Exagen Inc. Q3 FY2025 Earnings Call

Good morning, everyone, and welcome to Exagen Inc.'s Q3 2025 Earnings Conference Call. Please be aware that this event is being recorded. I will now turn it over to Ryan Douglas. Please proceed.

Good morning, and thank you for joining us. Earlier this morning, Exagen, Inc. released financial results for the quarter ended September 30, 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 thank you for joining us. I'm pleased to report that Q3 was the strongest quarter in Exagen's history, driven by robust volume growth and continued execution across our commercial, scientific and operational teams. Compared to last year, year-to-date, we've grown revenue by 19%, comprised of 8% growth in testing volume and 9% growth in ASP. This synergistic impact is exactly how we anticipated our top line performance would evolve when we set our strategy a few years back. These numbers highlight the power of combining volume with reimbursement growth and what effect that can have on top line when both are moving in the same direction. Our team is energized by the opportunities we continue to see in both areas, which I'll break down further in a second. But first, let's start with our recent product launch. At the end of Q3, we successfully launched assays for the detection of anti-PAD4 antibodies, our second novel set of rheumatoid arthritis biomarkers this year. While we expect the revenue impact from PAD4 to be modest, it continues to differentiate our rheumatoid arthritis offering and demonstrates our ability to bring new markers to the clinic quickly and effectively. The feedback from clinicians has been encouraging, and we're seeing growing interest in how these markers can impact patient care. I personally saw some of this clinical interest at the American College of Rheumatology meeting in Chicago last week, where multiple physicians wanted to dive deeper into the science with our team and where we had a robust attendance at our conference presentation on these markers. We've also had several clinicians share firsthand experience with the testing, highlighting the clinical need for better biomarkers in this patient population, but also several examples where the anti-PAD4 markers were the only serological abnormalities in clinically ambiguous patients. This is highlighting the true value of the markers in the clinic. One specific example that was shared was when a patient had anti-PAD4 positivity as the only abnormality in their serological profile. And because of this, was referred for x-rays where she had evidence of erosive changes. It's important to intensify treatment for these patients as anti-PAD4 antibodies also serve as a prognostic marker for highly erosive disease, but this pathology tends to respond better to treatment escalation. So hopefully, this patient is able to get their disease under control soon, and our biomarker testing led to the diagnosis and gave insight to guide the treatment in this patient. This is one of the many examples of our clinical utility these markers can bring and that we are hearing about from our customers. With the launch of these markers, we have now completed the development of one of the most sensitive serologic evaluations for rheumatoid arthritis available on the market today. I'm very proud of the work our team has done to deliver these tests to the clinic and in a field which hasn't historically seen a lot of biomarker innovation. We are setting a course to change that and better personalize care for these patients. To remind everyone of the impact our testing now has, conventional biomarker profiling for rheumatoid arthritis consists of rheumatoid factor and anti-CCP antibodies, which are positive in approximately 70% of clinically diagnosed RA patients. With the addition of RA33 antibody testing and our new assays for detection of anti-PAD4 antibodies, our serologic profiling will be positive in approximately 85% of patients, thereby capturing approximately half of the RA patient population, which would have historically been diagnosed as seronegative RA. Additionally, these patients, which are positive for RA33 antibodies are more likely to have milder disease, which tends to respond favorably to methotrexate. Patients positive for anti-PAD4 antibodies generally have more aggressive disease, but are likely to respond more favorably to treatment escalation. This level of precision in predicting the disease course and treatment response is exciting to bring to rheumatoid arthritis patients and it is just the start of what we are doing in this field. Lastly, and this is rare for biomarker