Earnings Call Transcript - XGN Q4 2022

Operator, Operator

Greetings, and welcome to the Exagen Inc. Fourth Quarter Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ryan Douglas with Investor Relations. Thank you, Mr. Douglas, you may begin.

Ryan Douglas, Investor Relations

Good afternoon and thank you for joining us today. Earlier today, Exagen Inc. released financial results for the quarter and fiscal year ended December 31, 2022. The release is currently available on the Company's website at www.exagen.com. John Aballi, 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, including 2023 guidance, 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 the business please see our filings with the Securities and Exchange Commission, including our Form 10-K and subsequent filings. The information provided in this conference call speaks only to the live broadcast today, March 20, 2023. 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 John Aballi, President and CEO of Exagen.

John Aballi, CEO

Thanks, Ryan, and thank you to everyone joining the call. Today, I will discuss our fourth quarter and full year 2022 results, recent changes we have implemented and highlight our initial progress towards achieving profitability. I'll then hand it over to Kamal, our CFO, for details on our financial results. As always, we appreciate your continued support of Exagen. Revenue in the fourth quarter of 2022 was $12.8 million, with full year revenue of $45.6 million. This past year, we delivered a record 135,000 AVISE CTD tests, of which 33,800 were delivered in the fourth quarter. From inception, we have now delivered approximately 750,000 AVISE CTD tests. Helping provide answers for so many patients is only possible because of the fantastic folks at Exagen and I'd like to thank them for their continued dedication over the last several months and congratulate them on accomplishing these milestones. We've implemented numerous changes throughout the organization, and the team has remained flexible and committed to our mission of serving patients throughout their autoimmune journey. In conducting my initial review of Exagen, it is clear that the Company has an exceptional product in AVISE CTD, which has seen strong penetration in an underserved market and has recently received improved Medicare pricing. The AVISE platform as a whole is well-known and highly regarded in the rheumatology field, shown by the consistent growth in demand. I believe there is still significant untapped potential in the AVISE platform and have tailored our strategy to focus on growing ASP and volume while reducing costs. Ultimately, this should lead to improvements in our gross margin over time. We are working to optimize our business operations around our flagship product. And my primary focus moving forward is in steering the Company to profitability. Organizationally, we have aligned on key goals, but the correct incentives in place to achieve those goals and are focused on delivering superior products and services to our customers. Reimbursement for AVISE CTD is the most sensitive lever in driving our revenue in the short to medium-term. One of the key metrics in measuring the success of our reimbursement strategy will be the progression of ASP over time. Due to variability in quarterly ASP data, we will focus and provide regular insight on annual ASP rates. For 2022, our derived annual AVISE CTD ASP was $285 compared to $306 in 2021. At year-end, AVISE CTD ASP was roughly one-fourth of our Medicare reimbursement rate, which we believe highlights the significant opportunity we have ahead of us. Our strategy for improving ASP encompasses optimizing our revenue cycle practices, efforts by our managed markets team to expand patient access and contracting with commercial payers at rates that reflect the value provided to the healthcare system. On these fronts, beginning in Q4 and continuing into this year, we have actively worked to revamp our appeals process by evaluating the workflow steps involved in making improvements. For example, we have recently revised messaging conveyed in our appeal letters to better address denials, and we're evaluating ways to further improve processes through automation. We continue to review our processes and will make additional changes as needed given this is a high priority for the organization. From a medical policy perspective, we adjusted the goals and incentive compensation of our managed markets team to elevate the importance of our medical policy progress over the next couple of years. And similarly to our appeals process, we are refining our messaging and being proactive in soliciting physician support with payers. As we look to make progress in securing medical policy for AVISE CTD and as contracts become available, we are committed to obtaining rates which are PAMA neutral and ideally accretive to our Medicare pricing in the long run. Regarding AVISE Lupus, our Medicare LCD application remains in process consistent with prior disclosures. We plan to provide updates as feedback becomes available or information changes. Medicare continues to reimburse and pay as detailed last quarter. In December, we finalized the sizing and realignment exercise of our sales territories and implemented changes to the incentive compensation plan for our sales reps. I believe we've optimized our sales footprint while balancing our expenses with revenue potential. We now have a model, which we believe allows us to continue to expand without incurring significant carrying cost per territory. The sales force realignment was part of a total reduction in force of 42 employees that took place in December. The 42 employees were split approximately one-third in sales, one-third in R&D and one-third spread throughout the general organization. This culminated in 40 sales territories across the U.S., down from 63 previously. Additionally, we have retained the majority of our inside sales force and are leveraging them in a more strategic manner. As we've conveyed previously, a key focus in our path to profitability is to reduce costs while driving AVISE CTD growth. We have set clear goals for our lab and are focusing on reducing COGS and creating efficiencies for processes that are labor-intensive. Additionally, we're exploring options in our facilities where we believe we can reduce fixed cost and overhead. We've implemented a process to routinely evaluate and ensure our products meet physicians' needs while contributing positively to the Company from a financial perspective. As a result, we may discontinue non-core product offerings that do not contribute meaningful revenue or have a negative impact on our overall gross margin percentage. As we successfully transitioned physicians to alternative testing, we will provide updates. Regarding research and development, I felt that our initiatives have expanded beyond what we were capable of supporting and we were taking on R&D projects that didn't have a clear return on investment. I implemented a screening process that filtered out three of our prior pipeline projects focused in fibromyalgia, interferon response and thrombosis prediction. Our R&D team is now comprised of nine employees, reduced from 23 in late Q4, who are focused on lupus nephritis therapeutic monitoring, biomarker-derived disease activity for SLE and prediction of response for rheumatoid arthritis therapy. These pipeline products meet our new screening criteria. They have the potential to solve a significant customer need within the field of rheumatology and they have a competitive advantage rooted in proprietary technology, all have internally defined paths to reimbursement. As a quick note regarding our reporting, our total ordering physician base continues to grow and reached a record 2,419 healthcare providers in the fourth quarter of 2022. Moving forward, we plan to disclose ordering healthcare providers during the fourth quarter update only and will no longer report the number of adopters or stickiness. I've outlined the most important metrics I use to manage the business and don't believe the omission of these metrics will have a material impact on one's ability to evaluate Exagen on a go-forward basis. Finally, and before I hand the call over to Kamal, I would just like to reiterate that we're optimizing our business operations around AVISE CTD and that my primary focus moving forward will be to steer the Company to profitability on our existing cash balance. We have already taken numerous steps to reduce our cash burn and should start to see the results of these actions soon. We believe we can achieve cash flow breakeven with gross margins around 60% and revenue of approximately $75 million with our current cash balance. I'm excited about our opportunity this year. We have a strong foundation based on a great product, a highly motivated team and the opportunity to make a difference in the rheumatology community, especially with patients facing autoimmune disease. The path we've laid out internally is clear, and I look forward to providing future updates on our progress. With that, I'll now turn the call over to Kamal to provide an update on our financial progress in the fourth quarter and for full year 2022.

