XGN - NASDAQ

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" B. Riley Securities, Inc., Research Division

" Canaccord Genuity Corp., Research Division

" BTIG, LLC, Research Division

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" Craig-Hallum

" KeyBanc Capital Markets

" TD Cowen, Research Division

Good morning, ladies and gentlemen, and welcome to Exagen Inc. Q3 2025 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I will now hand you over to Ryan Douglas. Please go ahead, sir.

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

Good morning, everyone, and thank you for joining us. I'm pleased to report that Q3 was the strongest quarter in Exagen's history, driven by robust volume growth and continued execution across our commercial, scientific and operational teams. Compared to last year, year-to-date, we've grown revenue by 19%, comprised of 8% growth in testing volume and 9% growth in ASP. This synergistic impact is exactly how we anticipated our top line performance would evolve when we set our strategy a few years back. These numbers highlight the power of combining volume with reimbursement growth and what effect that can have on top line when both are moving in the same direction. Our team is energized by the opportunities we continue to see in both areas, which I'll break down further in a second. But first, let's start with our recent product launch. At the end of Q3, we successfully launched assays for the detection of anti-PAD4 antibodies, our second novel set of rheumatoid arthritis biomarkers this year. While we expect the revenue impact from PAD4 to be modest, it continues to differentiate our rheumatoid arthritis offering and demonstrates our ability to bring new markers to the clinic quickly and effectively. The feedback from clinicians has been encouraging, and we're seeing growing interest in how these markers can impact patient care. I personally saw some of this clinical interest at the American College of Rheumatology meeting in Chicago last week, where multiple physicians wanted to dive deeper into the science with our team and where we had a robust attendance at our conference presentation on these markers. We've also had several clinicians share firsthand experience with the testing, highlighting the clinical need for better biomarkers in this patient population, but also several examples where the anti-PAD4 markers were the only serological abnormalities in clinically ambiguous patients. This is highlighting the true value of the markers in the clinic. One specific example that was shared was when a patient had anti-PAD4 positivity as the only abnormality in their serological profile. And because of this was referred for x-rays where she had evidence of erosive changes. It's important to intensify treatment for these patients as anti-PAD4 antibodies also serve as a prognostic marker for highly erosive disease, but this pathology tends to respond better to treatment escalation. So hopefully, this patient is able to get their disease under control soon, and our biomarker testing led to the diagnosis and gave insight to guide the treatment in this patient. This is one of the many examples of our clinical utility these markers can bring and that we are hearing about from our customers. With the launch of these markers, we have now completed the development of one of the most sensitive serologic evaluations for rheumatoid arthritis available on the market today. I'm very proud of the work our team has done to deliver these tests to the clinic and in a field which hasn't historically seen a lot of biomarker innovation. We are setting a course to change that and better personalize care for these patients. To remind everyone of the impact our testing now has, conventional biomarker profiling for rheumatoid arthritis consists of rheumatoid factor and anti-CCP antibodies, which are positive in approximately 70% of clinically diagnosed RA patients. With the addition of RA33 antibody testing and our new assays for detection of anti-PAD4 antibodies, our serologic profiling will be positive in approximately 85% of patients, thereby capturing approximately half of the RA patient population, which would have historically been diagnosed as seronegative RA. Additionally, these patients, which are positive for RA33 antibodies are more likely to have milder disease, which tends to respond favorably to methotrexate. Patients positive for anti-PAD4 antibodies generally have more aggressive disease, but are likely to respond more favorably to treatment escalation. This level of precision in predicting the disease course and treatment response is exciting to bring to rheumatoid arthritis patients and it is just the start