Q2 2023 Exagen Inc Earnings Call
Greetings and welcome to the extra Jenne, Inc. Second quarter 2023 earnings call. At this time, all participants are in a listen only mode.
Question and answer session will follow the formal presentation, if anyone should require operator assistance during the call. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded at this time I would like to hand, the call over to Ryan Douglas of Investor Relations. Thank you you may begin.
Good morning, and thank you for joining US earlier today <unk> released financial results for the quarter ended June 30th 2023.
The release is currently available on the company's website at Www Dot <unk> Dot com.
China, Barley, President and Chief Executive Officer, Kamala Daly, Chief Financial Officer will host this morning'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 guidance for the quarter potential profitability, our current and future Prada.
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 Burleson description of risks and uncertainties associated with our business. Please see our filings with the Securities and Exchange Commission, including our Form 10-K for the year ended December 31, 2022, and any subsequent filings.
Information provided in this conference call speaks only to the library cast today August seven 2023.
<unk> 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 of barley, President and CEO of estrogen.
Thanks, Ryan and thank you to everyone joining the call today I'll discuss our second quarter results and provide updates on our revenue cycle initiatives, including our path to profitability.
And then turn over the call to come off our CFO for details on our financial performance.
Our strategy to prioritize and focus on advise CTD has resulted in another strong quarter with over 37000 advise CTD test delivered and total revenues of $14 1 million.
As a reminder, we've made substantial changes to the structure and size of our sales team and we believe that our Q2 performance is testament to the fact that we continue to serve the rheumatology community and a highly effective manner.
I'm encouraged to see consecutive quarterly growth in volume as we make operational improvements to our business, but this also reinforces the strategic decisions. We made at the end of last year.
Actually we didn't have significant opportunity ahead, and we're really starting to get on track as a team it's exciting to see our progress reflected in the performance of the company this quarter.
Our revenue for the second quarter was reflective of the strong testing demand and volume delivered in Q2, but also a result of improved cash collections from testing performed in prior quarters.
We continue to focus heavily on our revenue cycle operations and have made major strides in Q2 to improve our processes, which I'll detail shortly.
We expect to see incremental improvement in Asps as we move into early 2024, but we believe these early improvements in cash collections are a positive sign.
Overall, we're seeing positive momentum in our operations and our efforts to achieve profitability continued to progress.
One of the key metrics, where we saw improvement quarter over quarter with our trailing 12 month, ASP, which increased to $320 from 279.
The increase in Q2 was aided by timing of cash collections on claims from prior periods, which we don't necessarily expect to recur each quarter. However, this was nonetheless, a positive development reflected in the improvement in ASP.
In general we're beginning to trend in the right direction, but expect the bulk of our efforts to materialize into 2024.
As we conveyed in Q1, we held claims to give ourselves time to optimize our appeal process, including an effort to increase the overall volume quality and persistence of appeals.
To give some color on the extent of our efforts to date, we brought in new leadership to this area of our business. We've worked with a technical writer to revise all appeal letter sent to payers on denied claims.
We've restructured the appeals process with our internal team redefining roles and responsibilities for every person involved in the process.
We've worked with our clients to improve the clinical notes they draft on each patient to better communicate the rationale for ordering and utilizing advice. We've worked to improve the process for exchanging these progress notes with our team to lessen the burden on our customers staff.
We brought in other personnel to increase the outbound calls to insurance companies, allowing us to keep better track of our appeal status, we strengthened the documentation around test ordering and the list continues.
These efforts have been a substantial adjustment compared to what we were doing even six months ago, and we're still making progress to execute efficiently with these changes.
All of this requires communication and resetting of expectations with our customers in a manner, which minimizes disruption and reinforces the value they've seen with advice testing for the last 12 years.
We continue to focus on achieving a profitable business.
We refinanced our loan this quarter, which included a principal payment of $10 million.
Our changes to revenue cycle management increased our accounts receivable by $6 9 million.
Excluding these two items, our cash decreased $3 8 million in the second quarter.
We are making progress in all areas of the company to operate as a leaner more effective organization and the team at <unk> is striving to deliver the best service in the industry with a markedly improved cost structure.
Additionally, we continue to expect our annual R&D expenses to approach $6 million and therefore, our Q2 performance was aided by the timing of some of these expected expenses.
As an ancillary item. We recently reached an agreement in principle with the department of Justice to settle an investigation that was initiated in February of 2022.
This investigation was related to conduct that occurred in 2014 and 2015.
