Greetings, and welcome to the Exagen Inc. Q2 2025 Earnings Call. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ryan Douglas, Investor Relations. Thank you. You may begin.

Good morning, and thank you for joining us. Earlier this morning, Exagen Inc. released financial results for the quarter ended June 30, 2025. John Aballi, our President and Chief Executive Officer; and Jeff Black, our Chief Financial Officer, will host this morning's call. A recording of today's call and the press release announcing the quarterly results can be found on the company's website at www.exagen.com. As today's call includes forward-looking statements, we encourage you to review the statements contained in today's press release and the risks and uncertainties described in our SEC filings which identify certain factors that may cause the company's actual events, performance and results to differ materially from those contained in the forward-looking statements made on today's call. In addition, we will discuss non-GAAP financial measures on this call. Descriptions of these non-GAAP financial measures and the reconciliations of GAAP to non-GAAP financial measures are included in today's press release. I will now turn the call over to John.

Good morning, and thank you for joining us. We're excited to report another strong quarter at Exagen, highlighted by record revenue and meaningful progress across our commercial, scientific and operational efforts. Our focus on disciplined execution, physician engagement and continued innovation is driving positive momentum as we look to build on our leadership in autoimmune diagnostics. Here are our highlights. Q2 revenue came in at $17.2 million, representing 14% year-over-year growth and the highest quarterly revenue in company history. AVISE CTD test volume growth was substantial. The team delivered the best quarterly volume since we made our strategic adjustments in the summer of 2023, which is a strong step in the right direction. What's especially encouraging is that this growth is being driven organically by our existing commercial team and the growing clinical recognition of our differentiated science. For Q2, we effectively still had 40 territories. Meaning our average revenue per territory reached just over $430,000 for the quarter. That's an encouraging sign of commercial leverage, especially when you consider where we were a couple of years ago, averaging $285,000 per territory. We've seen our per territory revenue grow by over 50% since I joined and it's important to note that the expected impact of our sales expansion likely won't be felt until at least Q4, further accelerating our trajectory. Layer on top of that, the fact that we've begun to expand into areas we believe have high growth potential, with team members of incredibly high character and talent, and it's hard not to get excited about the special business we are creating. The sequential revenue growth we saw in Q2 is coming from increased ordering within our physician base and expansion of our physician base and continued improvement in our revenue cycle efforts. It's great to have growth driven…

Thank you, John, and good morning, everyone. As John mentioned, we delivered another record revenue quarter. It was also a busy quarter as we executed on initiatives to shore up the balance sheet. As we discussed during the last earnings call, we refinanced our debt and added additional tranches that we can utilize at our option. On the heels of the debt refinance, we tapped the equity markets with a $20 million follow-on offering. We added several new fundamental investors with key participation from our existing investor base and continued support post offering. Our balance sheet now provides us with the flexibility to invest in growth while maintaining a clear path to positive operating cash flow. Turning to revenue. We delivered $17.2 million in the second quarter, a 14% increase over 2024 and this growth came from an increase in volume, which was up 14% sequentially from the first quarter and 7% from the second quarter of 2024 as well as continued ASP expansion. Our trailing 12-month AVISE CTD ASP grew $27 year-over-year to $428 primarily driven by our new biomarkers, which are still in the early days of collection cycles. We've taken a conservative approach this quarter with new biomarkers adjusting our accrual rate down to align with what we're seeing in actual cash collections. We expect to see continued expansion in the second half of the year as we see the impact of patient deductibles maxing out and the complete revenue cycle process for our new biomarkers begin to take effect. Gross margin in the second quarter was just over 60%, up from about 59% in the first quarter and 60% in the second quarter of 2024. This improvement reflects the growing contribution of higher ASP and the gradual normalization of lab operations following our Q1 investments. We…

[Operator Instructions]. The first question is from Dan Brennan from TD Cowen.

This is William Ruby on for Dan. Congrats on the quarter. You grew volume by 7% and grew volume for the second straight quarter. I'm just wondering how sustainable you think this volume growth is? And then on the volume growth this quarter, I heard you say, it wasn't from the sales force expansion. But is it more just an execution of the team with the existing base? Or are the markers a big contributor with new customers to this volume growth? Just wondering kind of what's contributing to it.