of what we are doing in this field. Lastly, and this is rare for biomarker innovation, these efforts require less than $3 million in investment, and we expect revenue payback in less than 24 months. We won't always be able to contribute to the clinic in such a valuable way with a relatively small investment and quick return, but we do believe that with our current commercial channel, we can innovate long term with decent returns on investment. Switching to AVISE CTD testing volume trajectory. Q3 volume was the highest we've ever recorded for a third quarter period. And notably, we did not see the typical quarterly slowdown. In fact, volume remained strong into October, which is a positive trend for Q4 and indicates to me that our team is back to growing the business after helping our customer base adapt to the billing changes we implemented a couple of years ago. Our expansion into new territories is also starting to pay off. We see meaningful contributions from these regions, and our per territory productivity remains strong. Of note, 2 of our recent expansion territories emerged as top-performing growth territories this past month, and we have others trending similarly. Total ordering physicians and orders per clinician continue to trend upward, and we're seeing increased engagement from both new and existing physicians. This is a testament to having the right team in place and the stability and focus we've built over the past 1.5 years. We currently operate with 45 sales territories, up from 42 at the end of Q3. Our focus remains on profitable growth, and we will continue adding territories where we see clear opportunity, strong physician engagement and can find the right talent. Now let's talk about ASP, which is top of mind for me. We've made significant progress over the past 2 years with our trailing 12-month ASP for CTD now at $441, a 9% increase year-over-year. However, it's important to acknowledge that we're not seeing the full second half ASP expansion I had anticipated. The new biomarker reimbursement, while accretive, has not ramped as quickly as I had hoped. We still believe there's a path to further ASP gains and our efforts around appeals, revenue cycle operations and payer education are showing incremental progress. But the reality is these gains are coming more gradually than I expected. Additionally, we lost a large high ASP direct bill account this quarter, which is weighing on our current ASP as we convert this business into a standard commercial insurance payer mix. Both of these items have temporarily slowed our trajectory. But as I've constantly conveyed throughout my time here, this is why I view it critical to gauge our success relative to a trailing 12-month measure, which does continue to climb. We continue to be very diligent with our revenue cycle operations and have a strong strategy employed to secure the higher reimbursement we ultimately expect, but you are seeing a somewhat muted ASP reflected in our top and bottom lines as we work through these efforts. Turning to our pharma and CRO business. We generated nearly $800,000 in revenue this quarter, bringing our year-to-date total to $1.2 million. Our order backlog now stands at $3.5 million and continues to grow. While this revenue stream can be lumpy, it's an important and expanding part of our business. We're encouraged by the momentum we're seeing in this area. As I mentioned, I was recently in Chicago attending the American College of Rheumatology Annual Conference, where we had a strong presence this year, highlighting new abstracts and deepening our interactions with clinicians. We submitted and had accepted 6 different abstracts covering the bulk of our pipeline efforts. One ultimately was chosen for a plenary talk and in general, we continue to showcase our company as an innovative presence within the rheumatology field. It was a highly successful meeting in this regard. Looking ahead, we remain on track to deliver $65 million to $70 million in revenue with the ability to be cash flow positive at the high end of our range, though the timing of sustained cash flow positivity may be pushed to 2026 as we continue to navigate the ASP challenges I just detailed. Generating cash remains a core near-term goal, and we're committed to achieving it in a disciplined, sustainable way. In closing, I want to thank our team for their dedication and execution and our partners and shareholders for their continued support. We continue to build something special at Exagen. And while the path is never perfectly linear, our progress is real and our opportunity remains significant. Thank you. And with that, I'll turn it over to Jeff for additional comments on the financials.