We agreed in principle to make a settlement payment with associated fees of approximately $700000 and admitted to certain facts, although we did not concede liability.
The Doj will not require an outside compliance monitor to oversee our operations going forward.
The definitive settlement agreement is subject to further negotiations, but ultimately we look forward to putting this issue behind us we can continue to focus on operating the business.
In closing, it's rewarding to see another quarter, where our organizational performance as training in the right direction.
This is testament to the hard work and the oxygen team and the value of advice testing provides the rheumatology community.
I'm very encouraged by our recent performance knowing that we continue to improve in many areas and have yet to see the results from several ongoing efforts.
Before I hand, the call over to come all I'd like to note that at our annual meeting this past quarter, Jim told US retired as a member of the X gene Board of directors.
Jim had been a director on the board for nine years, and a vital member of the team.
I want to thank Jim for his guidance and support to me personally.
Jim has been a strong supportive of that extra gen throughout much of the company's history, and we wish him well.
Additionally, I'd like to extend a warm welcome to Paul Kim the newest member of our Board Paul.
Paul joins us with Vas business and leadership experience and currently serves as the CFO of Fortinet genetics, where he played a pivotal role in growing the company into a successful and profitable business I will now turn the call over to come off.
Thank you John and good morning, everyone.
For Q2, 2023 total revenues were $14 1 million compared with $11 $2 million in Q1 of 2023 and $7 6 million in the second quarter of 2022.
As a reminder for year over year comparisons in 2022 payments from Medicare work delayed from Q2 to Q3.
Sequential quarter growth in revenue was driven primarily by an increase in ASP.
The increase in ASP was a result of improved collections from prior quarters dating back to Q1 2022, mostly due to greater than expected cash collections testing.
Testing volume for buying CTD were record 37749.
Other testing revenue was $1 6 million in the second quarter of 2023, compared with $1 4 million in the first quarter of 2023, and $1 7 million in the second quarter of 2022.
Cost of revenue were $5 $8 million in Q2, resulting in a total gross margin of 58, 7% compared to 47, 2% in Q1 of 2023 and 21% in the second quarter of 2022.
The increase in gross margin percentage from the first quarter was primarily due to an increase in crude oil rate from improved collections and prior periods.
Operating expenses were $19 1 million in the second quarter 2023, compared with $21 7 million in the second quarter of 2022, primarily driven by a decrease in employee related expenses due to the reduction in force in early December 2022.
For the second quarter of 2023, our net loss was $5 million compared with a net loss of $7 7 million for the first quarter of 2023, and $14 7 million for the second quarter of 2022.
As a reminder, we refinance our debt on April 28, which included a principal prepayment of $10 million.
The refinance with our existing lender and the current balance of the loan is $18 1 million.
The terms of the agreement include a floating interest rate, which is the greater of timber fat or prime plus 2% refining the interest only period to three years, the implementation of a new management plan and improve covenants.
Cash and cash equivalents as of June 32023 were approximately $31 5 million.
As John mentioned with our revenue cycle management strategy. The claims held in Q1 and Q2 contributed to the air bounds increasing to $16 2 million, which is offset by a lower cash balance.
Overall, the company is performing better operationally than we were even a few quarters ago and we're seeing the results in our key metrics.
As you heard from John excluding the loan principal repayment and changes in.
This resulted in a decrease in our cash balance of $3 8 million in the second quarter.
I'm very proud of the team and the changes we have implemented as we're off to a great start and our path to profitability.
Our cost of revenue or lower our operations are much more fashion and all departments have goals at a line across the organization and continue to drive improved operation.
Not to get lost in all the numbers, but just as important is the culture of the organization I. Originally joined the company almost 10 years ago and the culture is stronger than I've ever seen which is reinforced by a decrease in our trailing 12 month voluntary turnover rate.
The rate has decreased 36% from the end of 2022 to June 30.
Turning to guidance some of the changes in revenue cycle management that John mentioned, we will have an impact on future quarters. We're modeling a softening in volume in Q3 due to changes in revenue cycle optimization, but are anticipating the lower volume to begin to be offset by higher asps in 2020.
For.
For Q3, we are providing revenue guidance in the range of 10 to $10 5 million.
We will now open the call for questions.
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Please while we poll for your questions.
Our first questions come from the line of Dan Brennan.
And then with TV Cowen. Please proceed with your question.
Great. Thanks, Thanks for taking the questions congrats on the quarter.
