Exagen (XGN) Q3 2026 Earnings Call Transcript

Image source: The Motley Fool.

DATE

Tuesday, Nov. 10, 2026

CALL PARTICIPANTS

• Head of Investor Relations - Tina Jacobsen
• President and Chief Executive Officer - John Aballi
• Chief Financial Officer - Jeff Black

TAKEAWAYS

• Revenue -- $18.4 million, representing 7% growth compared to the third quarter of 2025 and driven by improvements in both volume and price.
• Year-to-Date Revenue -- $55.7 million, reflecting 11% growth over the first nine months of the previous year.
• Adjusted EBITDA Loss -- $1.9 million, showing stability compared to the prior year while year-to-date losses improved by more than 30%.
• Gross Margin -- 58.8%, up 40 basis points due to average selling price expansion, operating leverage, and cost rationalization.
• Trailing 12-Month ASP -- $451, marking a record for the company and its 14th consecutive quarter of price improvement.
• AVISE CTD Volume -- Increased 2% year over year, consistent with historical seasonality and following a 5% increase in ordering physicians.
• Pharma Services Revenue -- $900,000, contributing to a year-to-date total of $2.2 million, which represents an 85% increase.
• Pharma Services Backlog -- $5.5 million, reflecting expansion in clinical trial support and biobanking capabilities.
• Sales Territories -- Expanded to 45 territories from 42 in the previous year to drive clinician adoption and support future product launches.
• Cash and Equivalents -- $28.1 million at quarter end, an increase of $3.5 million during the period.
• ATM Facility -- Raised $6.5 million in cash during the third quarter through disciplined execution of the program.
• Debt Facility Draw -- $5 million drawn after the quarter closed from a perceptive debt facility to strengthen the balance sheet before a tranche expiration.
• Full Year Revenue Guidance -- $72 million to $75 million, which management reiterated based on year-to-date execution.
• Revenue Cycle Recoveries -- $800,000 collected from claims older than 360 days, driven by improved analytics and AI-supported processes.
• In-Process R&D Charge -- $587,000, incurred for the acquisition of an Israeli-based AI-enabled workflow optimization platform for rheumatology clinics.
• Market Opportunity -- Management estimates a total addressable market of over $2 billion in autoimmune testing, where the company currently holds a 3% to 4% share.
• Pharma Biomarkers -- Increased to 38 markers from 32 in the prior year, supporting Phase I through Phase III clinical trials.
• Selling, General and Administrative Expenses -- $12.8 million, representing a $1.3 million increase driven by commercial investments and stock-based compensation.
• Research and Development Expenses -- $1.8 million, focused on clinical and analytical validation for the upcoming myositis product launch.

Need a quote from a Motley Fool analyst? Email pr@fool.com

RISKS

• Aballi stated, "we do expect some slight headwinds overall in a blended rate... talking low single-digit impact if it were to be realized fully," regarding the potential implementation of PAMA pricing changes on generic CPT codes.

SUMMARY

Exagen Inc. (NASDAQ:XGN) reported record third-quarter revenue driven by a 14th consecutive quarter of growth in average selling prices and a 5% increase in the ordering physician base. Management reported that the company is transitioning from a single-product diagnostic provider to a multi-product autoimmune platform through strategic investments in product innovation and artificial intelligence. The company stated that year-to-date adjusted EBITDA has improved more than 30% as one-third of every incremental revenue dollar flowed through to the bottom line. Management indicated that a pro forma cash balance of $33 million provides sufficient runway to support the business until it reaches sustainably positive adjusted EBITDA and operating cash flow.

• The company plans to launch its new myositis diagnostic offering in early 2027, featuring a 17-marker profile that CEO Aballi stated will be "the only offering out on the market that is quantitative."
• The acquisition of an Israeli AI-enabled workflow platform is intended to streamline clinic operations for rheumatologists, which CEO Aballi noted gives the company "a presence on a day-to-day basis" in customer clinics.
• Management presented nine abstracts at the ACR Convergence conference, including two podium presentations on proprietary T-cell markers and phenotypic patterns across more than 375,000 AVISE CTD results.
• CFO Black confirmed the company is targeting a long-term average selling price of $600 to $650 per test, representing approximately 50% of Medicare reimbursement rates.
• The company reported that demand for Pharma Services is growing fastest in rheumatoid arthritis programs, with year-to-date revenue in that segment nearly doubling over last year.
• Management noted that sales productivity reached a record level, with trailing 12-month AVISE CTD revenue per territory increasing nearly 6% even as the sales force expanded to 45 territories.

INDUSTRY GLOSSARY

• ATM Facility: At-the-market facility, a type of capital-raising tool that allows a company to sell shares directly into the secondary market at prevailing prices.
• AVISE CTD: The flagship diagnostic test offered by Exagen that aids in the diagnosis of connective tissue diseases.
• CB-CAPs: Cell-bound complement activation products, the proprietary technology used in AVISE testing to monitor autoimmune activity.
• LCD: Local Coverage Determination, a decision by a Medicare Administrative Contractor regarding whether to cover a particular item or service.
• MolDX: The Molecular Diagnostic Services Program, which identifies and establishes coverage and reimbursement for molecular diagnostic tests.
• Myositis: A group of rare autoimmune diseases characterized by chronic muscle inflammation and weakness.
• PAMA: The Protecting Access to Medicare Act, which established a market-based laboratory clinical diagnostic fee schedule.
• PLA Code: Proprietary Laboratory Analyses code, a specific identifier used for billing unique clinical laboratory tests.

