Greetings, ladies and gentlemen, and welcome to the Exagen, Inc. First Quarter 2022 Earnings Conference Call. Please note this conference is being recorded. I would now like to turn the conference over to our host, Ryan Douglas of Investor Relations for Exagen. Thank you. You may begin, sir.

Good afternoon. Thank you for joining us today. Earlier today, Exagen, Inc. released financial results for the quarter ended March 31, 2022. The release is currently available on the company’s website at www.exogen.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 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, including 2022 guidance, the impact of the COVID-19 pandemic on our business, our current and future product offerings, distribution and availability 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 for the year ended December 31, 2021 and subsequent filings. The information provided in this conference call speaks only to the live broadcast today, May 11, 2022. 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, Ryan, and thank you to everyone joining the call. Today, I will discuss our first quarter business highlights and give updates on our pricing, payors, and pipeline. I’ll then hand over the call to Kamal, our CFO, for details on our financial results. As always, we appreciate your continued support of Exagen. In the first quarter of 2022, we achieved a record of 2,175 total ordering healthcare providers and a record of 761 adopters for our flagship, AVISE CTD and AVISE Lupus test. Our total revenue for the first quarter was $10.4 million, which included 30,903 AVISE CTD tests delivered. As we mentioned during our call in March, our testing volume during the first half of Q1 2022 was significantly impacted by the Omicron variant. As the quarter progressed, we saw patient referrals from primary care to rheumatologists gradually return to normal. And in March, we had an all-time record month for AVISE CTD volumes. This is the seventh quarter in a row since COVID began that we achieved a high retention rate of approximately 99% stickiness. Also, during these seven quarters, we sequentially increased ordering healthcare providers and achieved record adopters in every quarter. We believe this performance speaks to the value healthcare providers see in our tests and further strengthens our foundation for growth. Now to provide an update on our pricing and payor reimbursement, our strategy with payors has always been to apply for a proprietary laboratory analysis code or PLA code, once we began approaching $100 million in network lives. I am happy to announce that the American Medical Association has issued Exagen a PLA code of 0312U for AVISE Lupus effective April 1, 2022. This is a major milestone for Exagen that we believe demonstrates the effectiveness and proprietary novel aspects of our CB-CAPs technology, which drives AVISE Lupus. We also received pricing through our Medicare administrative contractor, Noridian. Medicare reimbursement for this code is $1,085, which is a significant price increase over the prior CPT code reimbursement amount of $295. Although the PLA code applies to AVISE Lupus, we believe it will have a positive effect on both our ASPs and revenue as well as gross margins since AVISE CTD is comprised of AVISE Lupus. We continued to make progress with payors and added 3 additional payors in the first quarter, two of which take effect in the second quarter. We believe with the addition of the PLA code and the fact that we are expected to have over 90 million in-network lives on June 1, 2022, we are well positioned to enter into additional payor agreements. We look forward to updating you on our progress throughout the year. Turning to our AVISE RADR platform, this platform combines over a decade's worth of scientific research by Queen Mary University of London and our AI technology. Over the past few months, we have made several investments, including essential bioinformatic hires and support of our AI and machine learning programs and equipment to further expand on this technology-driven platform. With these continued investments, AVISE RADR development remains on schedule for a clinical experience program launch later this year. As part of our AVISE RADR launch preparation, we commissioned market research to conduct a blind product concept study focused on RADR’s utility and the use of precision medicine by rheumatologists. From the 131 responding rheumatologists, we learned the most challenging aspects of rheumatoid arthritis treatment is the inability to predict therapeutic response. Our AVISE RADR molecular test will provide pivotal insights and directions on how newly diagnosed patients will respond to the DMARDS like methotrexates and biologics. Our AVISE RADR2 molecular test will address those patients that have been on therapies that are no longer getting the adequate control of their disease. Both of these tests add clarity to the physician’s empirical evaluation when determining which of the very expensive therapies to prescribe to patients. To close out the market research, 80% of the responding rheumatologists indicated they strongly believe personalized medicine will guide RA treatment decisions in the future. This further strengthens our belief that the AVISE RADR platform is well positioned to address the demands for therapeutic drug response beneficial for both RA patients and physicians. We believe this will also address payors’ concerns about the wasted $18 billion in annual RA therapeutic spend for RA treatment. For our other pipeline products, the better study for fibro continues and we anticipate a readout next year. For the next iteration of AVISE SLE monitor, we are expanding the indication with markers for lupus nephritis and planning a commercial launch in 2023. We continue to add necessary technology and personnel for our R&D organization to enable successful conclusion of these assets. We continue to execute on our business strategies and are looking forward to making our tests available to more patients by driving both adopting healthcare providers and expanding our payor coverage. We believe Exagen’s track record will serve as a foundation for us to develop and commercialize our innovative pipeline and intersect science and technology. I now will turn the call over to Kamal.

