Exagen Inc. (XGN) on Q4 2022 Results - Earnings Call Transcript
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: 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: 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 1/4 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 health care 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 1/3 in sales, 1/3 in R&D and a 1/3 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 mean our new screen 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 health care providers in the fourth quarter of 2022. Moving forward, we plan to disclose ordering health care 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 emission 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?
Kamal Adawi: 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 health care 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 revenue 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 were $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 increase in public company expenses and marketing spend. In December, we had a reduction in force that eliminated 42 positions. The annualized savings and salary and benefits from the reduction is approximately $8.6 million. With the elimination of the R&D positions also came to 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 a 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 momentums seen in Q4 have 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: 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: 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: 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. 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: Certainly. Good afternoon, Mark. Thanks for the joining the call and 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: 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: 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 have applied the scene process that we set internally, that's eliminated a few projects that we've disclosed publicly. One, the fiber biology project, other rooted in thrombosis. And so and 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, what our clinical utility requirements will be. So that's probably as much as I can dive into on the call.
Mark Massaro: 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: Sure. So maybe I'll start with rep sentiment. We did have our national sales meeting in San Diego. It was a great event. I got to meet several of them in person. I've spoken to many of them throughout the last couple of months of me being on board, but to actually see them in person and connect that way is always nice. There was a general sense, folks are energized. And it was really rewarding to see the level of engagement that people had and the level of excitement. They had just come off a successful Q4 as we just relayed. And we were seeing that momentum carry into Q1. So from that perspective, very positive, we did change the compensation plan, notably increasing the variable compensation for these reps. And I think that's -- that was an important strategic shift that we made, but we've also focused exclusively on AVISE CTD, whereas prior plans may have incorporated performance relative to some of our other portfolio of products. So I think that honed in focus, both from a compensation standpoint as well as the curriculum presented at the national sales meeting was very positive. And I think that's at least a contributing factor to some of the momentum we have here going into Q1. As it relates to the sizing of the sales team, the first part of your question, it's an interesting question. So do I think 40 is the right number long-term? Not necessarily. I think the way we've approached it is we've taken a look at on a per sales rep basis, at what point do we at least cover the cost of the sales rep in that territory. At what point does it necessitate having a physical field-based presence there? And when you take into account those rep associated expenses, 40 is the right number for us. This gives us a handful of territories which are, call it, expanding right? But yet, it's not 1/3 of the sales force necessarily that is trying to reach that breakeven point, if you will. And so, we went through an evaluation, a very analytical approach and took a look at the number of tests required to breakeven per territory and what that looks like at different levels of ASP and had a sensitivity analysis associated with that. But where we arrived at was roughly 40 territories for us going forward. And that number will grow as some of our expanding territories move into that profitable space. And so it will be just a more measured -- that's what I meant when I made the comment, but it will just be a more measured approach to expansion in that capacity.
Operator: Thank you. Our next question is from Ross Osborn with Cantor Fitzgerald. Please proceed with your question.
Ross Osborn: 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: 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: Okay. Got it. And then switching to gross margin. Could you provide an update on your work toward improving protest costs such as automation in the lab?
John Aballi: 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 -- 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: 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: 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: Thank you. Our next question is from Andrew Brackmann with William Blair. Please proceed with your question.
Andrew Brackmann: 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: Certainly. Thanks for joining, Andrew. So, we think the most sensitive lever that we have in improving the business, not only from a top line standpoint, but overall gross margin is ASP. And that's really where we're focused on. That's the heart of many of the efforts in the organization. And as is noted and I mentioned earlier in the call, the volume for AVISE CTD is substantial. And we just completed a year where we helped 135,000 patients with this test. And so if our ASP right now, our derived ASP is around $285. That's the most sense of lever we have relative -- especially relative to our Medicare reimbursed rate which for AVISE CTD is north of $1,000. So opportunistically, that's where we're looking. That's where the majority of our efforts are. I'm personally involved with several of the process improvements there, and we've put some of we put a good portion of the organization on that as well. So I think that's the biggest lever to look for is consistent improvement in ASP over time. And again, quarter-to-quarter variability will come into play here. But if you take a look at maybe a longer period, trailing 12 months is what we're using internally. We think that, that will be indicative of progress over time. And we'll also be speaking to some of the improvements and maybe be able to provide some qualitative real-time color over those analytical points. So, I think that's likely the most sensitive lever. Obviously, volume continues to be a strong indication of the product success as well. But organizationally, our strategy right now is to focus entirely on AVISE CTD and focusing on the reimbursement side of that is certainly key.