Full Conference Call Transcript

Operator: Good day, and thank you for standing by. Welcome to the Exagen Third Quarter 2026 Earnings Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Tina Jacobsen, Head of Investor Relations. Please go ahead.

Tina Jacobsen: Thanks, operator. Good morning, and thank you for joining us to discuss Exagen's financial results for the quarter ended September 30, 2026. Today, I'm joined by John Aballi, our President and Chief Executive Officer; and Jeff Black, our Chief Financial Officer. The recording of this call, the press release announcing our financial results and the slide presentation can be accessed on our website at www.exagen.com. Today's call will include 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. We also 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. And now I will turn the call over to John Aballi. John?

John Aballi: Good morning, everyone, and thank you for joining us. The third quarter extended what is fast becoming a record year for Exagen, with execution toward our vision increasingly evident in the results. I'll get right into the details. This morning, we reported third quarter revenue of $18.4 million, the best third quarter in company history. Year-to-date, revenue has grown more than 11%, which has contributed to an adjusted EBITDA improvement of over 30%. We grew both volume and price compared to last year. Trailing 12-month ASP reached a new record of $451, marking our 14th consecutive quarter of improvement.

That speaks to the durability of our growth, and we're confidently reiterating full year revenue guidance of $72 million to $75 million. During the quarter, we utilized our ATM facility to strengthen the balance sheet and opportunistically brought in high-caliber investors as we continue to build and shape the company for the long term. We're really pleased to have their support. As always, our mission is at the heart of everything we do. Autoimmune disease is diagnosed too late and too inconsistently and it's the patients that suffer. This is why Exagen exists, and we are singularly focused on building a unique platform to bring clarity to these complex diseases.

I spent a good amount of time in the field with customers over the last few months, and the conversations I had reinforce the critical nature of our work and the strategic path we're taking. I visited with customers here in Southern California, Louisiana and New York to discuss our offerings, how we can better support their practices and to preview new products that will address important diagnostic challenges. One of the groups I visited specifically validated the myositis offering we're readying for launch early next year. And we discussed the types of patients that would benefit as a result of this offering. Feedback like that is motivating.

And with this new product, we're looking forward to serving even more autoimmune patients in need. With roughly 3% to 4% share of an autoimmune testing market that we estimate at $2 billion plus, the opportunity ahead of Exagen is significant. We'll capture more of that opportunity the same way we've reshaped this business by focusing long term and executing against 3 core objectives. The first, expanding adoption of our products. The second being increasing reimbursement through disciplined value-based strategies and operations. And third, delivering a steady cadence of innovation to address the unmet needs of our clinicians. Let's jump into clinical adoption.

You can see in the chart on this slide that year-to-date, volume is up 8%, and we're now approaching 1.3 million of AVISE CTD tests since launch. Third quarter AVISE CTD volume was just above last year's test volume and in line with historical seasonality trends. In the fourth quarter, we expect continued normal seasonality with the holidays and annual societal meeting subsequently impacting the number of days physicians are in clinic. Our commercial investments are paying off well. We expanded to 45 territories over the past year. And while new reps typically take a year to get fully up to speed, productivity across the team continues to improve and our ordering physician base continues to grow.

Our evidence base continues to expand as well. This is very much a strategic effort of ours, recognizing that reimbursement progress requires an ever-growing wave of high-quality content, validating the utility of our products. And on that note, today, we're wrapping up at ACR Convergence in Orlando, where Exagen had a fantastic showing. 9 abstracts were featured at the conference, 2 of which were selected for podium presentations, one on disease associations for our proprietary T-cell markers and one analyzing phenotypic patterns across more than 375,000 AVISE CTD results. The college reserves podium presentations for a small fraction of the abstracts it receives.

And in 13 years of presenting at this meeting, this is only the second time in Exagen's history that it's earned 2 in a single year. Our science continues to push the boundaries of traditional autoimmune care and our wave continues to build. You may have noticed a new look for today's presentation. At ACR, we unveiled a refreshed Exagen brand with a modern science-forward identity built around a new tagline, clarity in autoimmune decisions. It reflects who we are today and the leadership role we intend to play in autoimmune care. Over the coming months, we'll gradually be rolling out the new branding along with a website upgrade.

Pharma Services delivered another strong quarter with year-to-date revenue nearly doubling over last year. In support of partners across Phase I through Phase III trials, IVD development and biobanking capabilities, we now offer 38 biomarkers, up from 32 last year. The programs we contribute to span lupus, RA, Sjogren's, myositis, among others, with RA demand growing fastest. It's further evidence that the data, biobank and scientific capabilities we're building have value that extends well beyond the clinic. Turning to ASP. Trailing 12-month ASP expanded to $451 in the third quarter, up $10 year-over-year. This remains the metric we use as operators to assess the business because it smooths the variability associated with accrual accounting and the timing of collections.