Kamal Adawi, CFO

Thank you, John, and good afternoon, everyone. As John mentioned, total revenues for the full year 2022 were $45.6 million. Total revenues in Q4 were $12.8 million, which was an increase of 1.2% over fourth quarter 2021. Total revenues were driven primarily by testing volumes from AVISE CTD with a record 135,210 tests for the full year and 33,819 tests for the fourth quarter. We also had a record 2,419 ordering healthcare providers in Q4 2022 compared with 2,126 for Q4 2021. AVISE CTD testing revenue was $11.1 million in the quarter and other testing revenue was $1.8 million. AVISE CTD revenue for the full year was $38.5 million and other testing revenue was $7.1 million. Positive revenues were $6.3 million in Q4 2022, resulting in a gross margin of 50.9% compared to 61.1% in Q4 2021. The decrease in gross margin percentage was driven by an increase in cost, mostly attributable to inflationary pressures and a decrease in other testing volumes, both of which were slightly offset by an increase in ASP. For the full year 2022, cost of revenue was $24.2 million with a gross margin of 46.9% compared to $20.6 million and a gross margin of 57.4% for the full year 2021. This decrease in gross margin was driven primarily by an increase in COGS due to inflationary pressures, a decrease in ASP and a decrease in revenue resulting from the termination of the Janssen agreement, all of which were slightly offset by an increase in volume. Operating expenses in Q4 2022 were $27.3 million compared with $18.9 million in Q4 2021. Operating expenses in the fourth quarter include a one-time impairment in the amount of $5.5 million from goodwill associated with the purchase of the medical diagnostics division of Cypress Bioscience Inc. in 2010. There was also a $1.2 million charge for severance payments related to a reduction in force and the CEO transition. Operating expenses for full year 2022 were $91.6 million compared with $72.4 million in 2021. Additional year-over-year increases were primarily due to the goodwill impairment and increases in employee-related expenses due to increased headcount and inflation and an increase in public company expenses and marketing spend. In December, we had a reduction in force that eliminated 42 positions. The annualized savings in salary and benefits from the reduction is approximately $8.6 million. With the elimination of the R&D positions also came the elimination of related R&D project spend, which will be additional savings. The net loss in Q4 2022 was $14.4 million compared with $7.1 million in Q4 2021. For full year 2022, the net loss was $47.4 million compared to $26.9 million in 2021. Looking to our balance sheet. Cash and cash equivalents as of December 31, 2022 were approximately $62.4 million, leaving us ample opportunity to bridge to positive cash flow. As John mentioned, we are focused on driving the company to profitability. Many of the changes we made late in the fourth quarter will reduce our cash burn, the results of which we expect to see starting in Q1 2023. Previously, we provided Q1 revenue guidance of $8.2 million to $9.2 million. The strong momentum seen in Q4 has continued, and we are increasing our Q1 revenue guidance to a range of $9.2 million to $9.7 million. We will now open the call for questions.