innovation, these efforts require less than $3 million in investment, and we expect revenue payback in less than 24 months. We won't always be able to contribute to the clinic in such a valuable way with a relatively small investment and quick return, but we do believe that with our current commercial channel, we can innovate long term with decent returns on investment. Switching to AVISE CTD testing volume trajectory. Q3 volume was the highest we've ever recorded for a third quarter period. And notably, we did not see the typical quarterly slowdown. In fact, volume remained strong into October, which is a positive trend for Q4 and indicates to me that our team is back to growing the business after helping our customer base adapt to the billing changes we implemented a couple of years ago. Our expansion into new territories is also starting to pay off. We see meaningful contributions from these regions, and our per territory productivity remains strong. Of note, 2 of our recent expansion territories emerged as top-performing growth territories this past month, and we have others trending similarly. Total ordering physicians and orders per clinician continue to trend upward, and we're seeing increased engagement from both new and existing physicians. This is a testament to having the right team in place and the stability and focus we've built over the past 1.5 years. We currently operate with 45 sales territories, up from 42 at the end of Q3. Our focus remains on profitable growth, and we will continue adding territories where we see clear opportunity, strong physician engagement and can find the right talent. Now let's talk about ASP, which is top of mind for me. We've made significant progress over the past 2 years with our trailing 12-month ASP for CTD now at $441, a 9% increase year-over-year. However, it's important to acknowledge that we're not seeing the full second half ASP expansion I had anticipated. The new biomarker reimbursement, while accretive, has not ramped as quickly as I had hoped. We still believe there's a path to further ASP gains and our efforts around appeals, revenue cycle operations and payer education are showing incremental progress. But the reality is these gains are coming more gradually than I expected. Additionally, we lost a large high ASP direct bill account this quarter, which is weighing on our current ASP as we convert this business into a standard commercial insurance payer mix. Both of these items have temporarily slowed our trajectory. But as I've constantly conveyed throughout my time here, this is why I view it critical to gauge our success relative to a trailing 12-month measure, which does continue to climb. We continue to be very diligent with our revenue cycle operations and have a strong strategy in place to secure the higher reimbursement we ultimately expect, but you are seeing a somewhat muted ASP reflected in our top and bottom lines as we work through these efforts. Turning to our pharma and CRO business. We generated nearly $800,000 in revenue this quarter, bringing our year-to-date total to $1.2 million. Our order backlog now stands at $3.5 million and continues to grow. While this revenue stream can be lumpy, it's an important and expanding part of our business. We're encouraged by the momentum we're seeing in this area. As I mentioned, I was recently in Chicago attending the American College of Rheumatology Annual Conference, where we had a strong presence this year, highlighting new abstracts and deepening our interactions with clinicians. We submitted and had accepted 6 different abstracts covering the bulk of our pipeline efforts. One ultimately was chosen for a plenary talk and in general, we continue to showcase our company as an innovative presence within the rheumatology field. It was a highly successful meeting in this regard. Looking ahead, we remain on track to deliver $65 million to $70 million in revenue with the ability to be cash flow positive at the high end of our range, though the timing of sustained cash flow positivity may be pushed to 2026 as we continue to navigate the ASP challenges I just detailed. Generating cash remains a core near-term goal, and we're committed to achieving it in a disciplined, sustainable way. In closing, I want to thank our team for their dedication and execution and our partners and shareholders for their continued support. We continue to build something special at Exagen. And while the path is never perfectly linear, our progress is real and our opportunity remains significant. Thank you. And with that, I'll turn it over to Jeff for additional comments on the financials.