Our revenue cycle team delivered another solid quarter and year-to-date recoveries on claims more than a year old are more than 2.5x last year's level as we continue to optimize processes with analytics and AI. We continue to work towards an ASP of roughly half our Medicare rate over time, and I'm confident there's more ground to gain in the coming quarters. This brings me to innovation, where we're positioning Exagen to serve our channel more comprehensively. Our myositis offering is on track for launch in early '27.

We achieved meaningful milestones for the program this quarter by completing clinical and analytical validation, and we expect to submit our validation package to New York State Department of Health by the end of January. Myositis will be our first new standalone product since I joined, and we plan to launch it through our existing sales team, reaching the same rheumatologists who already rely on Exagen for the best connective tissue disease testing on the market. Work also continues on the customer-facing AI applications we mentioned last quarter, taking the AI successes we've had inside our own business and applying them to help clinicians run their practices more efficiently.

During the quarter, we accelerated that effort by acquiring an AI-enabled workflow optimization platform for rheumatology practices, which we believe can streamline clinic operations and improve care for newly referred patients. It's early, and we'll share more as development progresses, but my field visits during the quarter confirm the need for a solution like this that we're building. In an effort to provide greater clarity into some of the exciting science and products we're building, I'm pleased to announce that on December 15 at noon Eastern, we will host a webcast titled Exagen Forward: Building the Autoimmune Platform. The event will offer a deeper dive into our myositis offering as well as a couple of other projects in our pipeline.

More importantly, we'll show how Exagen is evolving from a single product company into an autoimmune platform. Registration details are coming soon, and we really hope you'll be able to join us. To close, I want to step back and put Exagen's progress in perspective. We're very focused on building long-term success and results since the current management team arrived at the end of 2022 show that our strategy is working exceptionally well. Over this period, revenue has grown at a compounded rate of roughly 14%, while adjusted EBITDA loss has improved on average roughly 37% per year, now running roughly equal to our R&D investment.

We achieved that while completely rebuilding many areas of the company, launching unique and novel biomarkers, establishing our Pharma business and funding the pipeline that's taking us from a product to a platform. Today, the business is growing on both volume and price. Our commercial engine is strengthening, and we're investing in our next leg of growth from a stronger balance sheet. This is the business we said we'd build. We'll keep building it in the same way quarter after quarter, focused on the long term and delivering on what we communicated. Before I hand the call over to Jeff, I want to thank our team.

Progress like this is a tremendous amount of work and the energy effort and high character our people bring every day in service of autoimmune patients and clinicians is what makes this progress possible. With that, I'll turn it over to Jeff.

Jeffrey Black: Thank you, John, and good morning, everybody. As John just highlighted, our third quarter results reflect another solid quarter of execution across the business. Starting with third quarter revenue, we generated $18.4 million, an increase of 7%. Continued strength in clinician adoption and utilization offset normal seasonality to deliver AVISE CTD test volume growth of 2%. That's on top of a tougher comp compared to the first half of the year, which reinforces the strength of underlying demand. Our commercial investments are delivering solid returns as sales productivity continued to ramp, reaching another record with trailing 12-month AVISE CTD revenue per territory up nearly 6%.

That's even as we expanded from 42 to 45 territories over the past year with volume per territory holding stable while our newer reps scale. The number of ordering physicians was also up 5% in the quarter. AVISE CTD trailing 12-month ASP expanded to $451 per test, up $10 compared to last year, and revenue cycle initiatives drove another strong in-period ASP result, including about $800,000 collected from claims older than 360 days. As John mentioned, over time, we continue to target an ASP of at least 50% of Medicare reimbursement or approximately $600 to $650 per test, recognizing that this improvement will take time and that quarterly contribution from our revenue cycle initiatives can be variable.

Pharma Services revenue was over $900,000 in the third quarter, bringing the year-to-date total to $2.2 million, up nearly 85% over last year. This growth reflects continued execution against our contract backlog, which now stands at roughly $5.5 million and the broadening of our offering. While revenue recognition can fluctuate quarter-to-quarter, we see Pharma Services as a meaningful long-term growth lever with a strong trend line. Moving to gross margin. We reported just under 59% for the third quarter, up about 40 basis points attributed to ASP expansion, operating leverage and ongoing COGS rationalization. We remain confident that gross margin will progress to the mid-60s over time. Turning to expenses.

Our total operating expenses for the third quarter were $15.2 million, up just over $2 million compared to 2025. That includes a year-over-year increase of over $600,000 in non-cash stock-based compensation and a onetime in-process R&D charge of roughly $600,000 relating to the strategic investment that John described. Excluding stock-based compensation and the in-process R&D charge, non-GAAP OpEx was $13.4 million, up about 6% and $800,000 over the third quarter of last year. Breaking out the components of OpEx, third quarter SG&A was $12.8 million, up about $1.3 million, driven primarily by commercial investment and higher stock-based compensation.

