Exagen(XGN) - 2022 Q4 - Annual Report

Part I Business Exagen Inc. is a diagnostics company commercializing AVISE® brand tests for autoimmune diseases, focusing on AVISE® CTD adoption, new test development, and payor coverage - Exagen is dedicated to transforming care for patients with chronic autoimmune diseases through innovative testing products for differential diagnosis, prognosis, and monitoring[16] - The company's lead product, AVISE® CTD, leverages proprietary Cell-Bound Complement Activation Products (CB-CAPs) technology to aid in the differential diagnosis of Systemic Lupus Erythematosus (SLE) and other connective tissue diseases[16][38] - The company estimates the total addressable market for its AVISE® testing products to be approximately $9.0 billion[20][37] - Key business strategies include focusing on the flagship AVISE® CTD test, developing new innovative products with clear R&D criteria, and maintaining meaningful margins through operational leverage and improved payor reimbursement[18][21] AVISE® CTD Test Performance | Metric | 2022 | Change from 2021 | | :--- | :--- | :--- | | Tests Delivered | 135,210 | ~5% increase | | Ordering Healthcare Providers (Q4) | 2,419 | Increase from 2,126 | Our Solution and Testing Products Exagen's AVISE® brand tests leverage proprietary CB-CAPs and MTXPGs technologies, offering comprehensive diagnostic, prognostic, and monitoring solutions for autoimmune diseases - The company's core proprietary technologies are CB-CAPs, which measure complement activation products on blood cells for diagnosing SLE, and MTXPGs, which measure the active metabolite of methotrexate to optimize RA therapy[32][33][35] - The AVISE® CTD test is a comprehensive panel that aids in the differential diagnosis of SLE, RA, Sjögren's syndrome, and other overlapping conditions from a single blood draw[38] - The AVISE® SLE Monitor test uses CB-CAPs technology to assess disease activity in diagnosed SLE patients, potentially being used multiple times a year[44] - The AVISE® MTX test measures methotrexate polyglutamates (MTXPGs) to help rheumatologists optimize dosing for RA patients who are not responding to standard therapy[45] Pipeline and Growth Opportunities Exagen is developing new diagnostic tools, including the AVISE® RADR Platform for RA biologics, AVISE® SLE Monitor (2.0) with AI, and AVISE® Lupus Nephritis, leveraging proprietary technologies and AI - The AVISE® RADR Platform aims to develop assays using RNA expression patterns and AI algorithms to predict patient response to biological therapeutics for Rheumatoid Arthritis (RA)[54] - AVISE® SLE Monitor (2.0) is in development to leverage an AI-developed algorithm to guide ongoing treatment decisions for lupus patients[55] - The company is developing AVISE® Lupus Nephritis, a urine-based test to aid in the management and risk stratification of patients with lupus-related kidney disease[56] Sales, Marketing, and Reimbursement Exagen employs a specialized sales force targeting U.S. rheumatologists, with a primary focus on securing broad payor coverage and adequate reimbursement through clinical evidence and engagement - The company utilizes a specialized sales force organized into 40 territories to target approximately 4,500 rheumatologists across the United States[57][59] - Reimbursement strategy is centered on achieving inclusion in clinical guidelines, executing managed care policy efforts, and engaging with payors using published evidence of clinical utility and cost savings[62][63] - The CAPSTONE study, a large comparative utility study, showed the AVISE® Lupus test resulted in a 2x decrease in diagnostic testing costs and a 6x increased odds of establishing a new SLE diagnosis compared to the traditional ANA approach[67] - A health economics study demonstrated that using AVISE® Lupus could lead to an estimated total direct cost savings of approximately $2.0 million ($1,991 per patient) over a four-year period for a cohort of 1,000 suspected SLE patients[68] Intellectual Property Exagen's IP portfolio focuses on CB-CAPs and MTXPG technologies, including exclusive licenses from the University of Pittsburgh and owned patents for AVISE® MTX, with collaborations for novel biomarker development - The company's patent portfolio is primarily focused on CB-CAPs, red blood cell MTXPG exposure assessments, and anti-MCV antibodies[78] - Exagen is the exclusive licensee of five patent families related to CB-CAPs technology from the University of Pittsburgh, with patents expected to expire in 2024 or 2025[80][82] - The company owns four patents related to the AVISE® MTX product and methods for monitoring methotrexate therapy, which are expected to expire between 2023 and 2027[81] - Exagen has an exclusive license and research collaboration agreement with Queen Mary University of London (QMUL) focused on developing precision medicine approaches for RA patient therapeutic selection[102][108] Regulations Exagen's lab is CLIA-certified and subject to state licensing, with LDTs under FDA enforcement discretion, facing potential stricter oversight from proposed VALID Act and compliance with healthcare laws like Stark Law, Anti-Kickback Statute, and HIPAA - The company's Vista, CA laboratory is certified under CLIA and accredited by the College of American Pathologists (CAP), and holds state licenses from California and New York[110][113][114] - Exagen's tests are considered Laboratory Developed Tests (LDTs), which are currently under FDA's enforcement discretion. However, proposed