Exagen Inc (XGN) 2019 Q4 法說會逐字稿

Good afternoon. Welcome to Exagen Inc's. Fourth Quarter and Full Year 2019 Results Conference Call. As a reminder, today's call is being recorded.

We will begin today's call with opening remarks and introductions, followed by a question-and-answer session. I would like to turn the call over to Mr. Mark Hazeltine, Senior Vice President of Finance and Corporate Development. Please go ahead, sir.

Good afternoon, and thank you for joining us today. Earlier today, Exagen Inc. released financial results for the quarter and year ended December 31, 2019. The release is currently available on the company's website at www.exigen.com. Ron Rocca, President and Chief Executive Officer; and Kamal Adawi, Chief Financial Officer, will host this afternoon's call.

Before we get started, I would like to remind everyone that management will be making statements during this call that include forward-looking statements within the meaning of Federal Securities Laws, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that are not statements of historical facts should be deemed to be forward-looking statements.

All forward-looking statements, including, without limitation, statements regarding our business strategy and future financial and operating performance, the impact of the COVID-19 pandemic on our business, our current and future product offerings and reimbursement and coverage are based upon current estimates and various assumptions.

These statements involve material risks and uncertainties that could cause actual results to differ materially from those anticipated or implied by these forward-looking statements.

Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please see our filings with the Securities and Exchange Commission, including our Form 10-K to be filed.

The information provided in this conference call, speaks only to the live broadcast today, March 25, 2020.

Exagen disclaims any intention or obligation, except as required by law, to update or revise any information, financial projections or other forward-looking statements, whether because of new information, future events or otherwise.

I will now turn the call over to Ron Rocca, President and CEO of Exagen.

Thanks, Mark, and good afternoon, everyone. I'm pleased to welcome you to the call to discuss our fourth quarter and full year 2019 results.

With me today is Exagen's CFO, Kamal Adawi. We had an exceptional year at Exagen, highlighted by our successful IPO, and we entered into 2020 well capitalized.

We again delivered record number of tests and ordering health care providers. This is a continuation of our strategic initiative of marketing our innovative connective tissue disease testing products, alongside a biologic for rheumatic diseases.

We strengthened our position within the underserved rheumatic disease market by laying the foundation for future and sustainable success of our company.

Before turning to my formal remarks, I would like to briefly comment on the COVID-19 pandemic. Our thoughts are with our employees, partners and the communities around the world being impact by this crisis. We are closely monitoring developing situation and tracking disruption to our customers and suppliers, and we will adjust the strategy accordingly as the situation evolves. Our lab continues to be fully operational as of today.

On the personnel front, we recently made 2 key additions to the management team. Dr. Debra Zack joined Exagen as the Chief Medical Officer. She has over 30 years' experience being a board-certified rheumatologist, previously leading clinical development at companies like Novartis and Amgen.

Dr. Arthur Weinstein is stepping down from the Chief Medical Officer position to lead Exagen's scientific advisory board. I want to thank Dr. Weinstein for the contributions he made during his time as CMO. We are extremely excited that Dr. Anja Kammesheidt, who has also been serving as our interim Chief Scientific Officer since December, has accepted a full-time CSO role. Both of these appointments bring in-depth experience and insights into the immune system disorders and solidifies the management team for the next phase of Exagen's growth.

As many of you know, our strategic vision includes leveraging our portfolio of testing products to also market therapeutics through our sales channel. We are targeting approximately 5,000 rheumatologists across the United States.

Our business model is interrogating testing products and therapeutics, is designed to offer targeted solutions to rheumatologists and ultimately, better serve patients.

We believe this diagnostic therapeutic or, as we call it Dx/Rx strategy of marking both testing products and therapeutics, differentiates us from other diagnostic and pharmaceutical companies.

Our integrated testing and therapeutic strategy results in unique opportunity to promote targeted therapies in a patient-focused sales call with rheumatologists.

We ultimately seek to have a touch point in all aspects of autoimmune disease testing and refer to this as our vision to own the Rheumatology Hilltop. We will discuss in detail how we worked to advance this strategic vision in 2019.

Turning to our results. 2019 was a very exciting year for Exagen, as our autoimmune testing and therapeutic solutions continue to gain traction with health care providers, resulting in strong revenue growth. Our full year revenue was $40.4 million, a 24% increase over 2018 and within our guidance of $40 million to $41 million.