Thank you, John, and good morning, everyone. As John mentioned, we delivered another strong quarter, highlighted by our third consecutive quarter of volume growth, continued ASP expansion and a balance sheet that we expect secures our runway to positive free cash flow. Fourth quarter revenue of $17.2 million was our highest quarter in history, just beating out the second quarter and a nearly 40% increase over the third quarter of 2024. Even considering over $1 million in downside revenue adjustments in Q3 of last year, we still delivered over 25% revenue growth. And this is against seasonality headwinds we typically see in the third quarter, which we curtailed through growth in CTD test volume, up 15% from Q3 of last year and almost 2% sequentially. Year-to-date through the third quarter, we grew revenue 19% to roughly $50 million with trailing 12-month ASP up over 9% and volume up over 8%. As John mentioned, we're also seeing significant momentum in our Pharma Services business, which generated revenue of $780,000 in the third quarter. Year-to-date through Q3, we recognized $1.2 million in Pharma Services revenue versus about $100,000 in 2024. Our business development team has done a fabulous job of securing additional contracts and developing a strong pipeline that we expect will continue to grow. Today, we have up to $3.5 million under contract in pharma services, representing future potential revenue opportunity. The timing of deliverables and related revenue recognition are often lumpy from quarter-to-quarter, so we remain cautious to guide on specific timing of this revenue. Our trailing 12-month AVISE CTD ASP grew $37 year-over-year to $441 per test. The trailing 12-month number remains our best indicator of ASP traction due to the typical ebbs and flows of reimbursement in any one quarter. As John mentioned, we're behind expectations on our ASP acceleration, but we remain confident that we'll drive further expansion through revenue cycle management enhancements, commercial payer engagement and market access initiatives. These remain priorities for us and are core tenets to our success in driving reimbursement gains. As John also mentioned in the third quarter, our most significant ASP headwind was a loss from one of our higher volume, high ASP direct bill accounts. Importantly, we offset the revenue impact of this pullback with an overall increase in volume, which is a testament to our commercial team and ability to drive diversification of our physician base. As to the T cell and RA33 biomarkers we launched in January, we saw a moderate expansion in ASP and related accrual rate versus the second quarter, and we continue to expect over time to realize our long-term target. It's also important to note that while we launched our newest biomarker, PAD4, late in the third quarter and began billing for it, none of this volume was reflected in revenue. At the end of Q3, we had not established a payment history on this marker, so we did not record an accrual rate. We should see a moderate expansion in ASP in the fourth quarter for PAD4 as we establish an early payment history and related accrual rate. Gross margin in the third quarter was just over 58%, up about 260 bps compared to the third quarter of 2024. Excluding the impact of over $1 million in downside revenue adjustments in the third quarter of last year, gross margin in the quarter was down about 175 bps from just over 60% in 2024. Year-to-date, gross margin was just over 59% and up about 60 bps over the same period in 2024. Gross margin has been favorably impacted in 2025 by our continued ASP improvements even with an increase in COGS related to our new biomarkers. In fact, our per test AVISE CTD cost is running favorable to initial expectations, offsetting some of the ASP headwinds and allowing us to maintain our gross margin profile near that 60% level. We still see a path to the mid-60s over time as we remain focused on driving further ASP expansion and aggressively managing COGS. Operating expenses for the third quarter were $13.2 million, up from $11.6 million in Q3 of '24, and this increase was in part due to increased R&D spend for PAD4 and other pipeline initiatives as well as SG&A associated with our first sales territory expansion since John took over and another key commercial leadership addition to the team. We expect operating expenses to remain roughly at these levels for the next several quarters, and we'll continue to allocate resources responsibly as we've done in the past. At the same time, we remain focused on disciplined capital allocation to commercial, clinical and R&D initiatives that we believe have a high probability of driving accelerated long-term growth. From a balance sheet perspective, we have the flexibility to make the investments needed to support these initiatives and invest opportunistically as we see fit. But equally important, we have the ability to modulate spend down or up as needed, all with an eye toward preserving our path to positive free cash flow. Our net loss for the third quarter was $7 million compared to $5 million in the same period last year. But it's important to note that the $7 million loss in the most recent quarter includes about $3 million in noncash expenses related primarily to the fair value adjustments from our new debt facility with Perceptive, which we closed in May of this year. Our adjusted EBITDA loss in the third quarter is $1.9 million compared to $4 million in the third quarter of 2024. And year-to-date through Q3, our adjusted EBITDA loss improved $1.5 million or nearly 20% to $6.1 million for the first 9 months of 2025. We maintain our focus on positive adjusted EBITDA in the near term and believe that ASP growth is the most important lever for achieving this goal. Please refer to our earnings release issued earlier today for a reconciliation of adjusted EBITDA to net loss. Turning to our balance sheet. We ended the third quarter with $35.7 million in cash and cash equivalents, up from $30 million at the end of Q2 with accounts receivable of about $11 million. Excluding financing proceeds during the third quarter, we generated net cash of $2.3 million compared to net cash usage of $2.4 million a year ago. We also enhanced our cash position in the third quarter through opportunistic but disciplined placements under our ATM sales agreement with TD Cowen Securities. We raised just over $3.4 million at an average price of $9.83 per share, taking advantage of share price momentum and higher volume trading days throughout the quarter. We remain very well positioned from a balance sheet perspective with over $45 million in combined cash and accounts receivable at September 30 that we expect will fund our existing business to positive free cash flow and up to an additional $50 million in available future credit capacity if and when needed. In closing, we continue to deliver value to shareholders through solid operating and financial execution. We delivered another quarter of record revenue in Q3, a third consecutive quarter of AVISE CTD volume growth, continued ASP expansion, and we remain on track to deliver from 17% to over 25% revenue growth in 2025. We will now open the call for questions.