R&D was $1.8 million in the third quarter, up just slightly compared to last year to support pipeline development, including preparation for the myositis product launch expected in early 2027. Adjusted EBITDA loss was $1.9 million in the third quarter compared to a loss of $1.9 million last year. The year-to-date picture of adjusted EBITDA more clearly demonstrates the scale our business is delivering. Year-to-date, revenue grew more than 11%, while operating expenses, excluding stock-based compensation and the in-process R&D charge grew about 6%. Roughly 1/3 of every incremental revenue dollar has flowed through to adjusted EBITDA, which year-to-date has improved more than 30%. Turning to the balance sheet.

We increased our cash position by $3.5 million in the third quarter, ending the period with cash and equivalents of just over $28 million. During the quarter, we opportunistically added about $6.5 million in cash through disciplined execution of our ATM program. We don't see the ATM as a primary source of capital, but view it as a useful tool when deployed in a target disciplined way, and that's how we approached it this quarter. After quarter close, we also drew $5 million from the expiring $10 million tranche under our perceptive debt facility, bringing our pro forma cash balance at the end of Q3 to just over $33 million.

This was not about cash need, but with that tranche about to expire, drawing part of it was a responsible way to strengthen our balance sheet. Importantly, we have the runway needed to support the business to sustainably positive adjusted EBITDA and operating cash flow, and that gives us the flexibility to be disciplined and opportunistic in how we manage the balance sheet. Shifting to guidance. Today, we reiterated our 2026 full year revenue outlook of $72 million to $75 million. That outlook continues to assume high single-digit volume growth and mid-single-digit full year ASP growth compared to the fourth quarter 2025 exit rate.

It also reflects the typical second half volume seasonality from fewer clinic days and our growing contribution from Pharma Services. In summary, third quarter reflected continued execution against our priorities. We grew revenue faster than we spent. We saw continued momentum in sales productivity while we added territories, and we strengthened the balance sheet with discipline. That gives us a solid platform heading into 2027 and beyond. Operator, we will now open the call up for questions.

Operator: [Operator Instructions] And our first question comes from Max Masucci of ROTH Capital Partners.

Max Masucci: Nice quarter. First one, just looking at the implied Q4 guide, still a decently wide range. So just would be great. Can you walk us through kind of the key items there that bridge from the low to the high end?

John Aballi: Max, thanks so much for the question joining the call. I appreciate the opportunity to dive a little bit deeper here. From our perspective, the year is progressing really how we revised the guidance in Q2 and I feel confident that as we head into Q4, it's going to finish as a record year, as we stated. We still expect to be growing high single digits for the year on volume and, call it, low to mid-single digits on ASP. We felt that the guide still reflected that and especially the midpoint of the guide, we feel pretty comfortable with where we're at.

So from our standpoint, just continue to line up with how the company is performing and put us right in line with where we expected today.

Max Masucci: That's great. And next one for me. Just can you share any customer feedback you've fielded for the myositis test during ACR Convergence? And just what can we expect to learn during the December myositis education call?

John Aballi: Yes. Great question. So I actually was in Orlando this weekend at ACR and speaking to quite a few clinicians, really fun conversations. I mean -- so just to reframe this, when I joined Exagen, one of the first things I did was orientate our development pipeline to our top customer needs. And that required quite a bit of voice of customer. Our team is very adept at that and spent a lot of fun really studying our customer base. Myositis was the #1 ask for thing.

You'd be talking to a clinician, they'll be describing their family, their kids and then out of nowhere, hey, if you have the opportunity to develop something that can help me in myositis, that would be fantastic. And so that has rung true or continue to ring true. And at ACR, we meet with as many of our customers as we can, but especially those larger practices that have physician boards and whatnot. And countless times, it came up again the excitement around myositis, wanting to know the breadth of the panel, which we think will be sufficiently comprehensive. We'll have unique markers that others don't offer.

And then we expect to be able to turn our testing around within a week, which is really critical for the field and current alternatives are in the 4 to 6-week, some even extending to the 8-week time frame. So we think on those 3 fronts, we'll have a highly differentiated product that is still in extremely high demand. The #1 asked for solution amongst our customer base and very excited for what's coming. We should have a clinical validation that is published here in the next few months. You'll get a sneak peek of that on the call.

We've conducted our analytical validation, and we'll update a little bit on the process for launch there and the readiness of our team. But the other exciting thing on the call in December is we have a KOL clinician, Dr. May Choi, who I met with at ACR, by the way, as well, who will give, I think, a very important patient perspective of how challenging these patients are to diagnose, what you look for and then what the ultimate consequences of missing the diagnosis or not having the adequate tools to work with these patients.

So I think it should be very interesting, and it should give you a lot more specificity on this specific topic that I'm sure most people are not as familiar with.

Operator: And our next question comes from Dan Brennan of TD Cowen.