Maybe just a couple maybe just in terms of the benefit this quarter that you had from past collections can you just quantify kind of what that was.
And then are you expecting any more benefit in the back half of the year.
Yes.
Hi, Dan Thanks for the question.
Yes.
By the prior period's Lockdowns that were received in Q2 of 'twenty three but mainly took place in the prior year. It was just under $2 million.
It is a very positive impact.
But I view it as one time, it's very tough to.
Ill quantify if this is going to occur again, so does this come from.
Mainly 2022, and sometimes there are payments that take up take you received.
What do you anticipate it to be as large as what we just saw.
2002 and future quarters.
Okay.
Great and then on the burn in the quarter. So do I understand that is I guess when you net out.
Some of the changes that you had there it sounds like Youre basically, saying you are underlying cash burn was $3 8 million. If that's correct then what level of burden it with which is a nice step down obviously from what you guys have been having.
What level of burn should we be expecting in the back half of the year and what the impact on the accounts receivables.
That you highlighted is that kind of stopped so should we see that kind of normalize going forward.
Great. Good morning, Dan. This is John so here's kind of the way, we think about the cash burn in general.
I can open up the question a little bit more broadly so we burned almost 40 million of cash or an average of just over $9 million of cash per quarter in 2022.
So far here in 2023 looking at the change in cash as you mentioned accounting for the <unk> as well as our debt principal payment we burned approximately 11 million operating the company. These past two quarters and that was driven largely by some of the improvements we made just a recap.
The reduction in force a 42 individuals at the end of Q4 that was a substantial cost savings we've completed the evaluation of our R&D pipeline.
We've set up criteria to pursue what we consider a real business opportunities.
These also strive to ensure financial success of the projects, we're working to develop well.
Work to reduce the cost of our internal operations and we've seen a reduction in our Cogs as well you see that with.
Similar overall Cogs expense you had an increase in volume year over year, we've created an awareness and accountability at the company level from a budgeting standpoint, that's been one of the key things artwork to implement as transparency into the expenses that were being that we're incurring as a business.
All the way throughout the organization, especially if the department head level and then everyone has generally bought into our efforts to reduce costs I mean, mark spoke to it a little bit about the culture.
It's certainly a team effort, but it has embraced that way. So we essentially health claims in the first part of the year, because we have the cash to do so and because we are working to improve our revenue cycle operations I gave details on prior quarters, but this was a huge undertaking and a significant opportunity for US we began releasing these claims at the end of the quarter and this will obviously.
Slow the pace of cash burn going forward is how we look at it I'll, let small maybe speak a little bit more on some of the specifics, but I wanted to give you. Our view here. We're ahead of schedule with the strategy. We've put in place very positive from our standpoint. The success, we're having in reducing the cash use for operations as it's come down.
Pretty substantially dramatic changes relative to where we were really even six months ago.
RBR balances increase as we said about $10 million here in 2023 gives a sense of the cash we expect to collect over the next several months.
And that should be weighed in as well when considering our cash balance, but ultimately we're always looking.
For ways to improve the organization, so I'll, let maybe speak a little bit to that.
Cash burn for future quarters, and how we are thinking about that too.
Yeah. Thanks, John .
So as John mentioned air.
<unk> was one of the items that we have to exclude to.
I guess the number three.
Part of the reason why it increased from.
<unk> nine for Q2.
You went into Q2.
We're calling all clients in Q2, we started midway through the quarter Q1.
And so in regards to <unk>.
Earn going forward.
We're providing guidance on a quarterly basis, because sometimes there are quarters like we just had in Q2, where we have very positive impact from that just under 2 million.
Additional collections, we received from prior period into Q2, and it's tough to see the timing of some of these items that had a very positive impact on our gross margins.
We saw those increased 58, 7%.
But again very tough to project the timing of that on the previous call. What I had mentioned on our Q1 earnings.
$7 million cash burn in Q1, and we will see it gradually come down quarter. After quarter now again Q2 was very slight.
Thanks for the additional actions.
But that was as projected and we.
Did say that we would expect that to come.
Come down slightly each quarter that have not changed that is still what we believe we just have really good Q2, but we believe that we're going to see those year over year improvements, but again, starting at $7 million.
In Q1 and coming down from there.
Great. Thank you and maybe just one last one the <unk> volume guidance. Obviously you guys are on a journey here over the next couple of years, so not the goal.
Lawson incremental but why would the volume go lower in <unk> given all the positive changes you guys are putting in place I know you've talked about.
