Greetings, and welcome to Exagen Inc. First Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I will now turn the conference over to your host, Mr. Ryan Douglas, Investor Relations for Exagen Inc. Thank you. You may begin.

Good morning, and thank you for joining us. Earlier today, Exagen Inc. released financial results for the quarter ended March 31, 2025. John Aballi, 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.exagen.com. As today's call includes forward-looking statements, we encourage you to review the statements contained in today's press release and the risks 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 will 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 thanks for joining the call today. It's exciting to be reporting our first quarterly results with the impact of our new markers, and we are seeing fantastic results. We plan to touch on that along with providing additional color around the debt refinance we announced last week. We have a lot going on at the company. We're off to a great start, and it's an exciting time. I'll detail a few critical topics relevant to our success and then turn the call over to Jeff for further detail on our financial performance over the last few months. To start, we delivered our ninth consecutive quarter of increasing trailing 12-month ASP, and we're incredibly proud of the progress we've made over the last 2-plus years. Our revenue cycle operations continue to improve, and Jeff will provide additional commentary, but we are methodically growing our per case reimbursement and have started to generate real momentum with our market access efforts. I tend to shy away from describing activity as I believe cash in the door is what really matters. But I think it's important to highlight that we have started to win administrative law judge or ALJ hearings as part of our strategic reimbursement efforts. To explain a bit more, over the course of the last couple of years, we sought to elevate our appeals efforts to that of an external review by a neutral third party. This takes a lot of time and diligence and is a learning process for each product we offer as we fine-tune the packet of information we submit based on feedback throughout the process. This past quarter, we successfully won our first ALJ hearing, which was a formal hearing of a Medicare Advantage denial that we initiated as part of our ongoing…

Thank you, John, and good morning, everyone. 2025 is off to a strong and exciting start. We are eager to keep building on this momentum throughout the year. We've made great progress on our financial objectives over the past quarter. Notably, as John mentioned, the launch of our new biomarkers and early read on expanded ASP puts our profitability goals well within reach. and we remain fully focused on achieving them. And our new credit facility with Perceptive Advisors extends maturity of our prior term debt, ensuring runway to sustaining free cash flow positivity while also providing flexibility to further accelerate growth initiatives on a minimally dilutive basis. Diving into the details of the first quarter, beginning with revenue. We achieved record revenue of $15.5 million, representing a nearly 8% increase compared to the first quarter of '24. This growth was driven primarily by continued expansion of our AVISE CTD trailing 12-month average selling price now at $419 per test, thanks to the addition of our new markers. We also saw a modest uptick in testing volume, both year-over-year and sequentially. Volume expansion will continue to be a key focus for us throughout 2025. To give you further color on ASP, our early read on new biomarker reimbursement of $90 per AVISE CTD aligns with our initial expectations. And while it's too early to make a call on our longer-term expectations, we are encouraged by early traction. Given that these new biomarkers were reflected for only a partial quarter, the $90 per test translated to about a $15 increase in our trailing 12-month ASP. It will take the remainder of '25 before the full impact of these new markers is reflected in our trailing 12-month ASP. And we continue to see opportunities to expand ASP through enhanced appeals and market…

Thank you. [Operator Instructions] Our first question comes from the line of Kyle Mikson with Canaccord Genuity. Please proceed.

Hi guys. Congrats on the quarter and the agreement with Perceptive. So starting off on volume, I think you talked about a sequential increase by 6%. That's like kind of a modest growth of the year. Good to see that growing though. Could you just talk about your expectations for volume for the full year, how that kind of trends I guess, quarter-by-quarter, given it's a focus for you? And it seems like test per doc, per physician is kind of stable, maybe like 12 to 13 tests per doc. Could you just talk about if you are trying to expand that number as well?