Operator: Thank you. Our next question is from Kyle Mikson with Canaccord. Please proceed with your question.
Kyle Mikson: 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 reasonably 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: Sure. Thanks again for joining, Kyle. I appreciate the question. From my perspective, we're making quite a few changes to the organization, obviously, right? We've communicated. We've changed the overall strategy focused on AVISE CTD. This is a shift from the prior own the hilltop strategy. We're pairing down parts of the existing portfolio. We've resized the sales force. We're revamping our entire billing policy and the operations associated with that aspect of our business. We're taking a look at our pipeline. And originally, I think the Company had communicated launching some of those pipeline products this year, and I've been very clear that we won't be launching products until we have at least Medicare coverage, given the patient population we serve. So I think with a lot of these changes, providing full year guidance is tough because the impact is can be difficult to predict. And I don't have clarity, to be honest with you, is on the exact timing of some of these impacts. I think you saw that a little bit in Q4 where we had provided the guidance at the -- in the middle of the quarter, and we expected some volume impact to start the year, and yet we are continuing the momentum we had in Q4. So, we continue to execute well, but there will be some of these changes, which are designed to improve ASP longer term. Take effect in a specific quarter and what have you. And I think just the lack of clarity that we have there really precludes us or prevents us from providing longer-term guidance. But we've committed to communicating the changes as we go about executing on them. And then when we do have that clarity, we'll be providing that guidance. So, I think that's -- that's really the way that we're looking at it internally, and we want to have a high degree of certainty when we do provide that information to everyone. Did that answer your question? I think there was a second part. I may have not touched on in great depth.
Kyle Mikson: I mean that was great, John. I mean the second one component of that was like the actual numbers, but I think it's -- on one that we don't have to go there. I think I understand what you're kind of getting at so we can move on, but I appreciate it though. Maybe just thinking about the metrics that kind of drive results here going forward. So volume test fund has been pretty solid as well as the providers. I know you're not going to be providing that going forward. Test provider has been an interesting metric. I think that's kind of moved around a bit. How should we think about that going forward? And then separately, just a question on ASP, look, obviously, it sounded very important going forward as like a measuring stick for the Company. Is there like a range for the year, maybe like a lower bound that you think is appropriate going forward?
John Aballi: Certainly. Thanks for the chance to answer this a little more completely. So from a metric standpoint, if you're looking at commercial efficacy, if you will, the way that we've laid this out is you've got ASP, I think that's a very key component to evaluating how the Company is performing. You've got -- and specifically over time, where as I communicated, we're looking at prior 12-month periods. You've got your physician base and you've also got overall volume. And we will provide the number of ordering positions on an annual basis. I just -- there's somewhat of a competitive disadvantage in providing that metric, which is why we switched to maybe more of an annual update there. But that allows you to derive orders per physician. And so obviously, when you're working to grow your business, you can either charge a higher price, expand the number of customers or sell more to the existing customers you have. And I think you're able to take a look at trends in all three of those areas with the metrics we outlaid, which is why we've moved to this bucket of analytics, if you will. So from a lower bound ASP perspective, our strategy is focused on improving ASP over time from here on out. So whether we see some future decrease, I can't predict. We had -- in Q2 and Q3 combined, we had $4.9 million in commercial write-downs because we were subjected to a greater number of medical policy reviews, that didn't materialize in Q4. So that was some of the upside we saw there. But whether that happens here in 2023, we'll communicate, but difficult to predict. So when there'll be a lower bound there at some point, I kind of hope were there, if you will, but it's not necessarily that we are. I think improvements over time are what we're looking for as an organization. That the ASP continues to grow over time in a consistent fashion, and I think there'll be periods that it grows faster than others, and that's just a result of some of the efforts culminating or overlapping at a given time. But hopefully, that gives you some view as to how we're looking at it internally and really in all of those areas, physician-based, the number of customers we have, along with the penetration within those customers, I think similar time lines or time frames are applicable to ASP as to each of those, and you want sustained success, right? So that's what we're working to deliver.