Thank you, John, and good morning, everyone. As John mentioned, we delivered another strong quarter, highlighted by our third consecutive quarter of volume growth, continued ASP expansion and a balance sheet that we expect secures our runway to positive free cash flow. Fourth quarter revenue of $17.2 million was our highest quarter in history, just beating out the second quarter and a nearly 40% increase over the third quarter of 2024. Even considering over $1 million in downside revenue adjustments in Q3 of last year, we still delivered over 25% revenue growth. And this is against seasonality headwinds we typically see in the third quarter, which we curtailed through growth in CTD test volume, up 15% from Q3 of last year and almost 2% sequentially. Year-to-date through the third quarter, we grew revenue 19% to roughly $50 million with trailing 12-month ASP up over 9% and volume up over 8%. As John mentioned, we're also seeing significant momentum in our Pharma Services business, which generated revenue of $780,000 in the third quarter. Year-to-date through Q3, we recognized $1.2 million in Pharma Services revenue versus about $100,000 in 2024. Our business development team has done a fabulous job of securing additional contracts and developing a strong pipeline that we expect will continue to grow. Today, we have up to $3.5 million under contract in pharma services, representing future potential revenue opportunity. The timing of deliverables and related revenue recognition are often lumpy from quarter to quarter, so we remain cautious to guide on specific timing of this revenue. Our trailing 12-month AVISE CTD ASP grew $37 year-over-year to $441 per test. The trailing 12-month number remains our best indicator of ASP traction due to the typical ebbs and flows of reimbursement in any one quarter. As John mentioned, we're behind expectations on our ASP acceleration, but we remain confident that we'll drive further expansion through revenue cycle management enhancements, commercial payer engagement and market access initiatives. These remain priorities for us and are core tenets to our success in driving reimbursement gains. As John also mentioned in the third quarter, our most significant ASP headwind was a loss from one of our higher volume, high ASP direct bill accounts. Importantly, we offset the revenue impact of this pullback with an overall increase in volume, which is a testament to our commercial team and ability to drive diversification of our physician base. As to the T cell and RA33 biomarkers we launched in January, we saw a moderate expansion in ASP and related accrual rate versus the second quarter, and we continue to expect over time to realize our long-term target. It's also important to note that while we launched our newest biomarker, PAD4, late in the third quarter and began billing for it, none of this volume was reflected in revenue. At the end of Q3, we had not established a payment history on this marker, so we did not record an accrual rate. We should see a moderate expansion in ASP in the fourth quarter for PAD4 as we establish an early payment history and related accrual rate. Gross margin in the third quarter was just over 58%, up about 260 bps compared to the third quarter of 2024. Excluding the impact of over $1 million in downside revenue adjustments in the third quarter of last year, gross margin in the quarter was down about 175 bps from just over 60% in 2024. Year-to-date, gross margin was just over 59% and up about 60 bps over the same period in 2024. Gross margin has been favorably impacted in 2025 by our continued ASP improvements even with an increase in COGS related to our new biomarkers. In fact, our per test AVISE CTD cost is running favorable to initial expectations, offsetting some of the ASP headwinds and allowing us to maintain our gross margin profile near that 60% level. We still see a path to the mid-60s over time as we remain focused on driving further ASP expansion and aggressively managing COGS. Operating expenses for the third quarter were $13.2 million, up from $11.6 million in Q3 of '24, and this increase was in part due to increased R&D spend for PAD4 and other pipeline initiatives as well as SG&A associated with our first sales territory expansion since John took over and another key commercial leadership addition to the team. We expect operating expenses to remain roughly at these levels for the next several quarters, and we'll continue to allocate resources responsibly as we've done in the past. At the same time, we remain focused on disciplined capital allocation to commercial, clinical and R&D initiatives that we believe have a high probability of driving accelerated long-term growth. From a balance sheet perspective, we have the flexibility to make the investments needed to support these initiatives and invest opportunistically as we see fit. But equally important, we have the ability to modulate spend down or up as needed, all with an eye toward preserving our path to positive free cash flow. Our net loss for the third quarter was $7 million compared to $5 million in the same period last year. But it's important to note that the $7 million loss in the most recent quarter includes about $3 million in noncash expenses related primarily to the fair value adjustments from our new debt facility with Perceptive, which we closed in May of this year. Our adjusted EBITDA loss in the third quarter is $1.9 million compared to $4 million in the third quarter of 2024. And year-to-date through Q3, our adjusted EBITDA loss improved $1.5 million or nearly 20% to $6.1 million for the first 9 months of 2025. We maintain our focus on positive adjusted EBITDA in the near term and believe that ASP growth is the most important lever for achieving this goal. Please refer to our earnings release issued earlier today for a reconciliation of adjusted EBITDA to net loss. Turning to our balance sheet. We ended the third quarter with $35.7 million in cash and cash equivalents, up from $30 million at the end of Q2 with accounts receivable of about $11 million. Excluding financing proceeds during the third quarter, we generated net cash of $2.3 million compared to net cash usage of $2.4 million a year ago. We also enhanced our cash position in the third quarter through opportunistic but disciplined placements under our ATM sales agreement with TD Cowen Securities. We raised just over $3.4 million at an average price of $9.83 per share, taking advantage of share price momentum and higher volume trading days throughout the quarter. We remain very well positioned from a balance sheet perspective with over $45 million in combined cash and accounts receivable at September 30 that we expect will fund our existing business to positive free cash flow and up to an additional $50 million in available future credit capacity if and when needed. In closing, we continue to deliver value to shareholders through solid operating and financial execution. We delivered another quarter of record revenue in Q3, a third consecutive quarter of AVISE CTD volume growth, continued ASP expansion, and we remain on track to deliver from 17% to over 25% revenue growth in 2025. We will now open the call for questions.

