Business context and reporting period
Exagen Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The company develops and sells AVISE-branded diagnostic tests for autoimmune diseases and began co-promoting Janssen’s SIMPONI in 2019. AVISE CTD generated 83% of revenue in both the quarter and nine-month period.
Financial results and liquidity
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $10.4 | $8.2 | $30.2 | $22.8 |
| Gross profit (approx.) | $5.7 | $4.4 | $16.0 | $11.4 |
| Gross margin (approx.) | 54.2% | 53.2% | 52.9% | 50.1% |
| Operating loss | $(2.2) | $(1.1) | $(6.4) | $(4.7) |
| Net loss | $(3.1) | $(1.8) | $(8.6) | $(6.7) |
Net loss attributable to common stockholders was $17.1 million in Q3 and $26.9 million for the nine months; basic and diluted loss per share were $11.29 and $48.70, respectively. These figures include preferred-stock accretion and financing-related deemed dividends, including $13.6 million of deemed dividends in the nine-month period, and are not equivalent to operating losses.
At September 30, cash and cash equivalents were $77.8 million, versus $13.2 million at year-end 2018; current assets were $85.8 million and current liabilities $7.7 million. Nine-month operating cash use was $5.8 million. Financing activities provided $70.5 million, chiefly from IPO proceeds. Long-term borrowings were carried at $25.7 million; the term loan bears 11% interest, is secured by substantially all assets including intellectual property, and scheduled principal and accrued-interest repayment begins in October 2020. The company reported compliance with loan covenants.
Material changes versus prior comparable periods
- Revenue grew 26.9% in Q3 and 32.3% for the nine months. AVISE CTD test volume increased to 27,159 in Q3 from 21,090, and to 78,237 year to date from 60,605. Nine-month average reimbursement per AVISE CTD test rose approximately 1%, to about $318.
- SG&A increased 48.1% in Q3 and 44.2% year to date, mainly reflecting salesforce expansion to 55 representatives and higher professional and audit costs. Operating losses widened despite revenue growth.
- The September IPO raised approximately $50.5 million net. Preferred shares converted into common shares; the company had 12,559,492 common shares outstanding at September 30. A one-for-183.635 reverse stock split took effect September 6.
- Gross margin improved year over year, while interest expense increased due to higher debt balances. Preferred-warrant liabilities were eliminated or reclassified to equity upon the IPO.
Outlook, commentary, and risks
Management said existing capital resources and anticipated revenue should fund obligations for at least the next 12 months. The company expects continued losses and higher operating expenses as it expands testing, sales, SIMPONI promotion, R&D, and public-company operations. No specific earnings or revenue guidance was provided.
Management expects potential margin benefit from the expiration of a 10% annual royalty on CB-CAPs technology in January 2020, but noted that Medicare reimbursement reductions may offset some gains. PAMA-related reimbursement changes were estimated to reduce 2019 Medicare reimbursement for AVISE CTD by about 10.1% from 2018 levels. Medicare represented 26% of nine-month revenue; significant payer and product concentration, reimbursement uncertainty, and billing adjustments remain risks.
SIMPONI promotion revenue was approximately $0.4 million in Q3 and $0.8 million year to date. Fees depend on prescriptions above a quarterly baseline of approximately 29,000 units; Janssen may terminate the agreement on 30 days’ notice. Other key risks include reliance on a single laboratory and certain suppliers, continued dependence on AVISE CTD, regulatory and reimbursement changes, and the possibility of needing additional financing. The company disclosed no material litigation and no off-balance-sheet arrangements. It corrected immaterial 2018 warrant-liability misstatements, revising the prior-year liability downward by $1.2 million.
Important facts for investors to verify
- Whether test-volume and reimbursement growth continue, particularly given AVISE CTD’s large share of revenue and payer concentration.
- Actual operating cash use and the runway implied by the $77.8 million cash balance, including planned spending and debt service.
- Loan covenant headroom, repayment terms, and the effects of the 11% interest rate and asset security.
- Whether SIMPONI prescriptions exceed the fee baseline and whether the Janssen agreement is extended or terminated.
- The distinction between operating performance and common-stockholder loss per share, which was materially affected by preferred-stock accretion and deemed dividends.