For the fourth quarter 2019, revenues were $10.2 million. Our full year revenue consisted of $38.9 million from sales of our testing products and $1.5 million related to SIMPONI promotional efforts.

Our fourth quarter revenues consisted of $9.6 million from sales of our testing products and $0.6 million related to our SIMPONI promotional efforts. Testing revenues in the fourth quarter were flat year-over-year as increased volumes were offset by lower average selling price.

Looking at our results for our innovative testing products, we continue to experience strong volume growth. The number of orders for our flagship AVISE CTD, which includes advised Lupus test, increased 26% year-over-year to over 105,000 for the full year, a record.

Testing volumes in the fourth quarter increased 19% year-over-year to 27,000 tests. We also experienced record yearly volumes and revenue in our other testing products that we promote, which include AVISE SLE prognostic and AVISE SLE monitoring test. We believe this strong growth in our core testing franchise will continue to be the cornerstone of our success.

A key indicator of Exagen's progress is the growing number of health care providers writing orders for our test. Since the inception of AVISE CTD, we have processed over 387,000 tests.

In the fourth quarter, we achieved the following milestones: first, a record of 1,707 health care providers ordering our advice CTD products, a 34% increase over the fourth quarter of 2018; second, of these ordering healthcare providers, 572 are adopters, which we will classify those health care providers, who have ordered more than 10 tests in a corresponding period; third, the percentage of adopters from the third quarter of 2019, who remained ordering healthcare providers in the fourth quarter, was a robust 98%.

We believe this very high retention level speaks to the value we deliver to the health care providers diagnosing, prognosing and monitoring connective tissue disorders and the patients suffering from these difficult to diagnose conditions.

Now that I've given an overview of the business and financials, I'd like to provide some color on the results and offer a look ahead to 2020 and beyond. Overall, we are pleased with our results for the year, which fell within the guidance range. Revenue in the fourth quarter were impacted by lower ASP, driven by pricing pressures from payers and a supplier quality issue with one of our reagents.

Looking ahead to 2020, I believe that we are well positioned to provide value testing and therapeutic solutions to health care providers. The sales force, which stood at 50 representatives as of December 31, is now fully trained and is capable of reaching our target population of rheumatologists in the United States. Part of the process is to consistently evaluate, reach and frequency to identify optimal effectiveness. We recently added an additional 13 sales representatives, which give us a deeper penetration in the current underserved rheumatic disease market.

We feel that the investment we made in the expansion sales force and any continued expansion of our sales force will yield positive results and continue to drive the growth of our business.

I'd also like to comment on the all-important reimbursement efforts. We completed our dossier for AVISE Lupus test submitted to multiple payers in the United States, and are now preparing for meetings where it will be evaluated.

Given the strength of the clinical utility, clinical validation and health care economic of our testing products, we believe our efforts will lead to additional coverage decisions and good results in both higher ASP and volume growth going forward.

Related to our therapeutics efforts, our co-promotion of SIMPONI is off to a good start and contributed $1.5 million to top line 2019. A year into the co-promotion agreement, we feel more strongly than ever about the potential for this high-margin business.

With a large underserved addressable market, a maturing sales force, progress on reimbursement and increased name recognition, we believe we are poised for acceleration of growth across the entire business.

I would now like to turn the call over to Kamal, who will discuss our fourth quarter and full year 2019 financial results.

Thank you, Ron. Turning first to the income statement for the fourth quarter and full year 2019. As Ron mentioned, total revenues were $10.2 million and $40.4 million, respectively. Year-over-year revenue growth for the fourth quarter was driven by incremental revenues related to our SIMPONI promotional efforts, which added $0.6 million to our top line revenue.

Year-over-year revenue growth for the full year was primarily the result of a 26% increase in AVISE CTD testing. We achieved incremental revenues related to our SIMPONI promotional efforts, which were not present a year ago and which added about 4% to the top line in the full year.

AVISE CTD test revenues were $8.2 million in the quarter and other testing revenue was $1.4 million. For the full year, AVISE CTD test revenues were $33.3 million, and other test revenue was $5.6 million.