Hey Kyle, good morning. Happy Cinco de Mayo. Thanks for the question. So great question. So as it relates to volume, we are very pleased with the progress we had here in Q1. I tried to provide a little bit of color and it's really exciting from our standpoint to have the stability in the sales team that we've had over the last 12 months. And really, J.R. and his team have done a fantastic job identifying the right opportunities for us. As we launched these new markers, we focused on our existing physician base. So maybe to answer your second question first, that test per physician, is the key metric for us and the numbers you referenced are right on. We are -- that is an area we expect to see grow. And especially as we continue to penetrate into the rheumatoid arthritis market more, we do expect that number to go up. We again -- we've been working on getting physicians familiar and acclimated with the new markers. This is new information where the clinical utility has to be explained, detailed and gone over time and again and again. And so we'll see how that pans out for the rest of the year, but that's certainly an area of focus for us. We also are still driving expansion. There is quite a few physicians in the rheumatology space that do not utilize AVISE and is a great opportunity for us. So we right now believe we service about 1/3 of the rheumatology community. There's a referral network within there as well that is opportunistic for us. So we'll continue to drive on both fronts. As it relates to volume overall, as you know, we don't guide specifically to volume on a quarter-by-quarter basis. We do expect this to grow this year. Q1 was a great start for us, and we'll have to see kind of how it continues on from here. January was a little light for us volume-wise. It picked up towards the end of January. February was great and March was fantastic. That progress has continued here into Q2. So again, we'll have to see. We've launched our expansion from a sales standpoint and so a territory standpoint. And so that should also continue to drive volume throughout the year, but that's kind of how we see it.

All right. That was great. And then just sticking on that volume theme. You provided some anecdotes for examples last quarter about the case studies indicating that you could actually expand the reach to physicians through different indications of autoimmune disease and things with these new markers. And I think that you referenced new markers as being the driver for the volume kind of increase in the first quarter. So could you actually just elaborate on that and how that could progress going forward and help you drive volume growth as well?

Yes. So the drivers are, I think multi-pronged in terms of their impact to overall volume growth. One of them being stability of the sales team. We've talked a bit over the quarters that we've really been working to get the right team in place. So we rightsized the sales force when I joined the organization a little over 2 years ago. And then we've been working on finding the right person for our organization. And that transition has transpired over the last, call it, 12 to 18 months. And then you get people settling into their roles, really learning the product and getting a familiarity with the customer base. And that stability is -- really starts to pay dividends. You go from not just learning, training, acclimating to actually being more strategic in your selling process. And that's really where I feel like we're at now with our current sales team. It also allows us to open up opportunities for expansion, as we said. The new markers specifically as I've spoken with our sales team and also with clinicians, it brings an excitement to the selling process, right? So we've got new publications that came out here in Q1. You also have a new offering. There's a different selling approach. With your physicians who have already bought in, you're still educating and bringing something new to that discussion, and that makes it much more exciting. So I think that, that energy is certainly being felt and likely to persist, and that's been a big driver as well. Not to mention that the clinical utility of the new markers expands us into the RA space more than we had previously. So those three things, I think, will be pretty strong contributing factors to continued volume growth.

Perfect. And then finally for Jeff, on the financials. First, I have two questions. First, could you maybe parse out the prior period revenue? Just helpful to kind of know that. And second, the adjusted EBITDA loss was a touch deeper than our model. Could you -- even if you keep OpEx stable going forward, it might be kind of tough to get to breakeven by 4Q. You are clearly on the path there. I'm just kind of curious how the OpEx influence are working. So could you walk through maybe like your -- gross margin going forward as well as the SG&A and R&D investments for the rest of this year?