Our first question comes from Anderson Schock of B. Riley Securities.

Congrats on all the ASP progress. So first, you mentioned on the second quarter earnings call, $430,000 per territory. Do you have an updated revenue per territory for the third quarter? And how should we think about the productivity ramp of these new territories?

Thank you for the question. The $430,000 per territory was a record for us. To provide some context, that figure has increased from the high 200s. We have indeed made significant progress in revenue per territory, largely driven by the ASP gains we've achieved as a company. For the third quarter, it was slightly below that level. This is primarily due to the addition of new territories, which has expanded our denominator. We expect that as these territories start to yield results, revenue will increase over time. So it's just under that $430,000.

Okay. Got it. And then with the launch of your RA markers at the end of the third quarter, so once establishing a payment history for these, is there an incremental uplift to ASP that you're targeting similar to the $90 increase with the lupus biomarkers launched in January?

Yes. So we've not broken this out yet, and we hesitate to proclaim a number without having a robust history of collections there. So that's what we're doing right now. We're gathering that information, developing that history and then we'll establish it. Happy to provide an update on a future call. We expect it to be relatively modest compared to the $90 expectation that we had for the prior markers. This is a set of ELISA-based assays, 2 markers as opposed to 3 in the case of RA33 or 3 also in the case of the T cell analytes. So less markers, lower cost platform, build on the generic codes. It's going to be in the low single-digit dollars or maybe even in the double digits, but it's not going to be anything like what we had previously.

Okay. Got it. And then you also mentioned on the last call, you're approaching your first pharma partnership with the urine platform. Are there any updates you could provide there?

So we actually completed our first statement of work related to that platform. And just so that everyone is aware, we have some fantastic technology that we've licensed out of Johns Hopkins really with multiple intended use opportunities really to change the way these patients are managed for the better. And lupus nephritis affects about half of all lupus patients. This technology has been shown when you look at certain proteins in the urine of lupus patients, there's the potential to diagnose the disease through a noninvasive manner. That's something we continue to pursue and have published on from an abstract perspective. We're looking at therapeutic response and then even prediction of long-term kidney function or prognosis really. And so we have completed our first profiling effort. We're in discussions on subsequent efforts there, but it went successfully. It was a small project and I look forward to doing more.

The next question comes from Kyle Mikson of Canaccord Genuity.

Good quarter. John and Jeff, could you provide some clarity and a framework for us to consider as we approach the $500 target, which was the goal previously? You also mentioned the $90 increment from the new biomarkers in the last question. It would be helpful to understand the progression moving forward and whether there are any other metrics from the past 12 months that we should consider as we look toward 2026 and the upcoming quarters.

Thank you for the question, Kyle. First and foremost, I want to emphasize that we are not considering any other metrics, and I would be cautious if I did suggest an alternative, as targets often shift when challenges arise. At Exagen, we still see $500 as a realistic goal; it's really just a matter of timing. We've identified a couple of factors that contributed to Q3. One significant issue was with a large client bill account, specifically a hospital system in the Northeast, which decided for financial reasons to cancel their contract. This created some headwinds for our average selling price. However, we believe we can recover this through the standard commercial insurance route, although it will take some time. Our experience with regional payers in the Northeast has been limited, as we've historically built our business via hospital systems through client bill arrangements. Regarding the new biomarkers, you're spot on with your observation. We initially anticipated $90 at the beginning of the year but noted in the Q2 call that we were coming in lower, around $72. We've seen some improvement since then, and while we expected to reach $90, we're still working toward that goal. I firmly believe we are progressing in that direction. We have also introduced our new PAD4 markers, but we have not yet recognized any revenue from them, as we lack a solid history to establish an accrual rate. We anticipate some revenue growth from these markers over the next couple of quarters as we work to convert that client bill account, which had a reasonable volume. Additionally, we are making progress on the new biomarkers launched earlier this year, establishing an accrual rate for the current product launch, and continuing our foundational efforts. Over time, I expect that trailing 12-month number to increase. I had hoped for a steeper growth trajectory at this point; 9% year-over-year is acceptable, but we would prefer it to be faster. This is the right metric to focus on, and we will keep striving to improve it.

Okay. Perfect. Regarding volume, it appears that it has remained flat sequentially, quarter-over-quarter, if my calculations are correct. This actually seems to be stronger than your typical seasonal pattern, so that's encouraging. Could you confirm if this is accurate? Also, should we anticipate a decline in the fourth quarter due to ACR and other seasonal factors? Additionally, considering the challenges related to ASP, are you planning to scale back on rep expansion at this time, or are you still focused on building out the team for next year?