Our gross margin was 55% in the fourth quarter of 2019 compared to 59% in the fourth quarter of 2018. The decrease in gross margin was driven by lower ASP.

Our gross margins remained consistent at 53% in the full year 2019, as higher testing volumes, automation in the lab and cost savings initiatives offset slightly lower ASP. Operating expenses in the fourth quarter increased 34% year-over-year to $13.1 million, due primarily to costs associated with the expansion of our sales force and incremental cost of being a public company not present in 2018.

Operating expenses in the full year increased 33% to $49.7 million. Net loss for 2019 was $12 million, up from a net loss of $8 million in 2018. Net loss for the fourth quarter was $3.4 million compared with $1.3 million in the fourth quarter of 2018.

As Ron mentioned earlier, we increased our expenditures to execute on our strategic Dx/Rx vision. These increased expenses are primarily related to our significant sales force expansion, which was an important step in our progress of reaching the majority of the 5,000 rheumatologists in the United States.

Looking at our balance sheet.

Cash and cash equivalents as of December 31, 2019, were approximately $72.1 million. We believe we are well capitalized to endure an economic downturn associated with the COVID-19 pandemic.

Regarding 2020 guidance, we think it is prudent to hold off in providing top line guidance until we get more clarity on the effects of the COVID-19 pandemic on our business. We had a strong start to 2020. But over the last 2 weeks, volume has dropped due to the COVID-19 pandemic. We continue to both analyze the impact and adjust our operating approach to best serve health care providers and their patients.

I will now turn the call over to Ron.

We are experiencing unique times across the globe due to COVID-19 pandemic. Exagen is at a solid financial strategic position to weather the economic uncertainties. We are well capitalized. Our health care providers' retention rates are high, and we are rapidly becoming the diagnostic provider of choice in rheumatology. We have a strong operational business model, strong balance sheet, and new strategic opportunities.

We believe these attributes position us to demonstrate resilience through the COVID-19 pandemic. We are focused on executing our strategic plan to own the Rheumatology Hilltop, which will provide a platform for continued value creation.

This concludes the prepared remarks. At this time, we would like to open up the call for questions.

(Operator Instructions) Our first question is from Doug Schenkel with Cowen and Company.

Ron, I appreciate some of your comments at the end of your prepared remarks on recent trends. Obviously, when a company like you, for understandable reasons, as a recent IPO, is announcing Q4 call -- Q4 results, with only a few days left in the first quarter, a quarter later, it's going to prompt a lot more focus on what's been going on recently versus what went on, essentially 3 months ago. And that's even more so in the midst of the pandemic. So it would be helpful to get a little more detail on how volume has trended over the last, I'd say, 2 to 3 weeks? How new practice additions have trended over that period as well? And to some extent -- well, I guess, let's just pause there. How have volumes and new practice additions trended over the last 3 weeks?

Great. Thanks, Doug. And the great thing is everything we've been building up to this point was for 2020, the dossier, ramping up the sales force, doing all the things necessary since 2020 is our year. That's the year we go, as you saw in some of the press releases now getting a network and the arrangement we have with Sonora Quest out of Arizona.

So that was the whole purpose there. January, February and the first 2 weeks of March, were right on target, if not better. I mean, it was a record January, and a record February of volume going forward. We hit a record number of writers, too, as well. The last 2 weeks, we did see a dip, and it really has to do with patient flow.

We understand that roughly about -- from what we're hearing from the sales force, roughly about 20% of the offices are now closed. And even though if those offices are open, that they're restricting the amount of patients they see. They're really triaging them. We're also hearing that SLE patients do get in the front of the line, and you know there's no cure for Lupus. Those patients are still out there and do need to be monitored. We feel very fortunate with products that we have that can be used in this type of scenario. SIMPONI, for example, is an at-home, anti-TNF. We have 2 capillary tests, one for hydroxychloroquine and one for methotrexate. They can be taken at home as well. So the volume drop that we saw last week, and now we're monitoring closely this week has happened.

We're monitoring next week as well to see how we finish out the quarter. But I don't see the type of drops that I'm hearing from other places. And I think a lot of that has to do with the type of disorder we're talking about, and the fact that rheumatologists are the place where the SLE patients do end up. So the new practices continue to grow as we had added new representatives. And the volume we're keeping an eye on. It is still too early. I think as Kamal said, we have to just keep an eye on it as far as any type of guidance. But we do feel that we're in a good position with the type of products we have. These are not inconsequential products. These are central products for people that have disorders that could lead to kidney transplant or even death.