Sure. Kyle, I'll break that up a bit. I think your first question was on prior period cash collections. And as we continue to say that on a quarterly basis, those prior period cash collections are going to fluctuate, and that will have an impact on revenue and ASP. In the fourth quarter of '24, for example, we had about $1 million in excess cash greater than 12 months, in the first quarter of '25 was about $0.5 million, right? So that will fluctuate. But we do still believe there is opportunity there. We are continuing to go after it aggressively, and we consistently get better at it. It will fluctuate quarter-over-quarter, but it was about $0.5 million in the first quarter. On your question around profitability, EBITDA, OpEx margin, I think there are a few things at play in the first quarter that drove that EBITDA number. And the first one is, as I talked about in the call, was really the gross margin, right? We did have some, what we'll call transitory headwinds on the gross margin. We do expect to see a nice gross margin step up, at least particularly in the second half of the year. As we talked about, we did invest ahead of the curve a bit in labor and some additional expenses to accommodate the ramp-up of the new biomarkers as well as anticipated increase in volume. So we did see those expenses hit in the first quarter. And that was against a revenue composition where we weren't seeing the full impact of the new biomarker ASP, as a result of the fact that we only had a partial quarter, as well as some of the direct bill accounts hadn't been fully implemented with the new pricing. So there was a headwind there that we expect will start to clear in the second quarter. And then just generally on OpEx, we are still -- we do expect to see OpEx moderately increase. You saw that. A lot of the incremental expense in SG&A was really around the expansion of the commercial team and related really more to the variable comp associated with the step-up in revenue. So we will continue to manage that responsibly. We do expect we will start to see operating scale. We did see some minor scale in terms of total OpEx as a percentage of revenue year-over-year. We saw it tick down, and we continue to believe it will tick down. So we do think we're well positioned by the fourth quarter to be in that free cash flow positive adjusted EBITDA space.

Great. Thanks.

Thank you. Our next question comes from the line of Ross Osborn with Cantor Fitzgerald. Please proceed with your question.

Hi, good morning. Congrats on the results. So starting off, and I may have missed this, but do you have an update on when you expect to launch the second wave of RA markers?

Hi, Ross, good morning. So we've said approximately by year-end. We think it's following a similar cycle to what we did with this last set of markers. So year-end, beginning of the year is kind of right in that time frame. Obviously, with the LDT determination by the courts there, we are not exactly beholden to New York State approval at this time for a launch. But in all likelihood, we would still pursue that and launch post. So that's one aspect we can't control. It took about two months to achieve New York state approval for our last set of LDT assays. So that's -- we're on a similar cadence from a development cycle. So we'll see it towards the end of the year, perhaps into beginning of '26, but that would be our current expectation.

Okay. Great. And then lastly, would you just provide some color on how you are feeling about market awareness, just meaning physician awareness of your new enhanced test? How much groundwork are you guys going to have to go out in terms of educating community? Or do you feel like it is pretty well known following publications where people are coming to you?

That's a great question. And I think it varies regionally. We have higher concentration of sales presence as it relates to various patient populations. So in some of the Southeast, for example, we're more highly concentrated. And then as I'm sure you can imagine, as you start to move West, there's areas or pockets where some rep may be covering in certain circumstances, maybe even two states or something. So in those instances, it takes a little bit more time to drive awareness, but you also have less physicians or they're more sparse. So from our standpoint, I think the awareness is reasonable amongst our physician base that was bought into and using AVISE prior to the new marker launch. And we had the educational campaigns that didn't require necessarily an in-person visit. So e-mail blasts, fax blasts, ways to communicate outside of just the face-to-face. Although I believe internally, our strategy is to get in front of folks and actually walk them through it. I think that's a very powerful way to educate folks regarding changes to clinical practice, being able to answer questions, be able to talk through various case studies and what have you, it really makes it a more productive or fruitful conversation. So on that front, we're only two months in. We started doing a little bit of it prior to the holidays, but this is a message that certainly has to be discussed multiple times. And as different scenarios come up, various positivity rates or the new markers end up being positive in conjunction with other markers, physicians want to know what does that mean clinically. And so, that takes some time and then the value proposition starts to set in as you have those firsthand experiences. So I think we're still pretty early. It's likely going to take the majority of the year to fully educate folks, but it's just a deepening of the educational efforts.

Great. Thank you.

Thank you. Our next question comes from the line of Mark Massaro with BTIG. Please proceed with your question.

Hi guys. Congrats on a good quarter. So in your prepared remarks, you mentioned that the facility that you have in place with Perceptive includes up to $30 million available for approved strategic transactions if opportunities arise. Can you maybe comment on what types of strategic transactions are something that you would consider? Would this be content-wise within perhaps autoimmune disease diagnostics? Or could it be broader than that? And then as far as the approval goes, I would assume that would include your Board of Directors, but can you also comment about the role that Perceptive has in determining whether or not it's approved or not?