Those are great questions. So just to be clear, volume is actually up in Q3 relative to Q2, a couple of percent. So from that perspective and looking at historical seasonality, that's a meaningful change. And so we're very proud of that. I think the team has worked extremely hard. That was really with about the same number of sales territories. We had 42 at the end of the quarter here. So contributing territories in Q3 was somewhere still around that 40 level. So from that perspective, I think it was a very strong quarter. We've also seen the volume increase into Q4. October was a fantastic month for us. We've now understand what that final volume number is, and it was our highest month in several years. So from that perspective, I think we've got our team with the right incentive structure. We've got the right team, and we're highly focused in delivering the clinical value and the messaging and education around that, that is driving business and adoption. So I think as it relates to the sales expansion question, there's no reason why we wouldn't continue to expand if we have the right opportunities in front of us. Right now, we're making sure that the 5 territories we've added in the last 4 months or 5 months are well supported, well-educated and are set up for success. And we'll continue to add as those opportunities arise. We did add to our sales leadership side that was more opportunistic. Someone I had worked with previously became available and I think very highly of that individual. So we took advantage of the opportunity to bring them on board. And again, it just sets us up for future growth. So we did go up in Q3. I would expect somewhat of a step down in Q4, just mostly a function of business days. I think in Q4, you've got some pretty significant holidays. We had ACR, the week-long conference that actually occurred in October. So our October performance was in light of ACR occurring in this month. So we're on the right trajectory. I would still expect a slight step down. But overall, we're setting ourselves up very well for continued growth through 2 mechanisms, ASP and volume.

I would like to ask about the pharmaceutical business. The revenue for this quarter was $800,000, compared to just $100,000 for all of last year, which is impressive. What is driving such strong performance this year? Could this become a more significant business line by 2026? Is this an area where you might consider partnerships or acquisitions, given the unmet need in autoimmune diseases?

I'm excited about our progress in pharma revenue, reaching $800,000, which is significantly higher than what we've achieved historically in testing services. I'm proud of the team's hard work, which has clearly benefited our pharma partners who have time constraints and quality requirements. We are proving our ability to stand out in the market. The pharma services sector tends to be inconsistent, with revenue recognized upon project completion, leading to varying performance across quarters. However, I expect continued growth throughout the year due to numerous opportunities in pharmaceutical development, including the emergence of new diseases such as Sjogren's, which recently gained attention from Novartis. There is a demand for better diagnostic biomarkers and we believe we are well-positioned to meet that need. Our methodology using flow cytometry also gives us a unique advantage. We will continue to refine our business plan to understand how we can provide value. For instance, when a pharmaceutical organization approaches us, they often seek quick validation for assays to facilitate clinical trial testing at a high quality. We typically meet the necessary quality standards due to our extensive commercial pipeline and access to a broad range of patient samples, which enhances our ability to validate and develop new assays. This capability is a significant competitive advantage for us. We will monitor how this area develops, but the trends are certainly positive.

Our next question comes from Mark Massaro of BTIG.

This is Vidyun on for Mark. So just one on the sales force expansion. I understand that you just hired these reps. But could you just remind us how you're thinking about targets in terms of per rep and kind of the time that it takes for them to reach maturity and hit their stride?

From our perspective, we establish profitability targets on a per territory basis, which is influenced by the compensation structure. Once we achieve a certain scale, profitability bonuses come into effect. We're also focused on a minimum level of profitability or contribution margin that supports maintaining a field presence in that area. This naturally connects to the number of tests, but it also shifts as our average selling price changes. We typically split our largest territories if we believe there’s significant opportunity based on our research. This is the approach we take for sales expansion. Generally, it takes about 6 to 9 months for a new hire to start contributing, though there are exceptions. For instance, we have two territories in the Southeast that have shown the highest percentage growth and rank among our top five nationally as expansion areas. This reinforces our confidence in our personnel decisions and our evaluation of opportunities. We plan to continue assessing this, anticipating that by year-end, heading into 2026, we will start to fully realize the potential of this growth strategy.

Okay. Perfect. And then just a follow-up on the kind of slower-than-expected traction with ASP lift for the new biomarkers. Can you just help us think about steps you can take in terms of driving payment for these biomarkers or what it is exactly that's holding up payment here?

Yes. Great question. So as it relates to extra color on the ASP side. From our perspective, some of the denials that we're seeing are related to basically medical policy for these new markers and it's the diagnostic code in conjunction with the procedural code being used is not approved from a payer standpoint. We believe that through an appeals process, a robust appeals process that we've architected and implemented now here over the last couple of years that we can be successful long term, but initial denials are higher than I had originally expected. So that's really the basis for it. There's some other nuances there that we think we can improve upon, for example, out-of-network denials and things like this, but these are unique markers, and we're the only lab that's offering them. And so there is no in-network alternative, especially for this suite of analytes. So from our perspective, it has to do with revenue cycle operations probably being the most effective lever in this space. Still working on some physician efficacy advocacy along with patient advocacy, but those will be secondary or tertiary tactics that we employ, and then we'll have to take it from there.

