Exagen Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Exagen develops and commercializes AVISE-branded diagnostic tests for autoimmune diseases; AVISE CTD is its leading product.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $12.3 million | $10.8 million | $35.6 million | $29.3 million |
| Gross margin | 55.2% | 59.7% | 56.1% | 58.3% |
| Operating loss | $6.5 million | $3.8 million | $17.8 million | $12.4 million |
| Net loss | $7.2 million | $4.3 million | $19.8 million | $13.2 million |
| Net loss per share | $0.42 | $0.34 | $1.27 | $1.05 |
Q3 revenue grew 13.7% year over year; nine-month revenue grew 21.5%. AVISE CTD represented 81% of revenue in both 2021 periods, versus 68% in Q3 2020 and 71% in the first nine months of 2020. Higher test volumes drove growth, while the termination of the Janssen promotion agreement reduced related revenue. Costs and expenses rose faster than revenue, compressing gross margin and increasing losses. Q3 selling, general and administrative expense rose 25.3%, and research and development expense increased $0.7 million.
Cash flow and liquidity: Operating cash use was $14.2 million for the first nine months, versus $10.2 million in 2020; investing cash use was $1.4 million versus $0.5 million. Financing provided $64.9 million, principally from the March 2021 public offering, which generated approximately $64.7 million net. Cash and cash equivalents were $106.8 million at September 30, 2021, up from $57.4 million at year-end 2020. Accumulated deficit was $201.1 million. Management said existing resources were expected to fund obligations for at least 12 months from the financial statements’ issuance.
Debt: Non-current borrowings, net of discounts and issuance costs, were $27.3 million. The 2017 term loan was secured by substantially all assets, including intellectual property; the company reported compliance with its covenants at quarter-end. In an amendment effective November 1, 2021, the interest rate was reduced to 8.0%, with 2.0% paid in kind through December 2024; the interest-only period was extended through December 2024 and maturity to November 2026. The amendment also revised the revenue covenant.
Material changes and outlook
- AVISE CTD tests delivered increased 21% in Q3 and 31% for the nine-month period year over year. The company reported record Q3 ordering providers of 1,969.
- Janssen and Exagen mutually terminated their SIMPONI promotion agreement effective August 31, 2021. Related revenue was $0.4 million in Q3 2021 versus $1.3 million a year earlier, and $1.0 million for nine months versus $3.4 million. Exagen became entitled to $0.6 million upon termination and agreed not to promote certain competing therapies without Janssen’s consent through May 31, 2022.
- Exagen began converting warehouse space into expanded laboratory and R&D facilities, targeting completion in Q1 and Q2 2022, respectively. Management expects increased operating expenses and continued losses as it grows testing, sales, and product development; it provided no specific financial guidance.
- An October 2021 agreement with Inland Empire Health Plan is intended to provide in-network access to AVISE CTD and AVISE Lupus for approximately one million members.
Risks, contingencies, and unusual items
- The company has recurring losses and negative operating cash flow and may need additional financing. Management cautioned that financing may not be available on acceptable terms; failure to obtain funding could require reductions or delays to development and commercialization plans.
- COVID-19, including variants, could affect patient visits and test volumes, laboratory operations, supply availability, shipping, clinical studies, and reimbursement. Suppliers rationed some testing materials; two suppliers represented approximately 96% of diagnostic testing supply purchases in the first nine months of 2021.
- Revenue depends on estimates of collections and reimbursement by payor. The company cited exposure to payor coverage, reimbursement changes, retrospective adjustments, and concentration: Medicare contributed 19% of nine-month revenue, Medicare Advantage 13%, and Blue Shield 12%.
- Product concentration remains significant: AVISE CTD generated 81% of nine-month revenue. Development of new tests and molecular or multiomic capabilities is uncertain and may require substantial investment.
- Supply commitments included minimum purchases of $4.1 million in 2021 and $6.0 million in 2022 under a reagent agreement. The company also disclosed lease commitments, licensing royalties, and research collaboration costs. It reported no material legal proceedings.
- The company recognized $0.7 million of COVID-related Provider Relief Fund income in the first nine months of 2020, contributing to lower comparative-period other income; the 2021 period had no income tax benefit, versus $0.1 million in 2020.
Investor verification priorities
- Track test volumes, provider adoption, reimbursement rates, collections, and gross margin to assess whether growth can translate into improved operating leverage.
- Verify the financial and commercial effects of ending the Janssen agreement, including the $0.6 million termination consideration and restrictions through May 2022.
- Review cash burn, capital spending, financing needs, and compliance with the amended Innovatus debt covenants and repayment terms.
- Monitor supplier concentration and the costs and completion of laboratory and R&D expansion, alongside progress and evidence supporting new test products.
- Assess the durability of payor coverage and the impact of COVID-19 on testing volumes, supply, staffing, and clinical studies.