Sure. Good morning Mark, thanks for the question. I'll comment a little bit of our thinking around the strategy here, and I'll let Jeff comment on some of the administrative aspects of it. I guess maybe first and foremost in this vein is we did this because we wanted the flexibility. So should we want to draw down the additional capital, which by the way, is not anywhere near a given, okay? But it could happen, I guess then we now have a clear path to it that doesn't take a ton of effort and could provide a solution regardless of the macro environment. So that's why we ensured we had this aspect to the deal. We like the flexibility and they are working to just have options. What type of an opportunity are we going after? I think it's highly likely to be related to our existing business. And while we're not ready to fully divulge exactly the specifics of that comment, I think it's pretty reasonable to assume that it's in the autoimmune space and related to some aspect of biomarker development, novel biomarker development in this space. And so that leaves a pretty wide open field. We don't see a ton of commercial-ready assets for plug-and-play on a CLIA platform. But at the same time, we are always looking, always open to it, and we'll continue our diligence there. And I think we've -- now that we've gotten closer and are on the horizon of being cash flow positive organization, I think this is the perfect time for us to establish these processes so that we are ready and opportunistic when we can be. Jeff, do you want to comment a little bit on the administrative approvals?

Sure. Yes. Mark, and again, clearly, I can't or won't speak for Sam and team at Perceptive. But based upon conversations throughout the negotiations, I think the expectation would be that the level of diligence that they are going to need to do on any sort of consent required for a transaction will largely be based upon the reliance on diligence we perform and really what we present to the Board, right? And so, it is more likely than not that as long as we're comfortable, we've kicked the tires, done our diligence, the Board is behind it, that Perceptive would come along. I mean -- and again, I can't speak for Sam and the team again. But what I will say is historically, having worked with Perceptive before and in the process of conversations with them, they are very supportive and very interested in continuing to drive growth through transformative transactions, if they make sense. So we don't think it is going to be an onerous process as long as Management and Board are behind the transaction.

That sounds great. And then you guys talked about kidney disease and your effort in advancing early markers there. Is this -- do you envision this being an area that you're committed to? Or is this sort of like you're looking in the exploratory stage? I'm just trying to get a sense for your conviction in this market at this time.

Yes. Glad you brought it up. So we are very encouraged by the work that we are doing in kidney disease. I think we've got some exciting science at the organization. We've got really two development efforts, one in lupus nephritis, which takes us deeper into the autoimmune space and there is a high clinical need within a subset of SLE patients. But basically, approximately half of all lupus patients end up developing some form of kidney involvement or lupus nephritis. Diagnosis now is by kidney biopsy, and there are treatments out there, biologics out there, but you don't know after an extended period of time if the patient is responding. And during that period of time, the kidneys can continue to experience irreversible damage. So we have programs in place that potentially could serve as a diagnostic capability in that context, along with a measurement of disease activity or a measurement of therapeutic response. So very excited there. We've really worked hard to hedge our bets as we've done in many instances. And in the development efforts for lupus nephritis, we thought, hey, there may be an opportunity for us to look at broader biomarkers of kidney damage. And that's exactly what we've done. Excited, because this is a high clinical need and really, there's a significant patient need here. And so from our -- and the tools that exist in terms of standard of care are not very satisfactory. So the markers we're developing have broad applicability in multiple diseases. We have now validated in early diabetic kidney disease along with lupus nephritis. And again, that was the data that was shared in that biomarker Summit in Boston by Dr. Mike Nerenberg, our Chief Medical Officer, but this is a huge patient need. So chronic kidney disease impacts on the order of 14% to 15% of the U.S. population. Diabetes prevalence in the U.S. is somewhere around 11% to 12%. Either of those patient populations are substantial, obviously, when you take a look at the U.S. population. So excited about the potential of these markets, how we approach them and commercialize them is too far out in the future for us to comment at this point in time. We're really just focusing on the science. The science is encouraging, we are getting it out in the public domain. There'll be a manuscript out later this year, which details the findings as well, but very exciting for us. And I think maybe the other thing I will just add Mark, is you see a lot of progress on the SGLT2 and GLP-1 fronts where they're actively working on expanding labels or they already have, in some instances, labels for chronic kidney disease in the early stage and being able to identify these patients better than the current standard of care is an exciting opportunity for us.

