Business context and reporting period
Exagen Inc. (Nasdaq: XGN) filed this Form 10-K for the fiscal year ended December 31, 2021. The company develops and commercializes AVISE diagnostic tests for autoimmune diseases, primarily selling to rheumatology practices in the United States. AVISE CTD, its lead test, accounted for 81% of 2021 revenue. Exagen operated as one reportable segment and performed tests at its CLIA-certified laboratory in Vista, California.
Financial performance and liquidity
| Metric | 2021 | 2020 |
|---|---|---|
| Revenue | $48.3 million | $42.0 million |
| Costs of revenue | $20.6 million | $16.6 million |
| Gross margin | 57.4% | 60.6% |
| Operating expenses | $72.4 million | $57.2 million |
| Operating loss | $(24.1) million | $(15.2) million |
| Net loss | $(26.9) million | $(16.7) million |
| Net loss per share, basic and diluted | $(1.68) | $(1.32) |
| Net cash used in operating activities | $(20.3) million | $(14.1) million |
At December 31, 2021, cash and cash equivalents were $99.4 million, total current assets $112.7 million, total current liabilities $9.3 million, total assets $123.4 million, and total liabilities $38.5 million. Cash, cash equivalents and restricted cash totaled $99.5 million. The company reported a $208.1 million accumulated deficit and stated that existing cash and anticipated revenue should fund operations for at least 12 months from the filing date, subject to risks and assumptions.
Borrowings were reported at a net carrying value of $27.5 million; the company separately disclosed $25.0 million principal outstanding and $2.3 million of capitalized PIK interest at year-end. The Innovatus loan bears 8% annual interest, with 2% payable in kind through December 2024; principal and capitalized interest are scheduled for repayment in 24 monthly installments beginning December 2024, with final maturity in November 2026. The debt is secured by substantially all assets, including intellectual property. Exagen was in compliance with loan covenants at year-end.
Material changes versus 2020
- Revenue grew 15.1%; AVISE CTD deliveries increased to 128,246 from 100,450, up approximately 28%.
- Fourth-quarter ordering providers reached 2,126, compared with 1,690; adopting providers reached 739, compared with 635. Approximately 99% of adopting providers from Q3 ordered at least one test in Q4.
- Costs of revenue rose 24.3%, and gross margin declined 3.2 percentage points to 57.4%. Management attributed the margin decline primarily to lower Janssen promotion revenue.
- Selling, general and administrative expense increased 20.3%; research and development expense more than doubled, rising 102.8% to $7.2 million. The operating loss widened by $8.9 million.
- The March 2021 public offering generated approximately $64.7 million in net proceeds. Cash and cash equivalents increased from $57.4 million to $99.4 million.
- The Janssen SIMPONI co-promotion agreement ended August 31, 2021. Related revenue fell to $1.2 million from $5.1 million.
Outlook, management commentary, risks and unusual items
Management expects operating expenses to increase in 2022, including SG&A and R&D, and expects continued losses in the near term. It plans to grow test adoption and reimbursement, develop additional tests, and expand laboratory and R&D space. Warehouse conversions were underway, with laboratory expansion expected by Q1 2022 and R&D space by mid-2022. The filing provides no specific revenue, earnings or margin guidance.
Key risks include dependence on AVISE CTD and a single laboratory, reliance on two suppliers for approximately 97% of diagnostic testing supplies, reimbursement and collections uncertainty, continuing losses and potential future financing needs, and regulatory uncertainty over FDA oversight of laboratory-developed tests. COVID-19-related supply, staffing, patient-volume and clinical-study disruptions could recur. Exagen also disclosed a $6.0 million minimum reagent purchase commitment for 2022, with unconditional minimum commitments increasing 15% annually through 2025.
In February 2022, Exagen received a U.S. Department of Justice subpoena seeking documents related to an investigation of potential federal healthcare regulatory offenses. The company said it was cooperating, but could not predict the outcome or impact. This disclosure is notable alongside the filing’s statement that the company was not then party to material legal proceedings. The company also reported that 2021 revenue estimates included approximately $0.7 million from changes in transaction-price estimates relating to prior-period testing services. Other income fell from $1.0 million to $0.02 million, largely because 2020 included a $0.7 million CARES Act provider relief grant.
GSK’s data collaboration was extended through December 31, 2022 in a February 2022 amendment, which also removed a prior restriction on sharing certain data with other SLE pharmaceutical companies. Exagen reported a full valuation allowance against its net deferred tax assets and stated that prior ownership changes limit use of a significant portion of tax attributes. Management assessed disclosure controls and internal control over financial reporting as effective; the auditor’s report did not include an internal-control attestation because of the company’s emerging-growth-company exemption.
Important facts for investors to verify
- Review the DOJ subpoena, the scope and status of the investigation, and any subsequent disclosures or financial contingencies.
- Track cash burn, test reimbursement and collections, and whether the stated 12-month liquidity outlook remains supportable.
- Assess the Innovatus loan’s repayment schedule, covenant requirements, security interest and potential refinancing needs.
- Monitor AVISE CTD’s share of revenue, adoption trends, reimbursement coverage, gross margin and the replacement of terminated Janssen revenue.
- Verify progress and costs for laboratory expansion, reagent supply commitments, and development and commercialization of new tests.