Okay. And then just -- I guess, a few follow-ups. Just to confirm, your lab is fully exempt in California, in spite of the shutdown order. And then from a sales and marketing investment perspective, how does what's going on, change things right now? And then, I guess, a third follow-up would be, are you in a position where you can do virtual detailing, given, I guess, it would be a presumption that it's going to be harder for your reps to physically get in front of doctors given restrictions out there?

Yes, good question. So first of all, yes, exempt were lab, and all the lab workers do have a letter with all the rules that says, that they're, in case, are stopped by police or anybody that says that they're allowed to work and they are exempt employees to work into the lab. So that's a good thing. And again, that letter that they have with all the California rules in there does allow them to come to and from work. As far as where we are, we're well capitalized. That's the great thing about where we are right now. So things have not slowed down in our pipeline or in some of the other aspects of BD that we're looking at. In fact, we think we're in a better opportunity there. As far as the sales force, you're right, offices are closing. And this is -- I'm just going to read off what we sent to all the reps, and it's comes into 4 points. One is, first, adhere to any state and federal rules in your area. So the reps know that. If it's -- whatever that state is and what their rules are. Fulfill SIMPONI sample request through a remote sampling solution, which is a terrific solution.

Again, SIMPONI offering an at-home -- at-home anti-TNF test. We asked them to make follow-up conference calls and webinars with those offices that they have already set up lunch and learns and so forth. So those are being set up. And we're taking this opportunity to do a couple of other things. One is, it really ramp up some training at this point. We have our training department going forward and really ramping that up. And we're having the representatives make at least 4 or 5 outreach calls to see if they need to drop off transportation kits or literature for the patients and so forth. It's really early, Doug. But what I'm -- love is in the conference calls with the sales force, it does appear that where they can, they are having a very positive impact, and the doctors are very appreciative of the fact that we have some products that actually are really solution-oriented in a time like this.

And -- super helpful, Ron. And then maybe if I can just ask one more, not related to the pandemic. If we can take our minds off that for a moment. What drove the strength that non-AVISE CTD Lupus testing in the quarter? I think you mentioned SLE and monitoring in your prepared remarks. I'm just wondering if something started to take hold in the fourth quarter, where maybe your sales force was increasingly proficient in cross-selling some of these tests with AVISE CTD Lupus in either existing or new practices?

Great question. And it's because of the way we built the model of the sales force. So as you lead with your diagnostics of SLE, the prognostics follow along. So we don't even put any incentive comp on prognostic. There's 0 comp for the reps, but the more SLE that you're selling as a representative, the more those patients want to know which organ's being attacked, whether it's the lung, the kidneys or the heart. The other piece here is our monitoring product. Our monitoring product, obviously, be an annuity. There is no cure for Lupus. You do have to monitor disease progression. And with the addition of PC4d, you can possibly predict whether that patient may have a heart attack or stroke, which is disproportionately high in SLE patients. So those other products grow with the diagnostic. The modern product being an annuity, it just builds on itself. As long as we're out there, that monitoring product should just continue to grow because you're constantly adding patients on top of it.

Some of the other smaller products we have, HCQ, obviously, has been in the news a lot. It's just flying off the shelves. I mean that's -- but it's probably not the right way to do it at this point because we really don't know enough about HCQ, impact on the coronavirus. But those other products are also doing well. Lastly, I'll say, it's just our own the Hilltop strategy, Doug. We are recognized as the rheumatology testing company at this point. There's a lot of trust in what we do. Every product we launch, launches quicker and faster. And there's a respect and understanding in a relationship between the rheumatologist in the U.S. and Exagen.

Our next question is from Brian Weinstein with William Blair.

So let's start with the comment on the 20% of offices being closed from what you're hearing now. That seems a little bit lower than I would have thought. Where are the majority of your call points? Are they in states where there are lockdowns going on right now? Can you give us some geographic idea about kind of where you see the majority of your scripts -- your orders coming from?