Our next question comes from Ross Osborn of Cantor Fitzgerald.

This is Matt on for Ross today. I guess just one for me. You reiterated a path to mid-60s gross margin over time. I guess can you kind of expand on what the key unlocks are to get there, whether it's further automation, volume scale, repair mix normalization and how you're thinking about that timeline to start seeing incremental leverage?

Sure. How's it going? This is Jeff. I'll take that. I think there are multiple factors at play. We believe that expanding our average selling price will be the best way to drive margins into the mid-60 percent range. As John explained, we have a strategy to enhance our average selling price through improved revenue cycle management and ongoing enhancements in that area. Additionally, our cost of goods sold per test on AVISE CTD is currently well below our target, which is very encouraging. This is primarily due to better labor optimization, and we haven't had to make the significant labor investments we anticipated to manage the volume, especially with the new biomarkers. This has occurred before any significant optimizations we've implemented in assay development or lab operations. We see a real opportunity for further workflow optimization, but the primary driver will be the average selling price expansion. To provide additional context, John mentioned we experienced a pullback and lost a relatively high-volume, high average selling price account. If we adjust for that, we would already be above the 60 percent gross margin range for the quarter. We are still on track, and we are encouraged because our cost of goods sold profile is significantly lower than we expected.

The next question comes from Andrew Brackmann of Will Blair.

Maybe just on the volume front, accelerated volume growth again here in the quarter. A lot has been asked sort of on rep productivity. But as you sort of think about the drivers of that volume growth, how should we sort of parse out the sort of levers between the expanded commercial team, more efficient rep productivity, but then also just the launch of markers from earlier this year and then there's still just the massive penetration that you have in front of you, the penetration potential that you have in front of you?

Thank you for the question, Andrew. I think I can provide a qualitative response. It’s often challenging to address this with exact precision, but from my viewpoint, our innovative and clinically valuable offerings have definitely revitalized our sales team, as well as increased interest among our customers. The introduction of these new markers is certainly a positive development, and we’re witnessing renewed enthusiasm in the latter half of the year following their launch, especially now that we have a distinct marker set for rheumatoid arthritis. This greatly enhances our clinical discussions and adds significant value for our customers. I consider this a top priority. We’ve extensively discussed the stability and high caliber of our team, which I believe significantly contributes to our current growth. Our team members are dedicated to mastering the science and are working diligently, and the results reflect that effort. As long as we maintain a customer-centric approach and focus on meeting their needs while enhancing their clinical practice, success is achievable. This field of medicine heavily relies on relationships, and this is particularly evident in managing chronic diseases where patient-clinician relationships are crucial, as they are within our organization. We have invested effort in building and maintaining trust, ensuring that testing is conducted where it will be beneficial. Our tests aren't universally applicable in every clinical scenario for diagnosing connective tissue diseases, so we want to pinpoint where clinicians experience challenges and how we can provide value. I believe our team is close to mastering this and continues to improve in this area, which is reflected in our results. Thus, I see the new markers as a significant factor, along with team stability and an intensified focus on clinical messaging driving our current progress.

Okay. That's great color. And then just on the loss of that large direct bill customer, any more color you can maybe give on the magnitude of the headwind that, that caused ASPs in the quarter? And then as you look at that entire book of business for direct bill, any other risks out there that you might see popping up in terms of other customers going down this route?

I think the direct bill opportunity is quite intriguing, currently making up nearly 20% of our revenue and about 8% to 10% of our volume. This demonstrates a significant relationship. The negotiation involves both pricing and medical policy, allowing entities access to innovative technology sooner. However, this relationship can also be unstable as they can easily switch providers. Our understanding of the recent transition indicates it was financially motivated, without fully considering the clinical impact or the preferences of the rheumatology group involved. Nonetheless, they continue to offer our test in clinical practice, and we are shifting more towards commercial insurance. We recognize that this path may take longer to reach our desired average selling price, but we are knowledgeable about the necessary strategies. While we are approaching the maximum level of client bill business I want to accept for the organization, we'll keep an eye out for additional opportunities. Ultimately, I believe collaborating with insurers is more beneficial in the long run, as it offers a better competitive advantage despite being more challenging in the short term.