That sounds great. And just one more for me. Congrats on winning the ALJ hearing with a large national insurer. I wanted to get a sense for how many more hearings you have later this year? And then just give us a flavor. I imagine that there are likely multiple national health plans or health plans, regional that you might be meeting with. So can you just give us a sense for how many, what you think the impact could be and what the cadence of that is throughout the year?

Yes. So just so you understand how this progresses, we apply for these high-level reviews throughout the year as we learn in each of them. So we've had on the order of around 15 so far. Those that we have lost, we've learned from. And it's basically -- we have evidence that was not submitted early enough in the appeal cycle, call it the first appeal or the second appeal that couldn't be included in the case by the time we got to the ALJ hearing. And so in those instances, we adjust our entire revenue cycle operations to start including that information earlier. Some of this can be documentation of Medicare coverage, if you will, or reimbursement more appropriately. And so as we adjust our appeals process, that kind of most of the clock. There's no point in us going into an ALJ hearing knowing that we have an inadequate amount of information at the time. And so we've been learning over the last 24 months how best to do this relative to AVISE CTD and kind of culminated in having the perfect appeal package together and the right judge to review it more recently; and obviously the win. We currently have several scheduled in the month of May and a few in the month of June, but that doesn't mean -- that's about as far out as they are scheduled right now. So we have quite a few requests still outstanding, and we'll have to see as those get scheduled. But a couple of months is pretty reasonable to get all the way through the process at a very high level.

Great. Thank you so much.

Thank you. Our next question comes from the line of Andrew Brackmann with William Blair. Please proceed with your question.

Hi guys. Good morning. Thanks for taking my question. Maybe to stick on the payer's subject here for a second. You also noted that you had a positive medical policy with TRICARE in the quarter. Can you maybe just talk a little bit more about the learnings from that experience, how you can take those learnings from TRICARE and continue to broaden out those medical policy wins?

Yes. Good morning. Thanks, Andrew. I appreciate the question. TRICARE was a fantastic progress for us over the last couple of years. We went through their demonstration project is what the term is for their process in determining medical policy. And we had to submit our clinical dossier along with the supporting evidence for our test. They took a -- call it, about 1 year, 1.5 years to review all of that information and came out with a positive determination, which, first and foremost, validates the evidence behind the test and the demand for it. So I think that, that's a nice affirmation that we do have the right evidence to drive medical policy more broadly, especially at a highly impactful patient population like the active military. So that was very positive from our standpoint. I think something we take away. It also can be used in discussions strategically, if we are taking a look at some of the veteran opportunities or even other large national plans, I think it's a national policy that's been flipped in our favor, and it's a public policy. So it's something that we can reference. I think that, that's all very positive. We'll continue to enhance our evidence package, and we'll continue to work through our appeals efforts to drive awareness at the plan level, regional plan level. That never stops. But I think maybe the biggest learning is just that our current evidence package is holding weight and driving positive policy change.

Great. And then back to the next set of RA markers. It sounds like you have pretty good line of sight to launching those end of this year, early next. I guess outside of the NYS approval here, what internally needs to be done to get those ready for launch?

Yes. So in order to get an LDT ready for launch, obviously you have to get to a point where you're comfortable with the validation study. So that's both a clinical validation and maybe multiple, which proves that you're accurately determining disease from normal folks, right? Are we accurately identifying the seronegative population? And can you hone in on the sensitivity and specificity of the markers there, determine the cutoffs, et cetera. We are past that point. The next step and in no particular order, but the next step is analytical validation. And so can you reproducibly measure the markers repeatedly in different context, different operators, multiple machines, et cetera. Most of that work has been done. We are wrapping up the reports for that effort. And then you have to get ready to run it at scale. And that's something that takes a little bit of time. Training in these first two steps, we obviously don't distract the CLIA team. They're working on a daily basis to handle the clinical volume. But as we start to ramp up training, a lot of the competency assessments and all of the regulatory requirements, quality management system requirements in the lab have to be implemented, SOPs, that type of thing. So all of that work takes a little bit of time, especially to do it at a high quality level. But we also have to work with our suppliers to get ready for the type of volume we anticipate. All those contract negotiations have been completed from our standpoint. We are waiting now for our first large shipment of reagents. That should occur sometime probably over the summer. Manufacturing has to be ramped up at the supplier side and what have you. So those things still remain, mostly just operational. Our LAS systems have to be updated as well, but all that stuff is underway and is controllable mostly on our side. So that's why we feel comfortable by year-end into early '26, similar to how we did it with these last set of markers is a reasonable time line.