[Operator Instructions] Our first question comes from Anderson Schock of B. Riley Securities.

Congrats on all the ASP progress. So first, you mentioned on the second quarter earnings call, $430,000 per territory. Do you have an updated revenue per territory for the third quarter? And how should we think about the productivity ramp of these new territories?

And thanks so much for the question. So the was $430,000 per territory was a record for us. And just so that people have kind of the background trajectory, that was from -- up from the high 200s. So we've made -- you're right, we've made material progress in the revenue per territory, all really on the back of the ASP gains that we've seen as an organization. For the third quarter, it was right around that level, slightly below. I think that's more a factor of we added the additional territories. And so you have that denominator growing and give it a little bit of time as we see those territories bearing fruit, and we do expect it to increase over time. So you're just under that $430,000.

Okay. Got it. And then with the launch of your RA markers at the end of the third quarter, so once establishing a payment history for these, is there an incremental uplift to ASP that you're targeting similar to the $90 increase with the lupus biomarkers launched in January?

Yes. So we've not broken this out yet, and we hesitate to proclaim a number without having a robust history of collections there. So that's what we're doing right now. We're gathering that information, developing that history and then we'll establish it. Happy to provide an update on a future call. We expect it to be relatively modest compared to the $90 expectation that we had for the prior markers. This is a set of ELISA-based assays, 2 markers as opposed to 3 in the case of RA33 or 3 also in the case of the T cell analytes. So less markers, lower cost platform, build on the generic codes. It's going to be in the low single-digit dollars or maybe even in the double digit, but it's not going to be anything like what we had previously.

Okay. Got it. And then you also mentioned on the last call, you're approaching your first pharma partnership with the urine platform. Are there any updates you could provide there?

So we actually completed our first statement of work related to that platform. And just so that everyone is aware, we have some fantastic technology that we've licensed out of Johns Hopkins really with multiple intended use opportunities really to change the way these patients are managed for the better. And lupus nephritis affects about half of all lupus patients. This technology has been shown when you look at certain proteins in the urine of lupus patients, there's the potential to diagnose the disease through a noninvasive manner. That's something we continue to pursue and have published on from an abstract perspective. We're looking at therapeutic response and then even prediction of long-term kidney function or prognosis really. And so we have completed our first profiling effort. We're in discussions on subsequent efforts there, but it went successfully. It was a small project and look forward to doing more.

The next question comes from Kyle Mikson of Canaccord Genuity.

Good quarter. So I guess on the ASP topic, John and Jeff, maybe just level set and provide some more -- some framework of how we should think about approaching $500 because that was the target before. And you had that $90 incremental from the new biomarkers that was just referenced in the last question. So maybe just like if there's a way to kind of think about the progression going forward and maybe just like think of this more realistically when you can get to $500 again or maybe there's some other trailing 12-month metric that we should kind of model out and kind of think about as we look at 2026, the quarters and so forth?