Yes, William. Thanks a lot for the question. So we think the growth in sales, which was phenomenal this past quarter is really attributed to the strong team that we've established and the caliber of individuals that we now have in place. We've talked in the past, but about 1/4 to almost 1/3 of the team is new in the last 12 months, and they're getting up to speed, getting familiar with the product, our processes and the rheumatology community. And so as they gain that comfort level and that confidence, their clinical conversations can gain greater depth. And then ultimately, we become a more consultative resource for clinicians. So we think the stability of the team, our voluntary turnover is way down compared to where it was a few years ago. We're in the single digits now, and that includes one retirement. So fantastic team as far as that goes, just caliber of individuals and then the training and time in the seat, if you will. The new markers certainly serve as a catalyst. So that has absolutely proven to be a valuable contribution to our progress here in the first half. It gives our team something new to talk to clinicians about plus the value proposition that we've conveyed is panning out in first-hand examples, and I've highlighted a few on this call and I have on prior calls as well. So I think those two factors are very key. You referenced sustainability. We think this is very sustainable. We have a large market, and we're around just under 10% penetrated from our own internal calculations. So we have a ways to go. We're expanding our sales force. You're exactly right. Q2, we don't believe those results are attributed to some of the new territories, primarily because those were established towards the end of Q2, and it takes us somewhere 6 to 9 months for a new rep to get up going and contributing. So we expect to see the results of that expansion transpire later in the year. We'll have more additional markers on the seronegative front. So the effect that we're seeing here at the start of the year, we believe, should continue. The headwind there would be some traditional seasonality in the back half of the year, but our team is motivated and we'll kind of see how it plays out. But long term, we believe this is absolutely sustainable.

And just one follow-up. On the ASP progress towards that $90 increase in ASP. It seems like maybe the trailing 12-month increase is a little bit more modest this quarter versus the first quarter understandably, but just is that $90 increase to trailing 12-month ASP still seem reasonable to get to by the end of 2025. Just wondering how that stands?

Yes, that's a great question. Thanks for the chance to elaborate. So in any given quarter, there's likely going to be things that both positively and negatively impact our ASP. And that's why we pointed folks to a trailing 12-month number. As you noted, that did continue to climb here in Q2. The pace of climb has been something that I've always struggled with providing a temporal component to, knowing the exact pace relative to the magnitude there is difficult to forecast. So I am very bullish on our ability to continue to drive this number higher over time. We have a lot of opportunity relative to our clinical lab fee schedule and we're executing the right strategy there. But I do want to address your question. So we recognize revenue on an accrual basis, which takes actual testing volume build out in a quarter and multiplies it by an anticipated accrual rate. That rate is based on long-term expectations post appeal cycle and what we think we're going to cross the finish line with. In Q2, we did make some adjustments to a few accrual rates, which brought them closer to what we're seeing from a cash collection standpoint real time. And the reason for that is really, we don't want to get several quarters down the line and have to take a potential write-down of some sort. We do still feel very bullish with the $90, potentially even higher than that is absolutely where we should sit. We just thought it was a prudent measure that given the progress on those markers, we should adjust closer to cash right now and then recognize that increase in future quarters. So that's kind of how we viewed it. Hopefully, that provides a little extra color, but we're tracking very well operationally. We continue to make progress on many of our revenue cycle operations, and we're seeing very good collections there.

The next question is from Kyle Mikson from Canaccord.

Congrats on the great quarter. Just to put a finer point on the volume question and that theme. The second quarter, that's typically a pretty strong quarter seasonally for you guys. Maybe just like talk about what kind of a step down you would expect in the third quarter? And then again, like maybe fourth quarter trends as well. And I think the key is you have the same physician base, that's probably growing nicely like sequentially. I guess, if you're further penetrating this market, but the ordering, the test per physician is probably declining quarter-to-quarter. So just can you talk about that a bit?

Yes. Kyle, thanks for the question. So we don't guide volume on a quarter-by-quarter basis. But the way we think about it is, we had a fantastic Q2. And that was -- you're right, Q2 tends to be our best quarter of the year. But this outperformed what we've seen in terms of historical performance. So this was a fantastic quarter. The team deserves a lot of credit. They really have prepared. And like I said, I think we've got high-caliber folks that gave some confidence in standing in their seat and are really adding value to clinicians and that's reflected in the performance there. So we expect that to continue to improve through the back half of the year plus we have begun our sales expansion. So the traditional seasonality that we would expect, we're anticipating with the sales expansion to have some tailwinds there to counter that. So exactly how we see Q3, Q4. Like I said, we don't guide on a quarterly basis, but the aim here would be to continue to grow.

All right. Sounds great. And then it sounds like you're going to be launching new tests or at least one or two like in the next 6 to 12 months, let's say, as you do those rollouts, is that -- just could you clarify if that's a headwind to ASP as you're doing this whole ASP situation with the new markers on the AVISE CTD side. And then just generally on the pipeline efforts, I mean, could you just remind us of what the current snapshot of the strategy is to just generate some ROI off the R&D expense or investment?