Daniel Brennan: Maybe just looking out for 2027 for a moment. Can you just remind us on what the PAMA impact would look like if it gets implemented since I know this will be a topic as we head into the year-end?

John Aballi: Yes. Dan, thanks for the question. So yes, nice to have, I guess, some clarity regarding PAMA, I guess, in terms of the pricing and potential impact. We still don't know fully if it will be implemented. I believe the comment period has transpired, but still waiting to see ultimately what Congress comes up with there as they, as you know, delayed this multiple times. For us, going through PAMA, we had a couple of objectives. The first was to ensure that our PLA code remains in line with our existing pricing, and that's really been in the heart of our revenue cycle operations and optimization over the last several years. So we did achieve that goal.

I think it's a big milestone for us. Our Medicare rate for our unique PLA code remained stable and steady at $840. But we do also utilize some generic CPT codes. And those we have no control over given the median is set by the national labs there. So from that perspective, we do expect some slight headwinds overall in a blended rate. We're talking low single-digit impact if it were to be realized fully. We'll have to see again how it transpires. But from our perspective, we believe our revenue cycle optimization and the strategies we're employing here should overcome that over time. So not too worried as we head into 2027.

Daniel Brennan: Great. And just on myositis, I think you sized it like 100,000 person TAM in the past, but felt it could be really underdiagnosed. I know we'll get color as we head into 2027. But any way at this early stage to think about a predicate like ramp in myositis, like how meaningful that could be in year 1, year 2 type thing?

John Aballi: It's a great question. And the 100,000 patient reference point that you just brought up, we've now come to appreciate that I think it's materially higher than that in terms of the testing population, the rule-out population, if you will. The ramp, we're still figuring out. We have some internal projections, not entirely ready to share them externally. We may go into a little bit on our December 15 call as well. We'll have to just see. But from our perspective, it's the same sales channel. It's the same customer base. It has the potential to move into pulmonology as well, the ILD space, and we've actually seen quite a bit of excitement there.

But as we've done with AVISE CTD, we don't want to get out over our skis in terms of increasing sales expense. We want to do it in a responsible, measured way. And I think we'll just have to see how it paces throughout 2027. Maybe more to come on the December call.

Daniel Brennan: Great. And then maybe just one more just on coverage and payment. Has your systematic review driven any encouraging conversation with payers?

John Aballi: Great question. Thanks for bringing that up. The systematic review absolutely has. We've -- as you're familiar with, many of these payers have established time lines for a medical policy review. It's gotten us -- the systematic review has gotten in front of many of these folks for their year-end review cycle. It's driven some progress with One Blues plan specifically, but it continues to be a longer game. But yes, it absolutely has had an impact and open some doors.

Operator: And our next question comes from Kyle Mikson of Canaccord Genuity.

Kyle Mikson: So like solid quarter. It looks like volume and providers and all that in ASP as well in the period kind of growing like single digits, equating to this like high single-digit kind of overall revenue growth rate, which is solid like I said. But like in the past, you've been a double-digit grower. I'm just curious what you -- like what variables and factors will really drive a return to double-digit growth, recognizing that maybe the PAMA headwinds next year as you just discussed. So I'm thinking ordering physicians, the RCM efforts, expanded coverage or more reps and then, of course, the pipeline test. I'm curious how important these components are to getting to double digit.

John Aballi: Kyle, thanks for the question. From our perspective, we're on track to deliver at the midpoint there, somewhere around 11%-12% revenue growth. So we believe that this year should culminate in double-digit growth. But I think at the heart of our strategy, as you've been following for the last few years, we're really working towards cash flow positivity. And I think that's why we're especially proud of the improvements on the adjusted EBITDA side. And as I mentioned, if you look over the last 4 years, we've been improving that around 37% a year on average each year. So we'll continue to do that.

I do think that we can have double-digit revenue growth, especially as we move more into a platform from a single product. So I think myositis will certainly be a factor. We will continue to expand our sales team. I think we've had a nice expansion here over the last 12 months. Those folks are continue to get settled and acclimated, and we're seeing some pretty nice growth within those territories. But back half of the year tends to have some seasonality. We've talked about this in the past. We saw that here in Q3. We expect it in Q4. But our physician base continued to grow. I mean that grew 5% in year-over-year here.

So I think we're doing all the right things. We absolutely have the right strategy. And more importantly, probably we have the right people to execute that strategy. So the ingredients are here.

Kyle Mikson: All right. And then when it comes to the commercial payers, like I heard you talk about Blues, but are you focused on broadly like local maybe the health system base, the pay buyers or like the larger plans out there? I'm just curious like it's been -- to your point earlier, it's been years of watching this process happen with the coverage expansion and trying there, but it's unsuccessful in some areas with some of these mega plans for us. So I'm just curious what the current strategy kind of is there.

John Aballi: So from a market access standpoint, our strategy is really to drive broader awareness and then work with who's listening. And some of that has to do with physician advocacy. Some of that has to do with your appeals efforts. Some of that has to do with evidence generation that you have in conference attendance and what have you. So we continue to make, in my opinion, really nice progress to have 14 consecutive quarters of growth in an area that historically is pretty difficult for specialty diagnostics is something we're very proud of. Yes, we make -- to directly answer your question, we've made decent progress with some of the smaller IDNs in various regions.