Operator, Operator

Thank you. We will now be conducting a question-and-answer session. Thank you. And our first question is from Mark Massaro with BTIG. Please proceed with your question.

Mark Massaro, Analyst

Maybe the first one, Kamal. Maybe can you share what prompted you to increase your Q1 revenue guide, whether it's revenue cycle management, billing and collections, clarity on coding? And I recognize we're in mid-March here, but just can you just give us a sense for what your visibility looks like when it comes to ASPs? And volumes have been pretty steady, but just your thoughts around how we should think about pricing trending throughout the year?

Kamal Adawi, CFO

Mark, yes, thank you. I appreciate that question. So as you know, previously, our guidance for Q1 was $8.2 million to $9.2 million, and we increased it to $9.2 to $9.7 million. The reason for this is how strong Q4 ended. So, we had great momentum on our volume in Q4, ending in Q4, starting in Q1, that momentum continued. So that was one of the main reasons why we took our guidance up. I'm going to let John talk a little bit more about the revenue cycle management and his strategy there.

John Aballi, CEO

Certainly. Good afternoon, Mark. Thanks for joining the call and your question. Just to add a little bit more color on the volume side. We've continued to make changes to the organization, one of which has been a reduction in the size of our sales force. We did not know exactly the impact from that over time. And so, we anticipated some impact to our volume numbers. And yet that has continued to be strong into Q1. So that's the primary driver there. On the revenue cycle side, this is a very intentional process, but it takes a little bit of time. The period of time from when a claim is filed to when you start to appeal that claim and subsequently when you can change some of the impact from a change in appeal process that may take up to nine months or longer. And so, ASP-wise, you heard in the remarks as well, and we take a look at this, trailing 12-month trends. And I think it's important to do so; you just have the inter-quarter variability with some of the accounting aspects with the ASP. And so, I think if we take a look at how that progresses over time, that will be more indicative of our progress on the revenue cycle side, but nothing substantial on ASP-wise yet, continuing to hold strong.

Mark Massaro, Analyst

Okay. That's helpful. And then you didn't specifically call it out, but I think you alluded to it. As we think about therapy selection for rheumatoid arthritis, can you just confirm that the AVISE RADR program is still in development? Or is that something you're looking to continue to evaluate, just where does that stand relative to some of the other projects that you're working on in R&D?

John Aballi, CEO

Yes. So one of the things I've tried to do since I got here was really put processes in place that provided a little bit more standardization, and then subsequently prioritization. So, you see this in our general operating strategy as it pertains to the sizing of our sales force and the prioritization of some of the products and the evaluation of our portfolio. But especially on the R&D side, as it relates to prioritizing development of projects and then subsequently commercializing those projects. So from an overall pipeline standpoint, I know your question was related to RADR, but I think it's important just to note the overall pipeline in general has been under evaluation, and we have applied the same process that we set internally. That's eliminated a few projects that we've disclosed publicly: one, the fibromyalgia project; another rooted in thrombosis. And so we have our interferon signature as well, which we stopped development on. Those we've disclosed. The others remain in some various form of development. Specifically regarding RADR, we have pared it down or narrowed the focus. So originally, this was to provide prediction in signatures in both first-line as well as second-line therapy, methotrexate as well as some of the biologics in the second-line area. And we've been more specifically focusing on second-line prediction, specifically looking at biologic. And so, we do still have that program up and running but have narrowed it in and continue to evaluate exactly the path to commercialization, and what our clinical utility requirements will be. So that's probably as much as I can dive into on the call.