legislation like the VALID Act could create a new regulatory framework (IVCT) and increase regulatory burdens[120][295] - The company is subject to federal and state anti-kickback laws, physician self-referral prohibitions (Stark Law), and the False Claims Act, which carry significant penalties for non-compliance[124][127][134] - Medicare reimbursement for clinical laboratory services is governed by the Protecting Access to Medicare Act (PAMA), which bases payment rates on private payor data. Recent legislation has delayed the next PAMA reporting period to 2024[161][163] Human Capital As of December 31, 2022, Exagen had 204 employees, primarily in general/administrative and sales/marketing, with a focus on talent retention and a diverse workforce composition Employee Breakdown by Function (as of Dec 31, 2022) | Department | Number of Employees | | :--- | :--- | | Laboratory Operations | 52 | | Research and Development | 9 | | Sales and Marketing | 62 | | General and Administrative | 76 | | Total | 204 | - As of December 31, 2022, 58.6% of employees identified as female and 52.4% identified as White, 22.8% as Hispanic or Latino, and 13.3% as Asian[181] Risk Factors Exagen faces significant risks including persistent net losses, reliance on payor reimbursement, supply chain dependencies, potential LDT regulatory changes, IP protection challenges, and a material weakness in revenue recognition controls - The company has a history of net losses, incurring $47.4 million in 2022 and $26.9 million in 2021, with an accumulated deficit of $255.5 million as of December 31, 2022[190] - A material weakness in internal control over financial reporting was identified as of December 31, 2022, related to errors in revenue recognition from erroneous and duplicate billings[191][268][270] - Commercial success is highly dependent on obtaining and maintaining coverage and adequate reimbursement from third-party payors, as several commercial payors have issued non-coverage policies for AVISE® Lupus[191][194] - The company relies on sole suppliers for critical reagents and materials, and any interruption could disrupt test processing and harm the business[189][208] - Potential changes in FDA regulation of Laboratory Developed Tests (LDTs), such as the proposed VALID Act, could subject the company's tests to more extensive and costly premarket review requirements[191][295][296] Properties Exagen's corporate headquarters and laboratory are in Vista, California, leasing 46,500 square feet, with an additional 28,000 square feet subleased in Carlsbad, both expiring in 2027 - The company's main facilities, including office and laboratory space, are located in Vista, California, totaling approximately 46,500 square feet under leases that expire in 2027[370][371] - An additional 28,000 square feet of office space is subleased in Carlsbad, California, with the lease also expiring in 2027[371] Legal Proceedings Exagen is not currently involved in any material legal proceedings, though it may encounter claims in the ordinary course of business - The company is not currently a party to any material legal proceedings[373] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Exagen's common stock trades on Nasdaq under 'XGN' since its 2019 IPO, with no history or plans for cash dividends, as IPO proceeds were primarily used for selling and marketing activities - The company's common stock trades on The Nasdaq Global Market under the symbol "XGN" since September 19, 2019[378] - The company has never declared or paid cash dividends and does not intend to in the foreseeable future, with its loan agreement currently prohibiting such payments[380] - As of December 31, 2022, all net proceeds of approximately $50.4 million from the 2019 IPO have been used, primarily for selling and marketing activities[384][385] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, Exagen's revenue decreased to $45.6 million, leading to a widened net loss of $47.4 million due to increased operating expenses and a goodwill impairment, though the company maintains sufficient liquidity for the next 12 months Results of Operations In 2022, revenue decreased by $2.7 million to $45.6 million, while total operating expenses increased by $19.2 million to $91.6 million, resulting in a widened net loss of $47.4 million Comparison of Operations (Years Ended December 31) | Metric (in thousands) | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Revenue | $45,563 | $48,299 | ($2,736) | | Costs of revenue | $24,214 | $20,588 | $3,626 | | SG&A expenses | $52,018 | $44,541 | $7,477 | | R&D expenses | $9,876 | $7,237 | $2,639 | | Goodwill impairment | $5,506 | $0 | $5,506 | | Total operating expenses | $91,614 | $72,366 | $19,248 | | Loss from operations | ($46,051) | ($24,067) | ($21,984) | | Net loss | ($47,387) | ($26,851) | ($20,536) | - Revenue decreased by 5.7% in 2022, primarily due to a $1.2 million reduction from the terminated Janssen Agreement and a decrease in average selling price, despite a 5% increase in AVISE® CTD test volume[410] - Costs of revenue increased by 17.6% due to higher labor, materials, and shipping costs, leading to a decrease in gross margin from 57.4% in 2021 to 46.9% in 2022[411] - A goodwill impairment charge of $5.5 million was recorded in the fourth quarter of 2022 due to a sustained decrease in the company's market capitalization[415] Liquidity and Capital Resources As of December 31, 2022, Exagen held $62.4 million in cash and equivalents with a $255.5 