On the last call maybe some of the near term could have some disruptions from the sales force realignment and then eventually you'll begin to see the positive benefit but is that the reason why youre guiding the sequentially lower volumes.
Certainly.
So to give a little extra color there Dan in Q1 Q2.
We expected some impact from the reduction to the sales force I think we've detailed.
That extensively at the 42 individuals.
That were caught up in the reduction at the end of December .
Third established sales based and so we expect some impact of volume from reducing our U S based footprint by about 30% or so.
That was factored into our Q1 and Q2 guidance it didn't happen.
And to be totally Frank and we see now multiple quarters that even with that.
A more streamlined and condensed salesforce, we're able to deliver.
Actually record growth here. So that's been very pleasant, what we're factoring in in Q3 or some changes to our revenue cycle operations, which are being <unk>.
Translated to the customer so just to give you a sense. One example, we implemented a new billing policy this past quarter towards the end of this past quarter, which increases the cost sharing proportion for patients on our testing.
The price of the advice hasn't really hasnt changed in about a decade, and so we're making those changes as we see it.
Telegraphed pretty clearly as we pursue profitable more profitable.
So these changes will improve the profitability of our portfolio, we anticipate but could have some near term impact of volume.
And so again the magnitude and timing are always challenging to know ahead of time, but that's really what we factored into our Q3 guidance.
Great. Thank you very much I'll get back in the queue.
Thank you. Our next question is coming from the line of Mark Massaro with <unk>. Please proceed with your question.
Hey, guys. Thanks, so much congrats on the strong revenue growth and reduction in cash burn.
One for you John .
You've outlined a lot of changes to revenue cycle management, and certainly I appreciate a lot of the color that you've provided.
It would be interesting to get your sense for like what inning do you think we are in with the changes to revenue cycle management I'm, just trying to I'm trying to determine how much.
How much continued improvement do you think we could see as we think about the business into 2024 and beyond.
Great. Good morning, Marc Thanks for joining the call. Thanks for the question.
What inning, we're in I love It I love the baseball analogy, especially given the season.
So from my standpoint, I think we're early innings and the reason I say that is because we put a lot of work in terms of prepping.
Yes, that's what I considered much ahead in the first half of 2023 to be a lot of game planning there.
And.
We're starting to put some of those efforts into play really right. So the whole point of holding claims just to give context to those comments I will point of holding claims.
That we didnt trigger timely filing deadlines for our appeals process and the core.
Kind of a core tenet to our improvement and revenue cycle operations is improving the way we do appeal I think thats really where the rubber meets the road in terms of.
Impact for us longer term and so I wanted to postpone as long as possible really.
The timely filing deadlines that would be associated with claim denials and so as we are starting to release those I expect.
For by the claims that we are going to be denied on I expect to start seeing those come in sometime around September ish.
To October and then that will be our first round of appeals I've tried to detail. This in the past, but just to refresh everyone. I think that we're going to have the opportunity to appeal somewhere around three times that third level appeal.
Associated with an external review by a specialist and that's where that's where we think.
Really the value of the clinical data, we've assembled and the value proposition will resonate most with that review or so.
From our standpoint.
So it's been tough to nail down exact timing, but what we've tried to maintain consistency in communicating is sometime towards the end of this year and really into 2024, our growth will be a combination of both volume and ASP growth or revenue growth that is but it will be largely driven by ASP growth and I think that thats.
Really the opportunity for the organization again, I think thats the most sensitive lever we have to.
And growing this organization, we have substantial volume we've shown we can continue to grow that volume with the current sales footprint and we just need to pursue I think more profitable business from our standpoint.
I've also detailed the list price.
<unk> is $1650 in our Medicare rate for advise CTD is 1067, you see our quarterly asps within.
Within the 330 range this quarter, our trailing 12 months is about $3 20. So.
We're moving along in the right direction.
They'll have some quarter to quarter gyrations back.
Generally so far I like the trajectory, we're moving in and I think we need to get to that $5 $600 range on an ASP level to really have some.
That patch form the organization. So hopefully that gives you some context, the timing and how we're thinking about it.
Okay great.
Maybe one for come all tomorrow, if I strip out the nearly $2 million of one time payments.
Would've done at around $12 million.
In Q2, you're guiding to $10 two five at the midpoint in Q3.
How much of that sequential decrease would you think is related to the reduction in our the softening volumes in Q3 versus some of the.
Collections from prior payments and or other ASP dynamics.