Thank you, Ron, and good afternoon everyone. Total revenues in the first quarter of 2022 were $10.4 million. Total revenues were driven primarily by testing volumes for AVISE CTD, including AVISE Lupus, which grew to 30,903 tests delivered in the first quarter of 2022 despite the disruption caused by the Omicron variant through mid-February 2022. The increase was partially offset by a decrease in average reimbursement per AVISE CTD test due to payor mix. As Ron mentioned, the number of ordering healthcare providers was a record with 2,175 in the quarter compared with 1,763 in the first quarter of 2021. AVISE CTD test revenue was $8.7 million in the first quarter of 2022 compared with $8.5 million in the first quarter of 2021. Other testing revenue was $1.7 million in the first quarter of 2022 compared with $1.8 million in the first quarter of 2021. Costs of revenue were $5.8 million in Q1, resulting in a total gross margin of 44% compared to 55.5% in the first quarter of 2021. The decrease in gross margin percentage was primarily due to an increase in cost per test, a decrease in average reimbursement per AVISE CTD test related to payor mix, and a decrease in revenue resulting from the Janssen agreement. Testing gross margin was 44% in the first quarter of 2022 compared to 54.2% in the first quarter of 2021. Operating expenses were $20.1 million in the first quarter of 2022 compared with $16.2 million in the first quarter of 2021 due to increases in employee-related expenses from headcount growth, including stock-based compensation and recruitment expenses, cost of revenue due to the increase in testing volumes and cost per test, research and development costs, as well as overall increases due to inflationary factors. For the first quarter of 2022, our net loss was $10.3 million compared to a net loss of $6.2 million for the first quarter of 2021. Looking at our balance sheet, cash and cash equivalents as of March 31, 2022, were approximately $89.8 million. As Ron mentioned, we’re expecting to see a positive impact on our ASP revenue and gross margin from testing through Medicare going forward. This was due to obtaining the PLA code and subsequent reimbursement amount which was effective April 1. Medicare Advantage has adopted the code, but we will not see the benefits until they fully integrate the new price. As with all PLA code transitions, there is a potential for disruption when working with non-Medicare payors to adopt our new code. This may have a short-term impact on non-Medicare reimbursement, which could offset any positive impact that we would realize from an increase in ASP for Medicare. For full year 2022, we are raising our guidance. We now expect revenue to be in the range of $53 million to $55 million.

Thank you. Our first question will come from Brian Weinstein with William Blair. Please go ahead.

Hey, good afternoon, guys. Thank you for taking questions.

Hi, Brian.

How are you doing? Congrats on the PLA code. Just trying to again go through, Kamal, what you were seeing sort of at the end there. I just want to understand the practical impact of this increased pricing. What percentage of your business is CMS now that it would eventually – that would benefit from this? And I’m also curious about how this pricing impacts discussions that you have with other payors going forward. And Kamal, can you just repeat what you were saying about, again, the practical impact here? I understand that as you’re transitioning that there could be a little bit of disruption, but are you suggesting that you will not see any kind of net benefit from this this year? Or is that the reason for the guidance raise? It wasn’t clear to me. Just a few questions on that, and then I’ll have some more after.

Sure, Brian. I’m going to take the first part of that question, and then Ron is going to take the second part of that question. So, approximately 20% of our revenue is coming through Medicare. Ron will talk about the short-term disruption and the long-term positive impact this will have. And to answer the last part of your question, yes, this is part of the reason why we’re taking our guidance up from $51 million to $53 million to $53 million to $55 million.