Kyle Mikson: 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: Certainly. And I think it's actually at the heart of our strategy, to be honest with you. So, apologies if it was not fully transparent in the remarks. But certainly at the heart of our strategy since the Company switched over to a PLA code, higher level of scrutiny has been applied from commercial payers regarding whether this -- whether AVISE CTD is medically appropriate, we believe it is. We believe we have the data to support it, actually, a very strong data package and are just working from an awareness standpoint to bring that to the payers' perspective. Again, the new PLA code went to effect last April. And so this is a fairly new effort for the Company. Previously, I know there's been comments around in-network contracting. And I think that the way that I view it as medical policy, positive medical policy with individual payers will certainly help, and that's our primary aim. We've adjusted the incentive structures for our managed markets team and heavily focused on that as well as that's what some of the efforts in our revenue cycle process improvements are focused on is bringing that level of awareness and really working on the appeals process to pursue positive policy, either on a per claim basis or more broadly, for the test. So very important there. Obviously, we had to have Medicare coverage as we've updated in the last earnings call. So we have a good portion of it, but we have quite a bit of work to do on the commercial payer side, I think it's always tough to predict when you're going to have a specific payer never mind a large national payer fall online. But we're actively engaged with all. And I think we have a good strategy in place to do so. Our results will obviously be very important here.
Operator: Thank you. Our next question is from Dan Brennan with Cowen. Please proceed with your question.
Dan Brennan: 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: Certainly, I don't believe or at least I don't have it right off hand the exact disclosure in terms of number of contracted lives previously. I know it was limited mostly to contracted lives. On a coverage standpoint hasn't been as relevant. We haven't had a proprietary code. So as mentioned, this is a newer effort that the Company is working on. And specifically, we've disclosed Medicare coverage, but haven't disclosed total covered lives. Those contracts applied to prior CPT codes that were used, not the current PLA code. So we either are in the process of amending those contracts or seeking new contracts at the newly established rate. So, it's something we can disclose in the future. I'm not prepared to do so today, but happy to disclose it in the future. I think from a coverage standpoint, that's what we're heavily focused on right now and we'll provide updates in that sense. But as it relates to what fluctuations we'll see on the ASP side, it's tough to tell. I mean you can have -- you can have payers that have a fairly large constituency but that aren't necessarily represented in terms of our case mix. And so what I mean by that is you may have a plan that has 2 million or 3 million covered lives and yet it's one of our lower volume plans, and then you can have a smaller regional plan where you actually have a significant concentration from our standpoint. And it -- sorry, it actually looks like in the past we have disclosed that the Company has had about 100 million lives under contract so just to follow back on that number previously. But that's not necessarily applicable to the current PLA code. So little apples to orders.
Dan Brennan: Great. Are there any like early learnings about the timetable at which it takes to convert a contract now that you have the PLA code, like is it -- any way for us to frame that process? And is it months? Could it among two, three, four, five, six, anything that would help us think through like the pace at which those -- you can turn those over under the new PLA code?
John Aballi: 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 and 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: 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: 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: 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: Thank you. And our next question is from Paul Knight with KeyBanc Capital Markets. Please proceed with your question.
Paul Knight: John, on the charge in the quarter, what's the goal on the cost cut total for FY '23?
John Aballi: Paul, thanks for joining. From a goal standpoint, it's -- organizationally, this is something that we're putting in place that hasn't been there previously. So, I don't have a great baseline to go off of. So therefore, I hesitate to give those numbers externally. What I can tell you though is we're very well organized in identifying and putting a process in place for future identification of projects, we think can be improved upon, and we prioritized on our software side, operational improvements to the lab. So overall, from a COGS perspective, it's tough right now to give you the number we think we're going to get to but it is a significant focus of ours. We do think gross margin-wise, the more sensitive lever there is ASP and we've walked through that at length. But I think I should know more here over the coming quarters.
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: 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: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