Yes, Thanks for your question Mark.
So our ASP.
When you back out that approximately 2 million from prior periods collection.
Increasing.
We did see.
Sure.
That improved collections from prior periods does have an impact on current quarter Asps.
So we did have to adjust our accrual rate up for our task.
Performed in Q2, that's going to continue forward into Q3, so I do anticipate our ASP.
Two.
Continue that for Vince I was going to be higher than what we saw in Q1. So to answer your question, it's primarily going to be churn from a softening in volume and not being driven by the <unk>.
A&P.
Hasnt occurred.
Yes, and just to confirm I know Dan asked you on the prior question.
Sometimes obviously there is some seasonality in Q3.
Now in prior years, there had been some quarters where volumes.
Step down sequentially.
But can you just maybe walk me through.
Maybe how much of it is seasonality versus the.
The reduction in force versus other factors.
Certainly mark.
I'll chime in here.
In terms of seasonality here and we had July 4th on a Tuesday really ate away a good portion of the first week of July and we're basically one month in Q3, right. So where are we sitting here today is.
The quarter started off soft it's a mix between the holiday.
The holiday.
Impact that we believe we're also actually seeing that our customer base, a decent number of vacations I know ive seen.
I've seen this with some of the airline reporting as well international travels.
Especially with some of our key positions we've had them go on a fairly extended international trips. We've conducted some of this research ourselves.
Surveyed some of our customers.
From our standpoint, I have a lot of confidence that our team has executed the initial transition from our sales force restructuring standpoint, very well and I think.
I think we are a leaner organization, but we are delivering a very high level of service and we're able to serve our key customers extremely well. So I think yeah. How much is related to the reduction in force I don't believe much.
I believe the impact here is that makes a seasonality along with <unk>.
Some of our transition on a billing policy side in pursuit of more profitable business as I mentioned.
<unk> some of the patient cost sharing you changed some of the prices of your task.
And.
Well, while we don't believe it will impact the bulk of our business. It will it will impact a small amount. So that's kind of how we think about that.
Okay. That's it for me thanks for the questions.
Thanks.
Thank you. Our next question comes from the line of Andrew <unk> with William Blair. Please proceed with your questions.
Hey, guys. This is Buffalo online for Andrew.
Maybe a little bit more about the sales productivity, which I know you touched on in past questions, but.
Maybe more so how should we expect that going forward is there really any impact that you still think might linger in the third and fourth quarters from a reduction in territory and people and.
How exactly are you tracking those people maybe decides volume per rep.
Yeah.
Hey, Justin good morning, Thanks for joining the call. Thanks for the question.
So I can speak to this from a qualitative standpoint really to you in on some of the things that we look at in terms of performance as an organization. We take a look at orders per physician, we take a look at our physician base in Q2.
Yes.
Had a growth in our physician base, we've had a growth in our.
Higher ordering physicians.
We had overall outsize performance really across the board for all of our key metrics.
So from that standpoint, when we when we take a look at whether it be driving new business, where it would be further penetration within existing business I think through the app. The rep transition we've done a phenomenal job the team has done a phenomenal job and executing well.
And so I think that we're very strong in that regard our reputation our brand within the rheumatology community.
<unk> is extremely strong and the transition has had less much less of an impact than we originally anticipated to be completely Frank so.
From that standpoint, I think where we are right on track really as we get into Q3 as I've as I've tried to detail.
Slightly different scenario right youre changing expectations with our customer base and when the price of our test Hasnt changed for 10 years.
<unk> expectation.
That's out there and change management is always challenging I think especially when it comes to pricing.
And especially when it comes to physician behavior. So our team has adapted this leave.
The company has a history of launching.
And expanding the product portfolio and so in terms of educating the physician base I think we're very good at it we've prepared extremely well we've generated quite a bit of new collateral that's gone out really to aid in explaining the change in the y to the physician.
We've developed quite a bit of patient support material as well and then we have a very compassionate team internally. That's that's been educated as to how to communicate these changes.
And how to articulate them to patients as well as clinician. So I think we've done what we can to prepare.
And I've seen it firsthand I was in the field actually in Houston and St. Louis.
Over the last couple of weeks specifically for this reason working too.
Conversations with some of our key clinicians understand what the challenges are these changes mean for them in their practice and the majority of.
This is it over I think it was 17 or 18 different clinicians over a couple of week period.
And.
It was well received I mean once you once you explain why I think it was very positive there are some use cases that.