Mark Massaro, Analyst

Okay. That's helpful. And then if I can sneak one last one in. I think you're down to 40 territories from 63. How do you know that 40 is the right number? Maybe can you just walk me through how you decided to arrive at that number? And then maybe can you share if you've had your national sales meeting yet this year, but what some of the new metrics might be for the reps to ensure that volumes can continue to grow this year?

John Aballi, CEO

Sure. I'll start with the overall sentiment among the sales representatives. We recently held our national sales meeting in San Diego, which was a fantastic event. I had the opportunity to meet several representatives in person. While I've spoken to many of them over the past couple of months since joining, it’s always nice to connect face-to-face. There was a general feeling of energy and engagement, and it was rewarding to see the excitement among the team. They had just come off a successful Q4, and we’re seeing that momentum carry into Q1, which is very encouraging. We made a significant change to the compensation plan by notably increasing the variable compensation for our representatives. I believe this was an important strategic decision. We've also focused specifically on AVISE CTD, unlike previous plans that incorporated performance related to other products. This focused approach in both compensation and the curriculum presented at the national sales meeting has been very positive and likely contributes to our momentum entering Q1. Regarding the size of the sales team, I appreciate your question. Do I think 40 is the right long-term number? Not necessarily. We evaluated on a per sales rep basis to determine when covering the costs in each territory justifies having a physical presence. After considering the expenses associated with each representative, we determined that 40 is the appropriate number for now. This allows us to manage a few expanding territories while ensuring not too many sales representatives are trying to reach that breakeven point. Our analysis included looking at the required number of tests to breakeven per territory at various average selling prices and conducting sensitivity analyses. We concluded that approximately 40 territories are viable for us moving forward. This number will grow as our expanding territories reach profitability, and we'll adopt a more measured approach to expansion as we proceed.

Operator, Operator

Thank you. Our next question is from Ross Osborn with Cantor Fitzgerald. Please proceed with your question.

Ross Osborn, Analyst

Congrats on the progress. So starting with the fourth quarter, how much of revenue is from outstanding claims from past quarters versus tests performed and paid on during the quarter?

Kamal Adawi, CFO

Ross, thanks for the question. So with our accrual revenue recognition of ASC 606, we're looking back 12 months on what's being collected on all of our tests by payer to put the correct rate for that quarter. And that's how we book our revenue. What I will say in regards to Q4, we did have a very strong quarter in terms of collections, which did result in us making year-end accounting adjustments. Obviously, there's variability in the year quarter-to-quarter, and we make those adjustments at year-end, which took our ASP up in Q4, and that's why we like looking at our ASP for the last 12 months. So, it takes out that variability. Also, keep in mind, in Q2 and Q3, we have commercial payer write-downs. We did not have those commercial payer write-downs in Q4. So it was a strong quarter for collections.

Ross Osborn, Analyst

Okay. Got it. And then switching to gross margin. Could you provide an update on your work toward improving process costs such as automation in the lab?

John Aballi, CEO

Yes. Thanks, Ross. Thanks again for joining the call. Great question. So as I mentioned previously and in prior discussions as well, we're trying to implement processes across the board that we think will ultimately materialize in terms of effect here over the next several months, rather than just start on some projects that maybe have drawn on prior experience from. And so the first part of this is evaluating each respective area, whether it be revenue cycle, laboratory operations, sales, commercial, you have it evaluate each area from an analytical standpoint and then look for the opportunities to improve. On the lab side, our COGS are likely to be improved through continuing automation or improvements in infrastructure. So what we have is we have multiple methodologies that are all tied together for our AVISE CTD offering. And a big part of improvements here or efficiencies over labor-based cost will be associated with that infrastructure improvement from a software standpoint. Most labs have a lab information system, which drives, we're no different, which drives the tracking and facilitates the progress of each sample through the lab. And the better you can integrate that with all of your different instruments and remove some of the human choices that are required on a day-to-day processing standpoint, I think the more efficient you can be over time. So that's an area that we're certainly looking at. We are facing some inflationary headwinds from some of our vendors, as I'm sure most are, and we're working hard to offset those through some efficiency and productivity gains. So I should be able to provide more color as certain projects finish and materialize in effect, but really it's looking at improvements on the infrastructure side, mostly software.