That’s great color. Thank you.

Thank you. Our final question this morning comes from the line of Paul Knight with KeyBanc Capital Markets. Please proceed with your question.

Yeah, thanks for the time. Congrats on the quarter. Jeff, the first question for you is how does the line -- this new line work this year? You'll take $20 million roll over old line and then drop down $5 million of incremental cash. Is that what I heard?

Yes, Paul, that's about right. It is a little less in terms of -- so net proceeds, and we've already done. So we drew the $25 million initial tranche, retired existing debt. Net proceeds were just north of $3 million. And then we have opportunity based upon milestones in '26 to draw more down.

Meaning $25 million possibly and then $30 million later on, right?

Right. There are two potential $10 million tranches that are based upon revenue milestones between now and the end of 2026. And then there is another $30 million that's set aside for potential business development M&A.

Okay. Got it. And then, John the acceleration in revenue or test sales through March, what do you think it was that was really getting the momentum in March? Was it the ALJ hearing? What was -- what's your thoughts behind that?

Paul, thanks for the question. The volume growth I think, was driven primarily by the new marker launch. I believe that brings an energy and excitement to the team. It also brings enhancement in the clinical utility to our customer base. And along with the manuscript publication that came out, just really there is the newest innovation in this space, and biomarker innovation in the autoimmune space is few and far between in terms of frequency. So I think it ends up getting a lot of attention, a lot of talk amongst rheumatologists. And we had a great presence in Q4 kind of forecasting the enhancements to clinical practice that should be expected with using these markers. So I think that really drives a lot of it. And it also just so happens to coincide with when we started to really see the ramp. But you also, as I mentioned, had a stability in the team. We adjusted our national sales meeting to be in January of this year, brought the team together, really worked hard on the training and practicing of what the clinical value proposition is and role play and what have you of -- of what types of questions we would expect. And I think it's -- the teams are prepared well, and it is showing. So I think that's probably the primary driver.

And then, John what do you think you need in terms of number of successful cases, court cases where you start to change practice of payers?

Yes. So it's going to be payer-specific. And -- but I don't -- it's on the order of a half dozen to a dozen -- so you don't have to have hundreds or thousands of these wins, obviously. They are not that frequent in terms of when they're granted. And on top of it, this is not a positive mark for the insurer that lost the hearing, right? They have an obligation to treat their Medicare beneficiaries that's -- similar to straight Medicare would. And so to lose an ALJ hearing basically confirms that they did not do that. And so that is a positive for us. It sets a precedent. We actually include that determination in future appeals. And so for these large plans, this is a way that we can ensure patients are treated as they should be, as they're obligated to be. And so we'll continue to work through it, but it's not hundreds. It's on the order of half a dozen to a dozen would be my expectation.

Okay, thank you.

Thank you. Ladies and gentlemen, that concludes our time allowed for questions. I'll turn the floor back to Mr. Aballi for any final comments.

Thanks so much. We are off to an extremely strong year, start to the year. And we expect that in many regards to be one of our strongest years in the company's history here in 2025. Operationally, our turnaround is really taking shape. Our strategy of focusing on our core product, improving reimbursement and rebuilding our pipeline for the future is progressing ahead of my original expectations. We've continued to make prudent decisions in personnel, and we've focused -- intensely focused on the character of the individual who joins our team. The effect has been to reshape the company in a very positive way, where folks are holding each other accountable and driving progress towards shared goals. It's also created stability within the organization, which is starting to compound in effect and is exciting to be a part of. I look forward to continuing to provide updates. And as always, I’m very grateful for your partnership as we build something special here. Thank you.