You have that in the Southeast, you have it in the Southwest as well. We've worked with various military plans. TRICARE, we've talked about in the past. The large national plans, a couple of them actually pay us very well and find value in the testing that we provide. And then we've continued to work with the others on an appeal basis, and we've been successful through our ALJ process. Again, this quarter, we saw great success there. So at any given time, we're in some stage of the cycle, if you will, with various plans. And so it's not necessarily a concerted effort to go for this tier of payer. It's going to be more regionally based.

It's going to be where we have clinician momentum or ALJ momentum and appeals progress. And then when we're able to get in front of them face-to-face, we tend to be fairly effective. And I think you have -- you see that represented in our trailing 12-month ASP progress.

Kyle Mikson: Okay. Excellent. And then just lastly, was this acquisition of the AI-enabled workflow software platform part of the strategy to unlock new tests and expand the market opportunity? Or is it just kind of complementary to what you already were offering?

John Aballi: Yes. So this was somewhat opportunistic. We saw a very interesting platform that a few of our customers were already using in their day-to-day workflow. We think it has broad applicability, but a high value proposition in the community-based rheumatologists and really helps optimize their practice workflow. And there's a few different modules we can get into. But pretty exciting from our standpoint. The original technology was based out of Israel. And as we have been following them and talking with them, it just ended up working out well from a price standpoint and the value we think we got in return. Ultimately, where this platform evolves to, we're still working through.

But I can tell you, internally, we're pretty excited about embedding a software platform in our customer base that helps them work more efficiently and effectively, but basically gives Exagen a presence on a day-to-day basis. Right now, we fill a sales force, which goes in on a regular basis, but it's just not practical to go see 150 docs a week. So if that's roughly the number of physicians each territory is managing. Something like this brings Exagen into the clinic on a day-to-day basis. And potentially, we find that very interesting and attractive.

Could help leverage some of the testing solutions we provide, could shorten some of the learning curve, especially given that innovation is such a core aspect to our strategy. But we'll see how this evolves. Super excited. It has existing customers. We've been demoing some of the new features we've been working on, and we'll have to see how it evolves here in 2027.

Operator: And our next question comes from William Bonello of Craig-Hallum.

William Bonello: I'm wondering if you can just provide a little bit more color on the dynamics around volume growth. It was a lot lower on a year-over-year basis than we've seen in a while, I think, than people have been expecting. I understand seasonality, but obviously, that doesn't explain the year-over-year growth rate. So any nuance in the quarter? And then maybe just repeat again what you think is sort of the more normalized volume growth?

Jeffrey Black: Yes. Bill, this is Jeff Black. Thanks for the question. I think it's simply stated, it really has to do with the year-over-year comps, right? If you recall, and I know we don't disclose specific quarterly volume. But if you recall, in '25, we saw a pretty significant step-up, right, in our kind of average quarterly volume. And so it just made for a tougher comp in the third quarter. That's really the driver. But I think the encouragement here is that we still see an uptick in our ordering HCPs or ordering clinicians. So that's indicative of just continued demand and adoption, but just less clinic days as a result of summer vacations.

And we'll see some of that continue through the holidays in the fourth quarter as well, and that just seems to be a dynamic that we experienced in the second half of every year.

William Bonello: And just again, what you said in terms of the sort of expectations for volume growth going forward?

John Aballi: Yes, we would expect pretty much on an annual basis to be growing high single digits on volume, low to mid-single digits on ASP and to have that combination reflect revenue growth in the double digits as well while we pursue cash flow profitability.

William Bonello: Okay. And then just the last one is just can you give us an actual AVISE CTD revenue figure for the quarter?

Jeffrey Black: Yes. It's $16.4 million, Bill.

Operator: And our next question comes from Mark Massaro of U.S. Bancorp, BTIG.

Mark Massaro: I wanted to start with myositis. To what extent do you think you can answer additional clinical questions to the rheumatologists? I presume this test is for the aid in to diagnose myositis, but I'm wondering if there are any other clinical questions that this test can enable you to answer across autoimmune disease.

John Aballi: Yes. That's a great question, Mark, and I hope you'll be able to join us on December 15. We'll actually be able to have a Q&A session with KOL in this field, and I think that will be the perfect forum for that, but I will speak to what I know. So the exciting thing for us is that some of the unique markers that we have we're aiming at diagnostic capabilities, first and foremost, as you referenced. But in addition to that, several of them have other prognostic implications. And so there's 2 markers specifically that potentially confer high risk of lymphoma of progression to cancer.

That's very important, especially for how the patient subsequently gets worked up and is monitored throughout time. One of the markers is specifically associated with statin-induced myositis. And so that's basically a drug-induced condition that can be adjusted in a different MOA for addressing the patient's condition, but ultimately alleviating some of the negative side effects that are leading to that myositis or inflammatory myopathy condition. So from that standpoint, the test should be able to address that. But I'll also say one of the things we believe our offering -- one of the reasons why we think our offering is unique is it should be the only offering out on the market that is quantitative.