We will likely fall off better more price sensitive and so that's been taken into account into our guide, but from a sales rep standpoint, and from a preparation standpoint as an organization I think.
I think we're right, where we want to be.
Handling and as best we can.
Got it.
In the past you've also talked about opportunities with large academic institutions. Just wondering how you guys are tracking there.
In terms of ordering base trends.
Great question so.
We don't.
Pulled this out as an individual metric to report on but I can give you a few highlights we continued to do well with large academic institutions.
I think we are strongest in the community based.
Practices.
Rheumatologists have kind of different pressures if you will there.
Trying to operate a more effective business on their own and they're seeing upwards of 20 patients per day. So time is of the essence in that context in the academic setting or maybe even in the large institution setting.
There's typically a combination of research demands along with clinical demands and so there may be some more time.
For a discussion, but also maybe less patient flow and they tend to see some of the more.
Severe patient cases, right once you get referred into some of the academic institutions Youre disease.
Likely progressed you'd likely filter through some of the community based practices as well, but we've had over the first half of this year. We had some significant wins, we have had a major system in San Diego actually take on are our product and where.
We signed that.
Contract with them.
To offer the advise tests throughout their entire system and then additionally.
<unk> had northwestern as well that's a new contract for us major academic institution that we've worked with.
That was a multi year effort to get that.
That partnership established and we're launching within that system here in Q3. So I think we continue to do well I think we serve.
The client Bill if you will.
Customer very well and we have a very strong value proposition, we save the system money and so for those systems, which are integrated within themselves and maintain a cost share component. It's a very.
Attractive value proposition not to mention the clinical benefit of the test. So we continue to do well on both fronts. We have a team that's focused on this area.
Team of individuals that their sole responsibility is to take a look at some of these large practices, there's quite a bit of bureaucracy. So you have to have the skill set you have to have the experience to work through these institutions and so we have a strong team that continues to do so and we've seen some of those improvements. We just don't telegraph all of them on a regular basis or Peel. This apart.
Al.
Mostly because I think when it comes down to it what really matters is the performance of the organization as a whole and within the numbers and so with Q people into the trailing 12 month ASP.
We've taken a look at overall revenue and then the cost per revenue and so we think all of our efforts will culminate and improvements there and subsequently helped us achieve a profitable organization.
Got it good to see progress going on there and just the last small one for us any update on the advisors. This LCD.
LCD mid last July .
Yes.
Sure.
So from just to level set everyone as well on the call.
We obtain a proprietary PLE code for the advised lupus testing and it was granted in April of 2022, I went through the pricing.
Procedure.
Past 12 months or so and <unk>.
Pricing for advisors. This was finalized in January of this year and then we've maintained coverage as well as payment for 2022 and 2023 claims.
Throughout that process.
As part of this Medicare had asked us to submit for and apply for an LCD. We did so in September of last year.
And.
We got acknowledgement at the time that it was a balanced submission and we are waiting for the next contractors Advisory Committee meeting CAC meeting to understand when a draft LCD will be.
We will be published at that point in time, it'll be approximately about a year before any coverage document would be finalized until the comments would be welcome throughout that approach, but for now there's no statutory requirement for timelines and we're just waiting on our local Mac Thats meridian to.
To hold this meeting and to push the ball forward. So for now no additional updates we have a great working relationship with the meridian team and to date, they've given us no indication as to when that meeting will occur. So we remain in the queue and exactly where we were.
Almost a year ago at this time.
Great. Thank you Tim.
Okay.
Thank you. Our next question is comes from the line of Kyle <unk> with Canaccord. Please proceed with your questions.
Yes, Hey, guys. Thanks for taking the questions and congrats on a great quarter.
I'll take a stab at something here. So ACO convergence is coming up in early mid November or so the fourth quarter. Aside from these RCM changes does this is like a relatively solid <unk> guidance at least on the surface reflect any kind of.
Air Pocket, I guess, among docs, leading up to ACR I mean in the past ACR actually impacted the fourth quarter, but I just want to kind of ask that question around seasonality.
Seasonality factors that we should be considering in the second half of the year.
Certainly thanks call for joining the call.
And maybe I can share a little bit regarding guidance how were thinking about it.
The ACR direct factor I think in general just to directly answer your question in general.
Yes, it's part of at ACR, certainly pools as an annual meeting for the Rheumatology community. It pulls most of the rheumatology community out of the out of their practice for approximately about a week. So you lose <unk> or 13th.
Patient flow productivity through.