Our next question comes from Bill Bonello of Craig-Hallum.

I just want to follow up on Andrew's question to clarify what you mentioned. Regarding that client, are they still placing orders for the test but have switched from client billing to third-party billing? If that's the case, has there been any impact on the volume at that client, or are volumes steady with just the change in average selling price?

Yes, regarding the opportunity to provide more details about this account, when the contract was terminated, we received relatively short notice, just a few days. Access to the testing was immediately halted, which led the hospital system to freeze the EMR and restrict access for their clinicians. They also stopped using their in-house laboratory for blood draws. This effectively caused everything to come to a standstill at first. Due to our strong relationships with the rheumatology division and their eagerness to continue using this test, they sought an alternative, and we collaborated with them on the logistics to make that happen. Currently, the volume has picked up again as we have facilitated phlebotomy access for them and assisted in establishing a new ordering process. While we haven't fully returned to our previous volume levels, we are definitely moving in a positive direction, and the situation is significantly better than at the time of the transition. There was some volume suspension, but we are seeing a very positive trend and are optimistic about the future. The main impact has been on the average selling price.

Okay. That's really helpful and nice to see the acceleration in volume growth even with that. situation. So the second thing because to me, volume growth really seems like the exciting story here, the uptick, but ASP obviously matters. So just on the higher denials than you had expected, a couple of questions. Why do you think that's happening? Why do you think you're seeing greater denials than you had expected? And then is that dynamic exclusively related to the new markers? Or are you seeing an uptick in denials across the board?

Yes, that's a great question. So our base business, no notable changes in payer behavior that are worth going into a level of detail on this call, right? So we remain on a positive trajectory for the base business. It is related to the new markers as to why we're seeing a higher level of scrutiny than I expected. Well, I think it comes down to incentives for the most part, insurers are oftentimes profitable organizations, and they're looking for ways to curtail utilization. And this is one way, either through prior authorization, implementations, medical record requests. They throw a lot of hurdles in place to see if the clinicians truly really want this type of offering. And that's what we're seeing. So some of it is related to the ICD-10 code, the diagnostic code being used in conjunction with billing, but this is what we're provided by the client. So not a lot that we can do there. Just tough to simulate all of these situations ahead of time. I think we did a reasonable job on our end in estimating this and still believe that long term, that $90 aspiration is within reach. We're climbing to it. I think we're in the mid-high 70s now. We were in the low 70s a quarter ago. So even over a 3-month period of time, you've seen almost a 10% change in that new marker reimbursement for the positive. It just is going to take us a little bit of time to work through this. And ultimately, where do we land? Not entirely sure. Is it $85? Is it 95? I don't know. But I just think it's important and prudent to be transparent with this, and that's kind of what we're working on.

That's really helpful. And then just the playbook, is it radically different what you're trying to do here in terms of working through denials and eventually getting these additional markers paid for than sort of what you've done over the past 2 years where you've driven a sort of massive increase in ASP through revenue cycle management? Just trying to understand how unique this particular situation might be relative to what you've done in the past?

Yes. Tactically and procedurally, it's very similar. And so that's why I feel confident that from an architecture standpoint, from a process standpoint, we have the infrastructure in place to address this at scale. On the content, now that's obviously going to change because most of what we've been doing is having discussions around AVISE lupus and what the body of evidence is behind that in terms of clinical validity and utility. Now these are new markers. And so the body of evidence is not as deep, although with the rheumatoid arthritis markers, they've been studied for many years, RA33, body of literature out there for 20-plus years, the PAD4 autoantibodies, body of literature out there. So we're able to leverage some of that science that's been conducted by other institutions and infuse that into our appeals process, but it does require us to update the appeal letters and to structure that content a little bit differently. And there's going to be a learning curve naturally with some of that. But the process and tactics remain the same.

Our next question comes from Matthew Parisi of KeyBanc.

You've previously mentioned ALJ hearing wins during the prior quarters. And I was wondering if there has been any further ALJ hearing wins for Exagen in 3Q?

Matt, none that we disclosed publicly. We have continued a robust appeals effort. We are, I think, making some material progress there. This past quarter, we actually presented in front of multiple medical directors at various plans. And so we're getting the attention and the audience and the opportunity that we've sought out strategically, and we'll continue to make incremental progress there. We have filed for future ALJ hearings, but no notable update in that regard.

Our next question comes from Dan Brennan of TD Cowen.