Sure. And the 20% is a snapshot. It was a snapshot in time from the time we had the call with the field. And it seemed reasonable based on what we're seeing coming in every day here in the lab. So we are in all the major cities, rheumatologists, by their very nature are usually in big cities and near big hospitals. So New York, California, Chicago, L.A., big areas in Atlanta as well. But we also now, with the expansion, also went into some rural areas as well. And I think what you're seeing there in these rural areas, and I'm thinking of some in particular, those physicians need a quick answer to this. As you'll remember, when they -- they have to do a work up on connective tissue, oftentimes it's serial testing. I'm going to do an ANA, bring him back a week later, doing anti-dsDNA. A week later doing Anti-Smith and then maybe C3/C4. With our AVISE CTD, we truncate that time period, especially now in this pandemic, where they can do one test and cover all the really important connective tissue diseases. So I think in those rural areas, we're having a lot of positive impact for the convenience and speed of the testing. And in those bigger cities like New York or L.A. and Atlanta, where they're shut down, I have to say that's where we're the strongest with the KOLs. I mean, we do have relationships with all the major KOLs in the United States. So it's really nice that when we get together with them, they're still supportive of being to help us out. The last thing I'll say to your question is, SLE, by its very nature, is not going to go away. So those patients are there regardless. And they do need to seek help. They do need to have a rheumatologist evaluate them. So I don't think they're going to stay away. They need to see somebody. They know something's wrong with them and they need some type of therapeutic intervention to live a normal life.

Yes, okay. On the dossier in the submission there, you noted that meetings are scheduled. Are those scheduled in the near term? Are those getting pushed back? Is there a risk that those don't happen as a result of what's going on here? Or are the payers and the people you need to work with -- is the ability to work from home, not impacting your expected timing for those meetings and decisions?

Right. So somethings got pushed back. A couple of things have happened. One is they have gone into virtual meetings, which we have no problem. And in fact, it gives us an opportunity to bring more of our like, Deb Zack, our new PhD, MD, rheumatologists that come in on those calls as well. So none of them were pushed back. They were turned into virtual calls. And interestingly enough, Brian, we have gotten some calls, which I can't name here from some payers that are one of scheduled meetings. Now that our dossier is out and for consumption, it was very interesting to see some big payers actually call us to say, when do you want to schedule a meeting, and 2 of those took place just this week.

Okay. And then, Kamal, I recognized where you guys were at the end of the quarter from a cash position and feeling good about where things are and ability to weather the storm here, but are you doing anything actively right now to better conserve cash? Are you slowing down any pipeline investment or investment elsewhere?

Thanks for the question, Brian. So yes, as we mentioned, we had $72.1 million cash on hand at the end of the quarter. Now there's going to be certain things that flex with volume. So in the lab you're going to have your reagent expense, your shipping expense, and then we're going to be able to flex labor down. There is also other departments that were going to flex hours down to get a cost savings. We're very focused on the gross margin as volumes declined during this COVID-19 pandemic. So that's what we're really looking at today.

So nothing in terms of operating expense reduction, no programs are being cut, nothing like that?

No, there's -- what we are going to continue to look to flux in other areas that would have operating expenses as volumes decline.

Okay. And then on the ASP, it was lower, you mentioned pricing pressure and something about a supplier quality issue. I didn't quite follow what was going on there, and how that impacted pricing. What are your expectations for pricing as we think about 2020? I recognized it's difficult on the volume side to predict what's going on, but I would think you would have a pretty good idea kind of how to think about pricing with or without some of these payer meetings turning positive for you? So can you talk about what happened more specifically in the fourth quarter because we were under the impression that pricing does go up later in the year. It didn't happen kind of the way that we would have thought. And then how should we think about pricing as we try and do some modeling here on the revenue side? Just would love any kind of guidepost that you can give us.

Sure. So we anticipated a downward pressure on ASPs from PAMA, but what we did not see coming was the supplier quality issue with one of our reagents, which had an impact in Q4. Now that issue was resolved as of the first week of March. So it will have a small impact in Q1. Now as Ron mentioned, with the dossier, and with the meetings continuing to take place, that doesn't change our outlook, with continuing to get in network and coverage with the payers, and you saw over the past week multiple press releases come out, mentioning the coverage that we've received.

Our next question is from Craig Bijou with Cantor Fitzgerald.