Yes, absolutely. So the first one, we plan to launch just for everyone's benefit, we plan to launch two additional markers. They are the anti-PAD antibodies. These are useful in the seronegative RA space. So it continues to strengthen our value proposition as it relates to rheumatoid arthritis. And as we've seen with our launch here this past January, that is adding real clinical value for clinicians and having meaningful impact as we've detailed. So I would expect that to further strengthen the value proposition. We'll identify more seronegative patients in this context should actually be a tailwind to ASP. It won't be as meaningful as what we launched in January, namely the $90 impact we expect. However, it will be some impact. So it should be a tailwind actually. On the pipeline efforts, we have -- what we've talked about publicly a few very exciting programs in development. One is a urine program looking at lupus nephritis markers and the intended use here would be in the diagnosis, but also prognosis aspects of managing that disease. So understanding which patients are higher risk, which patients need escalated therapy, but also helping to diagnose those patients which can best benefit from treatment. That's a pretty challenging disease to diagnose, required kidney biopsy, et cetera. So we think high clinical need, and we're working with some of the top KOLs in the field there. Additionally, we took the approach of if we're going to study the kidney in the context of lupus, and we're going to run some clinical trials as well. One is taking a look at biomarkers, which relate to active inflammation, and that's the treatable aspect of this condition. But others are taking a look at biomarkers, which denote a true damage to the kidney, so that you…

All right. That's perfect. And then just on your last point there, John, about -- you mentioned biopharma. Could you talk about the pipeline for that business and how that kind of progressed or performed in the second quarter, especially -- and then as you think about going forward, how do you think about some of the new modalities kind of get like cell therapies, for example, getting into autoimmune more and more -- become more prevalent?

Yes. That's actually a very interesting question. So from a biopharma standpoint, historically, the company did maybe a couple of hundred thousand dollars of pharma business on an annual basis. And now it's a concerted effort with a dedicated team. That is being led by our Chief Medical Officer, Mike Nirenberg, who -- Dr. Mike Nirenberg, who has done this in the past and set up similar institutions at other companies. And I'm very pleased the progress that we've had. We've continued to strengthen relationships with prior collaborators and then brought on a few new programs. As I'm sure you're aware, some of that revenue is -- can be lumpy, and meaning, in any given quarter, you can have outsized performance. And then it's all relative to when projects and programs are finished and when some of those revenue milestones as defined in statements of work actually get completed. So I think we have great partnerships in some of the more cutting-edge areas of pharmaceutical development in this space or sought after because of our high quality and unique markers. And I think that, that's a combination that would be difficult to replicate. So I expect that to lead to future business. And then as our pipeline brings more novel biomarkers in adjacent disease areas I can see this growing fairly substantially. So the biopharma revenue for Q2 is in the other testing line, and I'll leave it to Jeff to comment on some of those details. But like I said, it can be lumpy. We'll have to see how it materializes throughout this year, but we do expect that to be a contributing factor in the back half. And then you mentioned a little bit of -- or asked a little bit of as we develop additional modalities, how does it play in here. And we view this as a way to derisk some of our R&D development, meaning if we can partner with a pharma organization and specifically take a look at well-characterized clinical samples, which help us with our validation efforts, what a win for us. And if you do it, in a manner which has reasonable margins and is accretive on a revenue basis, I think you're really setting yourself up well there. So that's our objective. We've done it in a few areas. I think we'll continue to do it in the lupus nephritis area. But more to come there. Anything else you want to add, Jeff?

I think you covered it. And to your question, it's -- we're running about anywhere from $100,000 to $300,000 a quarter. That's what we saw in the second quarter. But as John said, dependent on timing, there's a real opportunity and a nice setup in the second half to see expansion. And just to reiterate, that expansion, this business is generally margin accretive. So it will be a nice contributor to our path to profitability as well.

The next question is from Andrew Brackmann from William Blair.

This is Maggie Boeye on for Andrew Brackmann. I just wanted to further expand upon your efforts to expand your territories. Can you just remind us of where you are at today? I think -- I believe you mentioned that you added a few territories towards the end of the quarter? And where do you expect to be at by year-end? And then just looking ahead, how are you thinking about further investing in territories in 2026 and beyond.

Yes, Maggie. Thanks for the question. So just to level set, we started the quarter right around 40 territories. We have just initiated our expansion. But 40 territories is certainly where we started the year and then kind of around the beginning of Q2, we initiated some expansion. We got to 42. So we went from 40 to 42 over the course of the quarter. So we had 2 -- a net addition of 2 territories, and we have a line of sight to 2 more additions here, call it, Q3, early Q4. So we're likely going to be in the 44 range. There may be opportunity for another 1, potentially 2 territories as well, but near term, but we're always evaluating the U.S. taking a look at various metrics. We look at age demographics. We look at a rate of diagnosis. We look at prescriptions for some of the more common therapies in this space. And so we're triangulating all of those factors when we identify a potential territory. And then we actually go kind of scout it out, if you will, see what the rheumatology clinic dynamics are in that area and see if it justifies actually having someone in the clinic. What we have learned is that -- actually, having that face-to-face interaction is essential for this clinical practice. So having a field- based rep is going to be the way that we're growing over time. We tried other methodologies, inside sales and what have you. But I think having that field-based presence is certainly the most effective way to grow. And so we should end up somewhere around 45 -- 44 to 45 by the end of the year. And then we'll just do what's smart. I think it's -- I've made a very conscious effort…

