the rates, I'm going to kick it over to Kamal.

Kyle, we've never provided pricing details on any of the agreements that we've signed. But I can tell you, based on the history of the testing from this payor, this would be accretive to revenue and to margins.

All right, great. That sounds good. And then maybe like a few on like kind of already with RADR. So RADR is going to be the first rule in therapy select industry there's already like a blood-based test that can rule out RA. Is there anything about maybe the physiology of blood or just technology available today, including what's out there in the academic institutions that kind of like precludes a blood-based rule in test from being developed?

Yes. A couple of thing is liquid biopsies are popular because they're convenient. You don't have to do surgery. And that's the real reason that people like those. I don't have to surgically remove a thyroid, if you will, with the blood test. That's not the case here. There's not something that’s demonstrative like that, like a surgical procedure to show convenience to. Our test RADR elevates the rheumatologists. It's a procedure that the rheumatologists will basically exclusively have. And rheumatologists did not go through their fellowship and become a rheumatologist to act like our primary care doctor. So they like the sophistication of something that's a procedure solely for them that they can add value to the medical community above and beyond what a primary care doctor can do. That's one thing. It's just themselves and so forth. The second piece is this. When you're looking at blood, blood is dirty, blood has white blood cells, red blood cells, platelets, has all kind of things in it. But when you're picking out synovial tissue at the site of infection, you were getting the rawest information that's not diluted. That's the key. And that's what the advisors were telling us just recently at a meeting, our scientific advisors are saying, that's the purest way to get the most accurate answer is to actually look at the synovial tissue, the site of infection before it gets diluted in the bloodstream and so forth. So a rule in test is critical. A rule in test that doctors feel like they can command and get a hold of because it's a medical procedure they do is important. And the accuracy of tissue versus blood is going to be critical down the road. And we have no problem proving that as we continue to develop the asset.

Great. That sounds good. And then Ron or maybe actually like Mark, have you guys decided on using NGS or PCR for the RADR test yet. And actually, I think like encounter was possibly an option. Have you decided on the instrumentation yet for the test?

Yes. Kyle, this is Mark. We do encounter for discovery work. And we also have Illumina NXT 2000 for discovery work as well, which might make its way into our clinical operation. We are evaluating the gene count and for the optimization of the gene count for RADR 1 and RADR 2. Kyle, if it's low enough and provides the right performance characteristics, we might go with the PCR platform. So as we stand right now, we are looking at RNA gene expression with NGS, but there is an opportunity for optimization for the clinical lab.

Okay. Yes, that makes sense. And then last one for me on, I guess, all right. So congrats on the Scientific Advisory Board appointments. You had 1 new Board member that has a pretty solid background in like AI and machine learning and computational methods. Could you talk about how like AI and big data could be integrated into the RADR test over time as you kind of develop the product and maybe optimize the assay algorithm?

Yes. It's already being implemented there. We have -- we use data robot. So we use AI quite extensively now with RADR. So it is proven to be very valuable. I can't get into the details, but it has been very informative to use data -- big data the way we're getting it through AI, through data robots. So yes, absolutely, Kyle, that's been a very important part of this development.

Our next question comes from the line of Ross Osborn with Cantor Fitzgerald.

Just a couple of quick ones for me. So maybe regarding gross margin, specifically testing gross margin. Could you walk through some of the headwinds and tailwinds seen during the fourth quarter and how you expect this to shape out in calender '22, given the high testing gross margin seen?

Yes, Ross, I'll take that question. First, I'll say in Q4, we saw our ASP increased 2% year-over-year to $304 on our AVISE CTD test, last year fourth quarter was $299. ASP is always going to be the biggest driver of our gross margins going forward. That's why these deals like WellCare, Centene are so important to us as a driver gross margins north Other areas that helped us to expand our gross margins and have a record on our testing gross margins this quarter include efficiencies in the lab. We've done a lot to automate. We as we see our volumes increase, we have purchasing discounts. And sometimes those purchasing discounts hit in the end of the year and we get bigger credits at the end of the year. We also have that royalty of the 10% CB-CAPs. That's almost completely off the books in 2021. So looking at full year year-over-year, that was a 10% royalty on CB-CAPs paid to Royalty Pharma that ended in January 2020. But it takes about 12 months for that to completely come off of the P&L because sometimes it takes a payor 12 months to pay us, and that's how the royalty is calculated.

Okay. Got it. And then maybe just on the sales force. How would you describe the performance during the fourth quarter? Are there any metrics that you provide? And then has been seen performed year-to-date? And then just kind of a quick follow-up. What is the hiring plan look like for calendar '22?

Sure. No problem. Very proud of the performance. Look, I was -- I started my career as a rep. And in the middle of a pandemic to being able to continue to drive sales is tough, is daunting. The job is hard without a pandemic. But I'm very proud of hitting 128,000 orders for the year, 34,000 for the quarter, a record adopters of 739. Those are metrics that are very meaningful, especially in the face of a pandemic. So very proud of the team. They're highly educated. We train them like crazy. We make sure that they're absolutely sharp and understand autoimmune as well as any person could. So the time and effort we spent in training is paying off, and their ability to continue to grow even in the face of all these waves of the pandemic that keeps hitting the country. As far as the future, while I can't disclose it right now, we will do what's necessary to get the reach and frequency on our assets, and we look at it constantly. I sit here with Mark and Kamal and we run metrics. And if and when we need to add reps in a territory, we have no problem doing that. I will add this, we're finding and maybe it's a pandemic effect that in-house sales people can be very effective. So we continue to grow that team as well, along with the decentralized team. And I don't think that's going to go away. I think Ross, I think companies have learned that it's a very cost-effective way to add to your frequency and reach. I don't think I'd use it to launch a new product, but to augment an existing customer with new data, it does seem to be an effective way to go.

Got it. Sounds great. And then last one for me. Would you walk through the dynamics that drove the decline in other testing volumes during the quarter?

Yes. I don't think we've dipped all that much in those, but we -- those are assets that we don't put a lot of marketing or sales effort in. A lot of those assets are what we call own the hilltop assets. This is something I learned in my prior life. Instead of just offering 1 product, offer multiple products. It keeps the doctor engaged across the board. So some of these products ebb and flow probably a lot because of the pandemic. They're going to concentrate on the most important disorders. Well, obviously, lupus being one of them for rheumatologists where some of these other assets, while important and they like them, that's what they're really more focused on. I'm not too concerned about it. I think they'll rebound very quickly as patient flow continues to come back post pandemic.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Ron Rocco for closing remarks.

Yes. Thanks for everyone in your support of Exagen. We really do appreciate it. We do feel we're taking on the challenges of autoimmune. These are the top challenges with testing. I'm very proud of our team. And there's 3 things we're absolutely focused on. One, commercial excellence; two, the development of our elaborate extensive pipeline; and three, the payors adoption of our test for in-network coverage. Those are at commercial excellence, pipeline development, payor adoption. That's keeps us focused and that's what keeps us driven, so we can help more patients with autoimmune disorders. With that, I want to thank you for your support, and I look forward to our next call.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation on the rest of your day.