Any given quarter and it's occurring I believe in September ish. This year, it's in San Diego actually local to US. So we're excited for that meeting its productive meeting, where we certainly get to engage with our customers.
In terms of guidance there wasn't.
Necessarily one specific driving factor in the guidance overall, we're seeing very strong progress year to date in executing against our strategy.
And I am very encouraged by the results we're seeing this year.
That's coming across we continue to change significant aspects of the business and these changes can contribute to either a lack of visibility in the magnitude or timing or or really both in terms of the ultimate impact of the business. So we've been consistently communicating that there'll be some impact to our performance as we pursue more profitable business and it's it's just <unk>.
<unk> to know the exact timing and extent, obviously when you make a change to the billing policy and you start to increase some of the cost share component related to the patient. We think that that is going to be a driving factor for some near term impact and that was really what we took into account when making this guidance as I mentioned, we do still have while we.
Believe it has an outsized impact from vacations of physicians and.
But it's tough to exactly on proportionality, there and quantify the magnitude of impact we think we've done the best job, we can with the information we have.
Yeah, Okay that was great. Thanks for that John .
And then on command gross margins almost 60% getting flashbacks to the Janssen agreement days with 100% margin how should we think about the gross margins going forward I mean, obviously like tied to revenue.
That's a good thing in the third quarter, and I guess fourth quarter clearly margin should decline from here, but I mean, what's a good way to think about this.
The high Fifty's as good but should we expect to close at these or something like that going forward.
Yes, thanks for the question Kyle.
So in 2022, our gross margin percent was 47% year to date through the first two quarters of 2023, we're at 54% now keep in mind that $2 million of rapidly 2 million that we've been talking about prior period collections.
That does have an impact.
The gross margin.
A lot of that occurred in 2022, so if you back that out that.
That's about a 7% impact on year to date gross margin. So I'm very pleased with how the <unk> has been performing as John has touched on the company have been very focused on our path to profitability and just operating agile and lean organization that is <unk>.
Across the entire company, but it is definitely sure in the lab and we're seeing a lot of improvements there and they're doing a fantastic job of focusing on driving that gross margin percentage.
Now we spoke about.
The goal of achieving 61st Fat <expletive> organization, we're trending in the right direction and I feel confident that we're going to be also achieved 60% now in terms of trying to guide to that this year, we haven't guided on gross margin in the past.
But I think that tells you we shouldnt be seeing improvement.
Order over quarter from <unk>.
From how we're operating as an organization seasonality has always been impactful.
The positive impact as each quarter goes on because of the deductibles reset at the start of the year. So we should see higher gross margins as the year goes on but like I said, we're trending in the right direction and as a company. Our goal is to achieve the target of 60 versus out.
Okay. Thanks, and then I know John is kind of early to talk about.
The 24 strategic priorities, but as you evaluate this path to profitability are you are you guys, hoping to increase the salesforce in the territory footprints, maybe like early next year I guess could you just kind of walk through your thoughts on the expansion in the next 12 months to kind of drive that market penetration and the topline growth and everything.
Great. Thanks for the opportunity to go into detail here. So when we did a right sizing of the sales force in December of this past year, our logic or rationale at the time was to take a look at each of our territories and.
On a per territory basis to see which of them covered at least the cost of the sales rep, where we're breaking even for having a field based presence and that given territory that was the question. We tried to answer across the board and for 23 territories. The answer was no.
Actually a little bit more than that what we've done now is from.
From a footprint standpoint, but then also carries into an expansion strategy as we've taken a look at which territories.
We're supplementing.
At least the cost of the rapid we're maintaining about four to five of them right. Now that's the same number as at the start of the year and.
We are working to grow those territories that they at least cover the cost of the rep.
The idea here is it gives us an empirical approach to expansion where we can.
Really see if its the right territory because the right individual for.
For that area and it lets us change some of those variables.
In a more measured meaningful way.
But ultimately it also lets us.
Great visibility on the cash required the expense required to expand so right now it's about $1 million a year that we're supplementing.
The territory.
When you weigh it against the cost of the Rep, and so thats going to be our approach going forward as we have our <unk> expansion territories or growth territory that overtime, well flip over into a profitable state then we will add a new growth territory and that way it will it'll kind of be self fulfilling and cyclical in that manner.
So that's our approach whether that occurs in Q1, I hope so to be honest with you.
But we have some.
We have some variables that are really to figure out there again is it the appropriate territory whats the potential relative to the business that we have there is it the right individual.