Great. That's super helpful. And then just on ASPs, outside of that $90 increase from the new markers you're expecting for trailing 12 months ASPs. Just as we think about that for the rest of -- that outlook for the rest of the year, what levers can you pull to further increase those trailing 12 months ASPs? And then how should we be thinking about those increases for 2026 and beyond?

Yes. Great question. I know ASP is so critical and likely the most sensitive lever that we have to transforming our business, and we've done a pretty good job over the last several years in boosting this, and that's all been on the base business. That should continue. And what I've worked to explain for folks is our clinical lab fee schedule rate for the existing AVISE CTD profile is $1,299. Our blended ASP now here at the end of Q2 is $428. So we have some meaningful opportunity, substantial opportunity for continued improvement there. And both of those numbers are inclusive of the current new markers. And so our expectation is that through our appeals efforts and what we're doing on the revenue cycle side, we'll continue to drive those numbers up. And we have opportunity with the major blues organizations and are making progress on a quarter-by-quarter basis. There's large national payers that we're working with. To better understand our science and the value proposition we bring. And then there's other smaller regional plans that we target as well. We have a very strong market access team, that's been strengthened over the last, call it, 18 months, and they're working diligently from a top-down standpoint to talk to various medical directors and really engage and bring our offering top of mind, so that we can ultimately get covered and then work on an appropriate rate down the line. So we continue to make meaningful progress. I highlighted a few wins in the last call, namely TRICARE some of the ALJ wins we had organizationally. Those have continued, the ALJ specifically. So we've had multiple now in many of the claims we have with Humana. So those will pay dividends over time. It's -- you have to be diligent. You have to be relentless really and work through the system, conduct the right prior auth, submit medical records and really show that your offering is being used appropriately in clinical practice, which ours absolutely is, and that it's adding significant value. And then over time, we do expect that progress to occur.

The next question is from Ross Osborn from Cantor Fitzgerald.

Congrats on a strong quarter. So starting off and following up on your previous response, with an improved and improving product supported by the right team now at the company, what market access initiatives are in place to accelerate adoption to drive your 10% penetration higher? Is it simply a function of getting more feet on the ground? Or do you have larger marketing campaigns in place anything to drive better awareness?

Ross, so you're talking specifically relative to volume growth. Correct?

That's correct.

Okay. So as it relates to volume growth, our marketing campaigns continue to improve. We have digital campaigns bringing awareness. We're bringing novel new markers to clinical practice. And this is in a field where the conventional serological evaluation leverages technology and biomarkers, which were from the late 1800s to the mid-1900s, right? So 50 years of innovation, call it in the early 1900s. And so to bring that type of change to folks is takes time, right? And you have to have trust and be valued from a consultant standpoint. And so, that is really our primary focus, but we've launched significant marketing campaigns. We're doing clinical research to routinely validate the utility of these markers. And I think those publications help. They serve as some form of marketing. So that's where our marketing efforts are. The -- we've invested quite a bit in training on the team. I think you have to be able to handle the clinical questions that you're going to get from clinicians around sensitivity, specificity, patient populations, what's the appropriate patient and when is the appropriate time for leveraging these biomarkers? Do they change over time? All these questions come up. And having our team adequately prepared and informed is essential. And I think our sales team, along with our marketing and clinical affairs teams have done a fantastic job in doing that. We've also been looking at how to partner more with KOLs, specifically in this space, and you'll probably see that or we can point you to that with the PAD4 launch coming up. We've already had KOLs comment on the utility of some of these markers and how they'll impact clinical practice. So that's primarily our approach.

There are no further questions at this time. I would like to turn the floor back over to John Aballi, President and CEO, for closing remarks.

Fantastic. Thanks, everyone, for joining the call today. It was a pleasure to present the results and really a fun quarter from our standpoint. We'll see how the back half of the year progresses. But as I said, we are building something special. And I think it's apparent in the numbers. I especially want to thank the Exagen team for the incredible dedication and effort they continue to put in on a daily basis. I mean this team is truly fantastic. It's energizing. There's a lot of really talented people here focused on clinical and patient care. And it's fun to see that coming together really in an efficient and effective manner. We appreciate your partnership and look forward to future updates. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.