I wanted to start with the ordering physicians and the adopters. And obviously, you guys saw a nice step-up in ordering physicians, but adopters were relatively flat compared to Q3. So one, I guess, is that -- is there anything going on there? Any dynamic that we should be aware of? Or is it possibly just an issue of new sales force ramping and bringing on new physicians?

Yes, good question, Craig. So the ordering physicians continue to increase because we essentially doubled the sales force. And when you do that, a lot happens. You go from 30 to 55. That's just quite an expansion, 100% growth on expansion. So some of it is ordering physicians because we're reaching into these areas that we never were. So we're excited about seeing record number of ordering physicians as we continue to grow, roughly 30% of all rheumatologists now.

So the stickiness part is still adhering. I mean, we're still seeing the doctors that write the drug. They love the diagnostic. They like it and they come back and write it again. Part of that is because we got a great test. The other part is, is the consequences of using the old ones, they know what that is. It's 6 years before you get correctly diagnosed according to some surveys. So the stickiness is solid. The ordering physicians is high. We looked at 2019 as the year that we got everybody sitting in the right place and structured dossier done. And now what I'm really happy about is the fact that in 2020, this is our year. This is a year that everything is done, completed. There really is no feedback at all as far as a better test than what we have to help these patients. So Craig, feeling really good about the ordering physicians and the stickiness and a little bit of disruption, as always, whenever you have a 100% growth in your sales force, but that's all now in the rearview mirror as we wanted it to be heading into 2020.

Got it. That's helpful. And maybe -- and I think you touched on it a little bit earlier in the call, but the opportunity for new co-promotes. And just -- obviously, those take some discussion. I know you guys have relationships, but any impact that any of those discussions COVID-19 may have on those discussions?

Right. And obviously, I can't be specific on any of these, but we'll let you know nothing slowed down. If anything, especially some of these companies we're talking to now that they're at home, you actually have more time to get a hold of them and work things out. So we believe that the Dx/Rx strategy is the right strategy for health care and we continue to engage and be engaged by customers that see this as a valuable way to get into this very important area of rheumatology. At this point, rheumatology is nowhere near as crowded as all these other therapeutic areas. So when these companies have a product that makes sense to go to rheumatologists, they usually end up calling us, Craig. And we either decide whether to move forward or not. But to answer your question specifically, nothing slowed down in any of those discussions, if anything, some of them have picked up.

Got it. That's helpful. And just last one for me. And I think I heard you correctly, but correct me, if I'm wrong. So you guys added 13 reps in Q1? And then, I guess, if that is true, how should we think about your -- the rest of -- the hiring for the rest of the year?

Yes, we -- so Kamal and I constantly look at reach and frequency across the country. It's something that we like to see. We know that you have to hit a certain amount of frequency, a certain amount of reach in order to keep the ball rolling, if you will. So the 13, we're seeing is an obvious add as we looked at it. We said, yes, this has to happen. We fully realized that every time we add the representatives, we could get the same proportionate growth as we did there with the original set of sales forces. So our expectation is with the 13, it would be enhanced growth, enhanced reach, enhanced frequency, more new doctors as well.

Something else that's happening in the rheumatology area is that there is a shortage of rheumatologist. So there are some areas that even though the physician does not call themselves a rheumatologist, they act like one. So we decided to go into those areas, usually a little bit more rural and place representatives there to also go into areas like Wyoming and so forth, areas that don't always see coverage, but those patients need help too. And those doctors need very convenient accurate test as well. So if the data shows that it's appropriate because of the way the doctor prescribes, we'll add them to our list. To further answer your question is, we'll continue to monitor it, and we'll always be judicious and appropriate in adding any headcount.

That is all the time allotted to questions. I would like to turn the call back to Mr. Ron Rocco for any closing remarks.

Thank you, guys. I know we're in this real-world here, but the companies, I think, that are going to do the best here, when everything gets back to normal or those that are well capitalized, have meaningful products with strong IP and great relationships, and that's Exagen. I think we're well positioned to continue our track and continue our growth forward and become an important product, not only for the markets, but more importantly, for those patients that need these tests to be appropriately treated. Thank you for your time, and I look forward to further discussions. Take care, and have a good day.

Ladies and gentlemen, this concludes today's conference.