Ross Osborn, Analyst

Okay. Got it. And then one more for me. Are you able to disclose the amount of savings from cutting the fiber trial at this time?

John Aballi, CEO

At this time, we're not able to disclose that. I think what you'll see is, obviously, we had the reduction in force, and we haven't quantified the overall savings as it relates to some of the other projects, which likely would have been paused. But that's something we can look to do in future periods, but haven't at this point.

Operator, Operator

Thank you. Our next question is from Andrew Brackmann with William Blair. Please proceed with your question.

Andrew Brackmann, Analyst

You guys sort of recognize that you're not giving the full year top line guidance and certainly understand why. But maybe just from a high level, can you sort of talk about some of the key levers here for the year? Just trying to sort of get a better sense of the variables and the magnitude of those?

John Aballi, CEO

Certainly. Thank you for joining, Andrew. We believe that the most significant factor in enhancing the business, both in terms of revenue and overall gross margin, is our average selling price (ASP). This is where we're concentrating our efforts, as it is central to many initiatives within the organization. As I mentioned earlier in the call, the volume for AVISE CTD is substantial, and we recently completed a year in which we aided 135,000 patients with this test. Our derived ASP is currently around $285, which is our most crucial lever, especially when compared to our Medicare reimbursement rate for AVISE CTD, which exceeds $1,000. Therefore, we are focusing opportunistically on this area, where the bulk of our efforts are directed. I am personally involved in several process improvements, and a significant part of the organization is dedicated to this as well. I believe that consistent improvement in ASP over time is our key objective. While quarter-to-quarter variability will occur, looking at a longer period, such as the trailing 12 months, should reflect progress over time. We will also be discussing some of these improvements and may offer real-time qualitative insights related to these analytical points. Hence, I see this as the most sensitive lever. Moreover, strong volume continues to reflect the product's success. Currently, our organizational strategy is to fully concentrate on AVISE CTD and emphasizing the reimbursement aspect is critical.

Operator, Operator

Thank you. Our next question is from Kyle Mikson with Canaccord. Please proceed with your question.

Kyle Mikson, Analyst

So I guess, guys, could you maybe just talks about some of the reasons why you didn't want to provide full year guidance, like I understand that visibility is not great, given the reimbursement sub that you keep talking about. But some of the levers that you're just describing, I mean, it sounds like you have momentum and everything, just maybe what could be a reasonable way to think about this going forward. And I just want to point out the strategy you're doing like the $47 million for the year, that's like basically flat to 2022 with like quarterly revenue being kind of going up sequentially moderately each quarter. Is something like that a good way to think about the year? Or is it too early to kind of comment?

John Aballi, CEO

Thank you for joining, Kyle. I appreciate your question. We are making several changes within the organization. We have communicated a shift in our overall strategy to focus on AVISE CTD, moving away from the previous 'own the hilltop' approach. We are streamlining parts of our existing portfolio and resizing our sales force. Additionally, we are overhauling our billing policies and the operations related to that part of the business. We are also reviewing our pipeline. Initially, the company indicated that we would launch some pipeline products this year, but I have been clear that we won't do so until we secure at least Medicare coverage, given our patient population. Because of these changes, it is challenging to provide full-year guidance as the impacts are hard to predict, and I do not have precise timing on some of these effects. This was somewhat reflected in Q4, where we provided guidance mid-quarter and anticipated a volume impact at the start of the year, yet we have maintained the momentum from Q4. We are executing well, but the changes aimed at improving ASP in the long term will take time to show effects, and the uncertainty surrounding their timing makes providing longer-term guidance difficult. However, we are committed to communicating these changes as we implement them, and will provide guidance once we have more clarity. This is our internal perspective, and we aim to have a high degree of certainty when sharing information. Did that answer your question? I think there was another part I might not have covered in detail.

Kyle Mikson, Analyst

That was great, John. The second part of that was the actual numbers, but we don't need to go there. I think I understand what you're getting at, so we can move on, but I appreciate it. Maybe we should consider the metrics that drive results going forward. The volume test fund has been pretty solid, as well as the providers. I know you won't be providing that going forward. The test provider has been an interesting metric; it seems to have changed a bit. How should we consider that going forward? Separately, I have a question about ASP. It clearly sounded very important for the Company moving forward as a measuring stick. Is there a range for the year, maybe a lower bound that you think is appropriate going forward?