Great. Maybe just one more on the account, the direct account. I know it was asked, like did you size it just so we can get a sense of as we look forward, if that's still in the comp, kind of we can back that out. And then like what's the difference between the direct realized price versus the commercial realized price?

Yes. Dan, thanks for the question. So in terms of in-quarter ASP impact, you're talking on a blended rate, a little north of $20, right? So you've got a headwind of about $20 for the in-quarter ASP impact of that account alone. Volume-wise, we didn't cut it out or carve it out because we believe that volume is continuing to come back over time. And so we'll just have to see. It will be a slight headwind near term, but hopefully returning to normal levels or even improving as we continue to add more clinical value in that context. But the ASP should also start to improve as we develop a history and a better relationship with the payers in that region. So hopefully, that gives you a little bit of a feel. So it was significant, but also something for us opportunity-wise to work on. Does that help?

Yes. No, that helps. I mean your trailing 12-month ASP, right, still has been ticking up nicely even this quarter, another $13 or so sequentially. So I guess within the context of the $65 million to $70 million guide, is the assumption that the ASP continues to go up? Or is it like maybe flat because of this kind of account loss? Just how do we think about that realized price in 4Q from a trailing 12-month basis?

Yes. We do not break it down by average selling price or volume. Throughout this year, the guidance of $65 million to $70 million has remained largely stable, with some clarity improving towards the end of the first or second quarter. We believe we will stay within that range despite facing some challenges. I am proud of the team's execution in various areas, and the progress in both average selling price and volume positions us well to achieve our goals. Specifically for the fourth quarter, we have several strategies to reach our targets, including improving our year-end cash flow. We are exploring opportunities with different payers that could help us achieve this. The average selling price will be the most critical factor, but we also need to monitor how volume performs. We should remain cautiously optimistic about volume growth, particularly due to the upcoming holiday season.

And Dan, to add to your question about the guidance, the low end of the range assumes very little, if any, increase in average selling price in the fourth quarter. In contrast, the high end of the range would factor in continued and possibly accelerated increases, but the low end really suggests that we are not expecting much change in average selling price in the fourth quarter.

Got it. I got that. comps, you've done a really nice job, obviously, on the volume as you've kind of optimized for the profitability and the cash burn, and you've had really nice volume growth in Q3 and kind of year-to-date. As we look ahead, like comps do get more difficult. Obviously, the market is large. I mean, is double-digit growth like reasonable to think about as we go into 2026?

So we've not set a base guide or objective for our top line growth. We think it will be driven by 2 factors. Volume, we've said likely to grow in the mid- to high single digits, and we're seeing that, if not a little bit higher for this year as we've really established a strong sales organization, but also with the new marker launch. ASP is inherently difficult to project and especially timing. And I think you're seeing that play out real time here with these quarterly results, but also just in the past, we've had periods of time where we've seen pretty extreme acceleration. And I think as long as that trajectory continues upwards over time, we'll be in a pretty good spot organizationally with both factors contributing.

Got it. Maybe just one final question. There have been several inquiries about denials and payments, and your confidence with these differentiated markers indicates that you will be successful. In the past, many diagnostic companies, including yours, have experienced slow responses from commercial payers. Investors often look at long-term opportunities, considering not just the next 6 to 12 months, but over the next 2 to 3 years. What do you see as the potential for realized prices in that timeframe? Previously, you mentioned figures like $500 to $600. Can you share any insights on whether there have been changes that would make you less confident about reaching around $600, or how we should view the long-term potential for realized price capture?

Yes. Our relatively near-term goal remains that half of Medicare rate. I think that's still a viable objective for us to meet in that time frame. And so that would put us kind of at that $600 range. And as we achieve that, that continues to dramatically transform our organization. We believe that current volume, we'd be a cash flow positive organization at the $500 range. So we're close, and we're close to transforming the organization in a very positive way, and I still think that's a reasonable expectation for us. Longer term, it should be higher.

Higher than the $600 or the $500?

Yes, than the $600.

Ladies and gentlemen, with no further questions in the question queue. I will now hand over to John Aballi for closing remarks.

Thanks so much. Year-end has come or is coming fast. And I really just want to thank the team here at Exagen for their continued dedication and performance. We have an ambitious quarter ahead with key milestones to accomplish, and I look forward to finishing the year strong. Thanks to everyone on the call for their partnership as we work to establish a dominant company in the autoimmune space. Thanks for your time this morning.

Thank you, sir. Ladies and gentlemen, that concludes this event. Thank you for attending, and you may now disconnect your lines.