And so we're taking a lot of care, a ton of effort really to validate the quantitative nature of each of these markers. When we launch, it will be a 17-marker profile, which we feel, again, is fairly comprehensive for the market. But each of those markers are validated on a quantitative level. So rather than just saying positive, negative, we give you the titers, and that allows physicians to monitor as therapies come into the market over time. And so you can actually evaluate therapeutic response for the various markers, and that's something we're really excited about. Myositis has several B-cell depletion drugs that are in development right now. I believe actually one of them was recently approved.

So very exciting from that standpoint, and that's a different dimension than just pure diagnosis.

Mark Massaro: Fantastic. Yes. I figured there were multiple clinical questions, so that's great. And yes, I look forward to joining on December 15. All right. I also wanted to ask, Jeff, maybe this is for you. Are you still planning to achieve adjusted EBITDA positive at an $80 million annual revenue run rate?

Jeffrey Black: Yes. Mark, that hasn't changed. And again, what we reviewed with you, I think, last quarter was at $80 million and around a 60% gross margin, we should be right at breakeven on an adjusted EBITDA basis. And we still believe that's the case.

Mark Massaro: Okay. And then I know you got the question about PAMA. I recognize that the generic codes could come down just a little bit. And I recognize it's early, but I'm curious if with the modest PAMA impact, you still think you're on track to grow ASPs next year. I'm just wondering if you could walk me through some of the puts and takes on that. I recognize there's some opportunity on -- with commercial payers as well. So I'm just curious an early view on that.

John Aballi: Yes. I think it's absolutely an important question. We've talked at length, I guess, maybe more coincidentally, even last year at this time, we've talked about some of the impact, headwinds due to client bill and the Northwell customer that we lost last year and the impact to ASP there. So we've had headwinds, Mark, over time. And we've still been able to overcome them through our strategies. I feel like our market access team is stronger than ever. I feel like our revenue cycle team is stronger than ever. The way that we approach things are constantly learning, constantly challenging our underlying assumptions and working to get more efficient and effective in everything we do.

And I think the revenue cycle operations that we have are -- they're really incredible relative to where we were 4 years ago. So I have a lot of confidence that given we've moved our ASP up north of 70% in the last 4 years that despite having some smaller headwinds on some of the generic codes, we will still be able to improve our ASP. And that may come through additional relevant markers that we're working on in our pipeline. That may come through continual improvement from a revenue cycle standpoint. But I also think our market access team is doing a fantastic job, and we'll have to see kind of that impact over time.

Mark Massaro: And maybe just a clarification question. You recognized $800,000 in prior period collections. Jeff, do you think there's an opportunity to continue along that path? Or do you think that's not a likely scenario?

Jeffrey Black: No, Mark, we do -- as I think you know, it can be lumpy. A quarter ago, it was over $1 million, but it's tracking on a very nice trajectory. It's going to end up more than the -- greater than 360-day collections will end up more than double what it was last year. So we've got really good momentum. We're starting to optimize, as John said, with technologies and better education and better people to continue to enhance the appeals process, and that's both clearing backlogs and also just getting better at optimizing ASP. So we think there's continued opportunity there for sure.

Operator: And our next question comes from Mayank Mamtani of B. Riley.

Amine Chaherli: This is Amine Chaherli on for Mayank. I just wanted to ask how -- I guess, how did September and October exit and kind of what you're seeing quarter-to-date in 4Q?

John Aballi: Yes. Thanks for joining the call. September and October were fantastic months for us. October was, I believe, volume-wise, our third highest month in the last couple of years. ASP-wise, we continue to have progress, and we had very nice progress with our Pharma Services. So from Exagen operations standpoint, fantastic. Tough to complain about any of those areas. We also hit major milestones in developing our myositis platform. We finished -- in October, we finished some of the analytical validation work and then the clinical validation wrapped up towards the end of the month as well.

So from a prioritization standpoint, everything we're seeking to do or have sought to do in 2026 is we're executing in line with those expectations. So very nice in that regard.

Amine Chaherli: I guess piggybacking on the Pharma Services comment, does Argenx's recent Phase III data in IMNM kind of -- does that kind of change your myositis launch expectations or any Pharma Services interest?

John Aballi: So very happy for them. I think we also expect more behind Argenx. But from our standpoint, we think it does change just anytime you have drugs coming into a space that previously didn't have as strong medical solutions there, it's a positive. You're going to have more people out in the field talking about the disease. Clinicians are going to be more interested in finding these patients because now there's a practical way to address their condition. And so we think it's a positive for the space. We think it's a positive thing for the patients and look forward to their success and hopefully being a part of it through our solution as well.

Amine Chaherli: We hope so, too. Just maybe a final question on the in-period ASP against the $451 kind of trailing 12 months. And then I guess, like how much did the aged claim connections kind of contribute in 3Q versus that $2.3 million in first half?