John Aballi, CEO

Certainly. I appreciate the opportunity to provide a more detailed response. From a metrics perspective, when evaluating commercial effectiveness, the average selling price is a crucial element in assessing the Company's performance. Specifically, we analyze data over the previous 12 months. We also consider the physician base and overall volume. We will report the number of ordering positions annually. However, sharing that specific metric can be somewhat disadvantageous competitively, which is why we've opted for annual updates. This approach allows for the calculation of orders per physician. As we aim to expand our business, we can either increase prices, grow our customer base, or enhance sales to existing customers. The metrics we've outlined enable analysis of trends in all these areas, which is why we've shifted to this type of analytics. Our strategy focuses on gradually improving the average selling price over time. While I cannot predict potential future decreases, we did experience $4.9 million in commercial write-downs in the second and third quarters due to increased medical policy reviews that did not occur in the fourth quarter, contributing to some positive movement we observed then. I will keep you informed about any changes in 2023, though these predictions are challenging. I remain optimistic about achieving a lower bound in our pricing, but it's uncertain. We are aiming for consistent improvements in our average selling price over time, recognizing that there will be periods of faster growth influenced by various initiatives. This should provide some insight into our internal approach, where we consider the physician base, our customer count, and their penetration to share similar timelines with the average selling price. Ultimately, we're striving for sustained success.

Kyle Mikson, Analyst

Okay. That was great. And just one more before I hop off. I just want to ask about payer coverage, I guess, something important for the Company's history has been the obtaining a number of coverage from payers, whether it be larger payers or kind of like smaller regional payers. I mean, is that isn't really mentioned much during the prepared remarks, but is that something that will help performance going forward in your view? Or is it more of these other metrics and levers that we're talking about throughout the call here? I'm just curious what you think about in terms of payers and winning a large one maybe in the near term, something like that.

John Aballi, CEO

Certainly, I believe this is central to our strategy. I apologize if this was not entirely clear previously. Since the company adopted a PLA code, commercial payers have applied a higher level of scrutiny concerning the medical appropriateness of AVISE CTD, which we firmly believe it is. We have solid data to support this and are currently working on increasing awareness from the payers' perspective. The new PLA code became effective last April, marking a new initiative for the company. There have been previous discussions regarding in-network contracting. I see that establishing positive medical policies with individual payers will definitely be beneficial, and that is our main goal. We have modified the incentive structures for our managed markets team and concentrated heavily on this, which is also a key focus of our revenue cycle process improvements. This involves raising awareness and enhancing our appeals process to secure positive policies, whether on a claim-by-claim basis or more broadly for the test. This is crucial. We have Medicare coverage as noted in the last earnings call, which is a significant portion, but there is still considerable work to be done with commercial payers. It’s always challenging to predict when a particular payer, especially a large national payer, will come on board. However, we are actively engaging with all of them and believe we have a solid strategy in place. Our results will be very important in this regard.

Operator, Operator

Thank you. Our next question is from Dan Brennan with Cowen. Please proceed with your question.

Dan Brennan, Analyst

Maybe to follow up on Kyle's last question. I don't know what you guys have disclosed in the past. But just in terms of coverage and contracting, have you guys disclosed a number of lives on the commercial side that you have under coverage? And anything about like how pricing changes when you go coverage to contract?

John Aballi, CEO

I don't have the exact number of contracted lives readily available. Previously, it was mostly about contracted lives, and coverage hasn't been as relevant for us since we haven't had a proprietary code. This is a newer initiative for the Company. We've disclosed Medicare coverage, but total covered lives haven't been shared yet. The contracts we had applied to earlier CPT codes, not the current PLA code, so we are either amending those contracts or pursuing new ones at the new rate. This is something we can share in the future, but I'm not ready to do so today. Right now, our main focus is on coverage, and we'll provide updates on that. Regarding potential fluctuations on the ASP side, it's difficult to predict. Some payers may have a large number of covered lives but may not represent our case mix well. For example, a plan could have 2 to 3 million covered lives but be one of our lower volume plans, while a smaller regional plan might have a higher concentration of our business. In the past, we stated that the Company had about 100 million lives under contract, but this doesn't apply to the current PLA code, so it's not directly comparable.