million accumulated deficit, relying on product sales and equity financings, and believes current liquidity is sufficient for the next 12 months Cash and Liquidity Position | Metric (in thousands) | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $62,391 | $99,442 | | Accumulated deficit | ($255,527) | ($208,140) | - Net cash used in operating activities was $32.1 million in 2022, an increase from $20.3 million in 2021, primarily due to a larger net loss[431][432][433] - The company has a loan agreement with Innovatus with $25.0 million in principal outstanding as of Dec 31, 2022. The loan matures in November 2026, with principal repayments beginning in December 2024[261][424] - Management believes that existing cash and cash equivalents, along with anticipated future revenue, will be sufficient to meet cash requirements for at least the next 12 months[428] Critical Accounting Estimates Exagen's critical accounting estimates include revenue recognition, which led to a $2.4 million net decrease in 2022 due to estimate changes, goodwill impairment resulting in a $5.5 million charge, and stock-based compensation valuation - Revenue recognition is a critical estimate, relying on an expected value method based on historical collection data by payor and test. Changes in these estimates for prior period services resulted in a $2.4 million net revenue decrease in 2022[440][442] - Goodwill is tested for impairment annually or when a triggering event occurs. A quantitative assessment in Q4 2022, prompted by a sustained decrease in market capitalization, resulted in a full impairment charge of $5.5 million[443][415] - Stock-based compensation is valued using the Black-Scholes model for options and ESPP rights, which requires subjective assumptions for inputs like expected volatility and term[445][447] Controls and Procedures As of December 31, 2022, Exagen's disclosure controls were ineffective due to a material weakness in revenue recognition, leading to financial statement restatements, with a remediation plan currently in progress - Management concluded that disclosure controls and procedures were not effective as of December 31, 2022[459][464] - A material weakness was identified in internal control over financial reporting due to inadequate controls around revenue recognition, which led to erroneous and duplicate billings[461][462][463] - This control deficiency resulted in a restatement of the Form 10-Q for the three and six months ended June 30, 2022, as revenue and accounts receivable were overstated[462] - A remediation plan is in progress, which includes evaluating accounting personnel, enhancing control structures for revenue recognition, and improving the detailed review process of revenue models[465] Part III Directors, Executive Compensation, Security Ownership, and Accountant Fees Information for Directors, Executive Compensation, Security Ownership, Related Transactions, and Accountant Fees is incorporated by reference from the company's definitive 2023 Proxy Statement - Information regarding Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, Certain Relationships, and Principal Accountant Fees and Services is incorporated by reference from the company's upcoming Proxy Statement[475][477][478] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements and exhibits included in the Annual Report on Form 10-K, along with the independent auditor's report, with all schedules omitted as not applicable - This section contains the list of exhibits filed with the 10-K and a reference to the included financial statements[485] Financial Statements Financial Statements Overview In 2022, Exagen's total assets decreased to $86.2 million, liabilities increased to $43.8 million, and the net loss widened to $47.4 million, with $32.1 million net cash used in operations Balance Sheet Summary (in thousands) | | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Assets | $86,221 | $123,445 | | Cash and cash equivalents | $62,391 | $99,442 | | Goodwill | $0 | $5,506 | | Total Liabilities | $43,761 | $38,509 | | Total Stockholders' Equity | $42,460 | $84,936 | Statement of Operations Summary (in thousands) | | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Revenue | $45,563 | $48,299 | | Total operating expenses | $91,614 | $72,366 | | Net loss | ($47,387) | ($26,851) | Cash Flow Summary (in thousands) | | Year Ended Dec 31, 2022 | Year Ended Dec 31, 2021 | | :--- | :--- | :--- | | Net cash used in operating activities | ($32,144) | ($20,269) | | Net cash used in investing activities | ($4,318) | ($2,420) | | Net cash (used in) provided by financing activities | ($489) | $64,683 | Notes to Financial Statements The financial statement notes detail accounting policies, liquidity assessment, revenue recognition estimates, borrowing terms for the $25 million loan, purchase commitments, and disclose goodwill and long-lived asset impairments in 2022 - Management believes existing capital resources of $62.4 million are sufficient to fund obligations for at least twelve months from the financial statement issuance date[524] - In 2022, Medicare accounted for 39% of total revenue, a significant increase from 19% in 2021[530] - The company recorded a full goodwill impairment charge of $5.5 million and a long-lived asset impairment of $0.4 million during the year ended December 31, 2022[542][572] - The company has minimum annual purchase commitments for reagents of $6.9 million for 2023, with a 15% annual increase thereafter through 2025[602]