Yes. The disruption from a PLA code is well established. What it is, Brian, it’s a unique identifier on your asset. When you’re doing CPT code stacking, which is what companies should do until they get to third of the nation, and we followed that pretty much to the letter. We’re approaching 100 million lives, so now it’s the time to get that PLA code, and we rapidly got a significant price of $1,085. Now this is what happens. While you get into the Medicare, strict Medicare, the advantage Medicare takes longer. You have to do basically hand-to-hand combat. You have to go to each payor and talk about the carve-out and get them to increase the price there. But you now have a unique identifier for any payor. And if you can keep in mind what happens here is the bill goes in, some administrator sees the code 031 and says, well, we don’t pay for that. They will pay for all the other markers that we have that we stack, but not for that one. Our job, of course, is to get more payor coverage with this. This is an important factor though because even though you have the long-term successes there, obviously, with a price over $1,000, it’s significant. And it really speaks to the value that Noridian put on the asset when you see that. But we will have to keep in mind that when any company does this, the first thing that’s happening is you’ve got a unique identifier for payors to target you for non-payment. That will go away over time and adjust, but it really is an ebb and flow. Anything else you need there, Brian?

No. I think it’s clear that there is no question that CTD is covered in this because the lupus markers are kind of buried inside of that. There is no issue on that, correct?

Correct. Yes. The other markers get paid. The lupus product itself with the algorithm will have the $1,085, and of course, that is inside and surrounded by the other 12 markers that surround the asset for CTD.

Okay. And then you guys continue to make progress with ordering clinicians and doctors, all those are turning in the right decision. Just curious if you have any insight on how kind of the share that you’re getting inside of clinicians’ offices is at this point. You’re adding new docs, you’re getting better adoption, but what type of overall penetration do you see on average, typical or if you want to talk about the extremes at the high end, at the low end, what kind of penetration are you getting inside of these offices at this point?

Yes. Great question. Unlike pharmaceuticals, there is no market research syndicated data I can buy from Walters Kluwer or IMS. It just doesn’t exist for testing. And the reference labs, of course, are not going to share that with you either. But what we do know is that we’ve done well over 600,000 orders since launch, and that’s substantial. We know that nobody does 600,000 of anything, especially in a tight market like rheumatology unless you’re adding significant value and you are being adopted. The second part of this is that not every rheumatologist is created equal. There is a group within that 4,500 that self-anointed themselves as lupologists. Now there is no such thing as an AMA lupologist, but that’s all they want to do is see those lupus patients. We feel like we have the adopters because there is such strength, over 35 peer-reviewed published studies on our asset and a lot of KOL support. I can’t give you a market share number because one does not exist that I can actually stand behind on a day-to-day basis from syndicated data. I can tell you that we are a dominant force within the lupologists and we are really growing in the general rheumatologists as well. Now there is also that group that all they want to do is infusions in RA, and we will be able to address them with our AVISE RADR asset.

Understood. Okay. And then last one for me. Kamal, we have revenue guidance, but can you give us some thought about how we should be thinking about spending through the year and cash burn? Thank you.

Yes. So, as Ron mentioned in the prepared remarks, we have a lot of exciting stuff in the pipeline. So, R&D expenses will continue to increase quarter-after-quarter sequentially as we continue to invest in the personnel and other items in R&D to advance these products through the pipeline. For SG&A, we really do have the infrastructure built. As we have mentioned on the past several calls, we are in 63 territories, and we did supplement that with an inside sales team. That’s been in place for a while, and those costs have been fully annualized. If you look at the current quarter, you can pretty much use that for the next few quarters. It’s just the inflationary increases that are going to occur this year for SG&A.

Okay. Thank you.

Thank you, Brian.

Our next question will come from Kyle Mikson with Canaccord. Please go ahead.

Hey. Thanks guys. Congrats on all these updates today and congrats on the quarter. Maybe just thinking about the guidance, I just was wondering any commentary on year-over-year volume or revenue growth in March specifically. I know it was like a record month. But just looking at the guide, it implies year-over-year growth of like 18% for the period between the second quarter and the fourth quarter. And obviously, I know the first quarter had about 15% growth, so clearly impacted by Omicron. It would just be helpful if you could provide any commentary on, like I said, year-over-year volume or revenue growth exiting March or maybe for the full month itself. Thanks.