We have quite a few things to evaluate and there are constantly working with.
So as of right now we feel very comfortable with the 40 that we have.
We will see when when we have some sustained performance in some of those growth territories that flips them over to a profitable state and then at that point, we'll add we'll also be very clear in that communication.
Perfect that was great John I'll leave it there thanks, guys I appreciate the time.
Okay.
Thank you. Our next question comes from the line of Ross Osborne with Cantor Fitzgerald. Please proceed with your questions.
Good morning, Congrats on the quarter I just wanted for us would be curious to hear if there's any update on the pipeline with regard to step right is that if you can provide any more color on where you are in terms of talking to market. Thank you.
Sure Good morning Ross.
I got the first question. The second question was timing to market for us, but just to be clear.
Yes, that's correct. Thank you okay, great. Thanks for your clarification, so in terms of our R&D pipeline.
In terms of what's occurred over the last six months.
The key cornerstones when I joined the company, where the radar program, which was therapeutic selection in the context rheumatoid arthritis, along with fibromyalgia diagnostic assay and then.
Therapeutic response assays in the interferon space as well so at the time, we took a pretty detailed approach to this.
I'm, a big fan of setting up the criteria for success before conducting the valuation and so we put this criteria in place and we thought that if we can identify technologies that were had one proprietary in nature too.
Had an ability to demonstrate clinical utility that was we.
And we thought was realistic three had the ability to achieve value based pricing.
We believe that you have to have some uncertainty in your reimbursement before launching a product. So Medicare coverage was a fourth component here.
Also we wanted to develop products that meet customer needs existing customer needs. So that was another component and then lastly, really having fleshed out the guideline strategy I think having inclusion in guidelines or at least a pathway to getting there is incredibly important when you are.
When you're weighing whether or not to move forward with a given opportunity and so we put those in place as a way to evaluate the pipeline ultimately resulted in discontinuing quite a few of the projects that were in the existing pipeline, but we've rekindled some of those efforts in the context really owning the lupus patient journey, that's kind of how we are.
Were doing it internally and so we have a program ongoing now to take a look at both diagnostic as well as therapeutic monitoring or disease activity in lupus nephritis. So this is the indication where you have inflammatory flare.
In the context of lupus that related to the kidney.
Potentially life threatening very significant consequences for the patient.
Unfortunately as detected oftentimes late stage when the kidney is.
<unk> has progressed quite a bit in the call.
Context of that inflammatory state Theres also therapeutic options on the market that are available.
You have a couple of fronts. Some pharma companies that are been on the market for a little bit of time here. So we believe that's a pretty exciting.
We're pursuing we're also looking at lupus in general from a disease activity standpoint, right now, there's some clinical nomogram that exists, but they're extremely cumbersome very time consuming to execute or not done practically in the community setting and really understanding how the disease is progressing over time is essential to modulating therapy in this context so exciting.
And for us to develop something here and I think we have some great initial data showing we can do so and then there's a few other projects that we're working on with what Ive really committed to externally is talking about some of our pipeline products as we have meaningful developments not so much selling the the.
The future on the Com.
We're very excited about the potential for advise CTD and the ASP improvements that we believe will develop here over the next.
Several quarters and well into 2024 into 2025, so that's where a lot of our focus is and as Opportunistically. We have some meaningful data scientific breakthroughs if you will.
We will disclose those.
Right now I've said.
I think I'll make some more comments.
It's available externally once we have a clear path to commercialization within the 12 to 24 month timeline in right now.
Our current R&D pipeline.
Doesn't have projects, which fit that but that doesn't mean that the current projects can't.
Fall into that over time, I, just need to gain a level of certainty and.
Derisking some of the either whether it be technical performance of the assay or in the reimbursement side before commenting on them. So.
That kind of conservatism, we've taken in detailing our R&D pipeline.
Hopefully that helps us.
Thanks for the update congrats again on the quarter.
Thanks.
Thank you there are no further questions at this time I would now like to turn the floor back over to John <unk> for closing comments.
Q2 was another strong quarter, where we continue to execute on our objectives in pursuit of a profitable organization.
We're making great progress and I'm, especially proud of the <unk> team for navigating these changes effectively through this point.
Thank you for your interest in Nexgen, and we look forward to continuing to provide updates on our progress as we work to improve our organization. Thank you.
Thank you. This does conclude today's teleconference. We appreciate your participation you may disconnect. Your lines at this time enjoy the rest of your day.