Dan Brennan, Analyst

Are there any early insights on the timeframe for converting a contract now that you have the PLA code? Is there a way to frame that process? Is it a matter of months? Could it take two, three, four, five, or six months? Any information that could help us understand the speed of turning those over under the new PLA code would be appreciated.

John Aballi, CEO

Sure. So, I think a primary question to be answered there is how strong is the data package? And are you getting traction with your current data set amongst payers? And so our answer to that is we have actually gotten positive medical policy with Highmark and Blue Cross Blue-Shield high mark. And so that's a very positive thing that's unfolded for the organization. That's the new PLA code, and that's our test cited specifically from a medical policy standpoint. We're evaluating this year how strong our data package is in our payers' eyes. We feel pretty confident about it from a clinical utility standpoint, certainly a clinical validity standpoint. We also have a fairly strong economic benefit as well. So from what we believe the payers are looking for, we think we have the data, but that needs to be validated through a cycle or two of medical policy review. And so, since we're early on in that stage, I think it's a little premature to comment, be a little bit more on speculation standpoint. But we'll continue to provide updates and then maybe some regular cadence can be established. But my experience is that these things are fairly lumpy. You go through a medical policy cycle and you may make progress with a few plans that culminate in some meaningful impact to the Company. And then there may be a period or so where there's no medical policy review or limited. A lot of medical policies are being reviewed here in the first half. So we should know here in the second half how we're performing.

Dan Brennan, Analyst

Terrific. And maybe just one other, and I apologize, I joined a few minutes late, and this may have been asked, but just on the balance sheet and the capital need, just kind of walk us through how we think about 2023 from kind of where you sit today and while you're not guiding annually like the rate of burn and I know you have the ATM in place, but just how do we think of the pieces to kind of while you have the ongoing cost cutting being implemented now under you, John. Just how do we feel from a capital needs basis in '23?

Kamal Adawi, CFO

Thanks, Dan, for the question. I'll start it off, and then I'll pass it back to John. Our cash balance at the end of the year was $62.4 million and it's tough to look at what our burn was in '22 and carry forward because we went through some cost-cutting measures at the end of the year. And the cost cutting, the reduction in it took place on December 5, so we don't have a clean full quarter yet to be able to say take this as a run rate. But what I can speak to help with understanding some of the cost cutting as we did mention, there is about $8.6 million in annualized savings just from the headcount reduction. So that's a savings that we have quantified. What hasn't been quantified is how this translates to other OpEx mainly around our R&D and project spend, specifically with some of the clinical trials. That's going to be a significant savings when you look at the cash burn from '22 to '23.

John Aballi, CEO

Yes. I think you covered most of it, Kamal. I'll just speak more from a strategy standpoint that we believe we're well capitalized and are prioritizing projects, which we think will materially positively impact the business. We're not sacrificing there. We're full steam ahead in terms of supporting AVISE CTD and so we're keeping that very much top of mind, serving customers and improving our service to customers in that respect is very important. But I think we'll have our Q1 call here in the next couple of months, and I think it will be more indicative of the burn rate going forward, and we work obviously throughout the year to improve that rate.

Operator, Operator

Thank you. And our next question is from Paul Knight with KeyBanc Capital Markets. Please proceed with your question.

Paul Knight, Analyst

John, on the charge in the quarter, what's the goal on the cost cut total for FY '23?

John Aballi, CEO

Thank you, Paul, for joining. From a goal standpoint, this is something new for us as an organization, so I don't have a solid baseline to reference. Because of that, I am cautious about sharing specific numbers externally. However, I can say that we are well-organized in identifying and establishing a process for future project identification that can be improved. We have prioritized operational enhancements in our software and lab areas. Overall, regarding our cost of goods sold, it’s challenging to provide a specific number at this moment, but it remains a significant focus for us. We believe that the more sensitive factor in gross margin is the average selling price, which we have discussed in detail. I expect to have more concrete updates on this in the coming quarters.

Operator, Operator

There are no further questions at this time. I would like to turn the floor back over to Mr. John Aballi for closing comments.

John Aballi, CEO

Great. The fourth quarter was a fantastic finish to the year. It was incredible to see the level of engagement within the team, and that effort was reflected in our quarterly performance. I look forward to continuing to execute on our operating strategy while refining our growth initiatives and providing our progress on future calls. As we end today, I sincerely thank the Exagen team for their contributions in serving our customers, and our investors for their continued support. Thanks, everyone, for joining the call today.

Operator, Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.