Yes. Thanks for the question, Kyle. We feel great about the volume trend. As we mentioned, March was an all-time record. So, with guidance, it really becomes more of an ASP story, because the long-term impact from the PLA code is a great opportunity. But we are going to have that short-term disruption potentially from the insurance payors. We are going to work with those payors to minimize the disruption in the short term, but long-term this is a great outcome. But there are many organizational systems we are going to have to work through, and this might take some time. But as we mentioned, long-term this is a good outcome and this is a big part of the reason why we are taking our guidance up this quarter.

Alright. Thanks, Kamal. That was helpful. And I guess on that note, actually, I wanted to talk about ASP and test per provider in the quarter. I mean it looks like both declined year-over-year, which I guess understandable on the ASP side, you mentioned payor mix, test per provider. It’s not clear to me what happened there. I guess Omicron. Can you walk through why these declines occurred and maybe expectations for the full year, like the cadence as we go ahead here? And just maybe on ASP, like obviously it was like 280 in the quarter. Given all these dynamics with the new PLA and things like that, like do you think that this could remain 280 or maybe fall below? Because obviously, we want to get back to like 300 or so, right? So, that would be helpful.

Sure. So, in Q1 of ‘21, our ASP on AVISE CTD was around $294. We saw a $13 decrease to Q1 of ‘22 to $281. And as you mentioned in your question, yes, this was in regards to payor mix. So, there is obviously a wide range of ASP between payors, so larger volumes or smaller volumes from many payors could have that swing to cause that $13 decline. To address the second part of your question, yes, we do anticipate our ASP to increase from this PLA code. As we mentioned, the reimbursement from Medicare is going to $1,085. Medicare allowable prior to this was $295. Now, that’s for the AVISE Lupus Test. Keep in mind, as Ron was mentioning, there are the 12 additional markers to make it AVISE CTD, and there is still an additional $200, approximately, reimbursement on those additional 12 markers through Medicare. So, we do anticipate that in each quarter, we should see our ASP increase. And the reason why I say each quarter is because of the short-term disruption with the commercial payors.

Okay. It sounds good to me. Let me just ask a final one I guess maybe for Ron. And you were just mentioning this a moment ago. Around the whole, the impact from the PLA code on maybe your ability to obtain new payor coverage, I think this was asked, but like I am not sure if the answer was totally clear. Is this a sign of maybe like validation for the AVISE Lupus Test and maybe that could push you over the finish line with some of these payors? And you have used the CDT stack for years. What makes you the most excited about the new code?

Yes. So, this is very meaningful because not only is it a PLA code, which is important, but getting price as fast as we can from our MAC and Noridian at the $1,085 is significant and really shows the value of the test when they took it to that price. And of course, now obviously, the next step is the LCD. This is a path that we know really well, and we are monitoring it as we should. So, the impact of other payors is an endorsement. But, we call them payors, but they – you have got to get to them. You have got to be able to get to them and have the discussion. We think that this helps us along with our current studies. Again, over 35 published peer-reviewed studies in top journals and more studies coming. We think we have all the evidence necessary to prove that when it comes to diagnosing lupus correctly and accurately, we should be part of the story for these physicians. We do have the physician support. What excites me the most about it is we are continuing to do exactly what we said we would do. And even in the face of Omicron, which slowed us down as far as getting everything done, it did show the fact that we continue to grow volume, we hit our mark of roughly a third of the nation before we filed, and we did get a price that we really appreciate. So, now as we approach these payors, we do have this going in our favor. It can only help us. They are not going to be fast to make these changes because traditionally, I have witnessed this, if they can get away with paying $300, they are going to try to, as long as they can. But they are going to have to answer a lot of questions since we do have the pricing from Medicare.

Okay. Perfect. Thanks, Ron. Thanks, Kamal.

Thanks, Kyle.

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

Sure. Thanks, Chuck. I would like to point out that May is Lupus Awareness Month. Every year, we partner with the Lupus Foundation of America out of Washington, DC, and we dedicate each week of the month to a different initiative to help promote the awareness of this terrible disease and the work being done by the lupus community. I think it’s always important to remember that the work we do has a patient on the back end of it, and that’s really what we are focused on. We know the numbers, the dollars, and everything will follow as long as we put patients first. We are a discovery-driven company, but we are a patient-first company first. Thank you, everyone, for your time and effort. Really do appreciate your support of Exagen.

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