Jeffrey Black: Yes, it's a great question. So just to put it in perspective, so the trailing 12-month ASP at $451 was roughly equal to where we ended up in period in Q3. But I think you raised an important question, and that is, if you take a look at we did about $1.3 million in excess cash collections over 360 days in Q2. We did $800,000 in Q3. And like I said, that can be very variable from quarter-to-quarter. But to put that in perspective, that was a $0.5 million difference, if we would had collected at that same level in Q3, it would have had almost a $14 impact on ASP.

So you can see the opportunity and the impact it can have on a quarter-to-quarter basis.

Operator: [Operator Instructions] And our next question comes from Matthew Parisi of KeyBanc Capital Markets.

Matthew Parisi: This is Matthew Parisi on for Paul Knight at KeyBanc Capital Markets. Congrats on the great quarter. You previously called out that ACR is now advocating for the AVISE CTD test. I'm just wondering if you could talk to the impact that you're seeing as a result of advocacy.

John Aballi: Yes. Matthew, so I was just at ACR, as I mentioned, part of the agenda that I accomplished there was meeting with a few of those physicians on, if you recall, the CORC Committee, the Committee on Rheumatologic Care. That is one group or one entity within ACR that has been willing to advocate on our behalf directly into payers. They continue to have conversations on a regular basis with multiple payers on our behalf, advocating for broader access to high-value -- clinically high-value testing. And we continue to talk to them about some of our offerings in the pipeline and how we need likely a more robust solution than individual advocacy.

But the interesting thing here is while they continue to talk to various medical directors, they're also looking at regulators. And that's a slightly different angle than we've had in the past. Especially as it relates to Medicare Advantage populations, Medicaid Advantage populations where we've consistently won ALJ hearings. And so a great partnership. It continues to strengthen. Many of the members of those committees have 2-year rotations. And so it's important for us to have a really good feel for who's in the wings, if you will, and who's likely to come into that committee over time, and we continue to strengthen our partnership there. So grateful for it and like the progress we're making.

Matthew Parisi: That's great to hear. And then you expanded both the sales force and territories in the last 12 months. And I'm just wondering if we should expect further expansions in 2027.

John Aballi: Yes. Great question. I'll be able to give more details on it likely in Q1. As we launch myositis, I think I referenced that the initial launch is going to be directed straight into the rheumatology channel, consistent with the demand that we see in the market and where we think we'll have the most success initially. That said, there may be opportunities to move into interstitial lung disease. One of the primary questions there is, is it autoimmune-related interstitial lung disease? And one of the ways of resolving that is through or in part myositis evaluation. We think the connective tissue disease offering that we have has applicability there, too.

But depending on how our launch looks and what feedback we're getting and how pulmonologists start to receive that information, I think it will help us frame our expansion plans for 2027. And as I mentioned, I do try to travel quite a bit and get into the field. This quarter was no exception. I actually was in Louisiana visiting a pulmonology group. I spoke with a few pulmonologists recently virtually as well. There's a strong need for this type of offering in the market. So that will be informed at the start of '27.

Matthew Parisi: That's really great to hear, and I appreciate the insight. And if I could just ask one more, if there's been any kind of further update regarding the LCD for AVISE CTD.

John Aballi: Yes. Great question. Thanks for keeping that topic going. It's very relevant for our organization. I think also just given the lack of autoimmune LCDs that are out there, relevant for the industry. From our perspective, no update, no change. We meet quarterly with the MolDX team and actually have a meeting here later this quarter, mostly just to get the systematic review in front of them and to educate them on how that was published and how the study was conducted. I just want to make sure that we answer any questions and again, continue to foster that relationship given what we have in our pipeline. But as we sit today, no update.

And the way this process goes, you really don't find out until you find out. So still in waiting.

Matthew Parisi: Congrats on the quarter, and I look forward to the December 15 meeting.

Operator: I show no further questions at this time. I'd like to turn it back to John Aballi for closing remarks.

John Aballi: Great. And thank you all so much. I really appreciate everyone joining the call today. Q3 was emblematic of our strategy in general. We continue to grow revenue faster than costs. Our sales productivity advanced, ASP improved, and we reached meaningful milestones on our pipeline. I'm very pleased with where we're sitting today. What stood out to me this quarter was the confidence showing in Exagen from multiple directions, from the rheumatology community, which put our science on the podium at ACR, from the institutional investors who chose to [indiscernible]. I'm really incredibly proud of our team. The talent and character across Exagen continues to transform this organization into the preeminent diagnostic company serving the autoimmune community.

In the next few months with our myositis launch and with the Exagen Forward webcast on December 15, we'll give you a much clearer picture of the platform we're building and the scale we believe we can achieve. Again, just appreciate the support of all of our stakeholders and look forward to continuing to update you on our progress. Thanks so much.

Operator: This concludes today's conference. Thank you for participating, and you may now disconnect.

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. Parts of this article were created using Large Language Models (LLMs) based on The Motley Fool's insights and investing approach. It has been reviewed by our AI quality control systems. Since LLMs cannot (currently) own stocks, it has no positions in any of the stocks mentioned. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.