Kyle, thanks for the question. So I guess, first and foremost, there's no other metric, and I'd be skeptical if I did provide a different metric as people change targets when they get hard. So that's not the approach we take here at Exagen. From our perspective, $500 is still very realistic. It's really just a timing thing. And so we outlined a couple of contributing factors in Q3. We actually had a large client bill account that for purely financial reasons, it's a hospital system in the Northeast. They made the determination to no longer to cancel that contract. That had some ASP headwind. We believe over time, we can build it back through the commercial -- the standard commercial insurance route, but it takes a little bit of time. We haven't had as much history with some of those payers, those regional payers in the Northeast, given that we've built through the hospital system through a client bill arrangement. Related to the new markers, you're exactly right. You're right on there, $90 was our expectation at the start of the year. We had mentioned on the Q2 call that we were coming in the low 70s, around $72. We're up from there, actually continue to go up almost on a daily basis, but expected to be at the $90 now, and we're not. So I still believe that we're on the path to $90. It's through our standard revenue cycle operations that we'll get there. We believe we'll get there. Additionally, we've launched these new PAD4 markers, and we haven't recognized any revenue there because we don't have a good track record for an accrual rate to establish an accrual rate. So those will be lifts over, call it, the coming quarter or 2 or 3 is progress in converting that client bill account, which had some reasonable volume associated with it, continued work on the new biomarkers that we launched at the start of the year, establishing accrual rate for the current product launch and then just our underlying groundswell of efforts that we've continued to work on. So I think you'll see over time, that trailing 12-month number continue to rise. I just had expected the trajectory to be a little bit more steep at this point in time, 9% year-over-year is still reasonable, but we'd like it to be faster. So that's the right metric, and we'll continue to work at it.

Okay. Perfect. And then on just on volume, it seems like that was kind of sequentially flat, I think, like quarter-over-quarter, if I do the math right. And that's actually -- I think that's actually stronger than your typical seasonality. So that's good, maybe just confirm if that's true. And then if we should think about a drop-off or step down in the fourth quarter, just given ACR and the other seasonal factors. And on that point, given the ASP, as you characterize it, the challenges, would you like kind of pull back on rep expansion at this point? Or are you still kind of all systems to building out the team going into next year?

Those are great questions. So just to be clear, volume is actually up in Q3 relative to Q2, a couple of percent. So from that perspective and looking at historical seasonality, that's a meaningful change. And so we're very proud of that. I think the team has worked extremely hard. That was really with about the same number of sales territories. We had 42 at the end of the quarter here. So contributing territories in Q3 was somewhere still around that 40 level. So from that perspective, I think it was a very strong quarter. We've also seen the volume increase into Q4. October was a fantastic month for us. We've now understand what that final volume number is, and it was our highest month in several years. So from that perspective, I think we've got our team with the right incentive structure. We've got the right team, and we're highly focused in delivering the clinical value and the messaging and education around that, that is driving business and adoption. So I think as it relates to the sales expansion question, there's no reason why we wouldn't continue to expand if we have the right opportunities in front of us. Right now, we're making sure that the 5 territories we've added in the last 4 months or 5 months are well supported, well-educated and are set up for success. And we'll continue to add as those opportunities arise. We did add to our sales leadership side that was more opportunistic. Someone I had worked with previously became available and I think very highly of that individual. So we took advantage of the opportunity to bring them on board. And again, it just sets us up for future growth. So we did go up in Q3. I would expect somewhat of a step down in Q4, just mostly a function of business days. I think in Q4, you've got some pretty significant holidays. We had ACR, the week-long conference that actually occurred in October. So our October performance was in light of ACR occurring in this month. So we're on the right trajectory. I would still expect a slight step down. But overall, we're setting ourselves up very well for continued growth through 2 mechanisms, ASP and volume.

Perfect. And then finally, I would love to ask about the pharma business. So that was -- so $800,000 in revenue in the quarter compared to $100,000 for all of last year. That's pretty impressive. So I guess why is so strong now this year? And then could that be even more material in 2026? Could that be like a real business line that you could actually start to kind of break out? And kind of additionally, is that an area you would partner or acquire in given the unmet need in autoimmune disease?

Yes. That's a very interesting set of questions. So from my perspective, excited about the progress on the pharma revenue side to deliver $800,000 far and above what we've done historically as it relates to testing services. And so I'm very proud of that, proud of the team and took a lot of energy and effort, but well worth it. And I think we've delivered for our pharma partners. They have time constraints, they have quality requirements. They want flexibility. And in all of those facets, clearly, we're demonstrating our ability to differentiate ourselves in the market, and it's working out for us. So where could this go? I mean the pharma services in general, tends to be a lumpy business. As you know, you complete a project and you tend to get recognized revenue consistent with that project when the work is completed. And so there'll be certain quarters with outsized performance versus others. But for the year or on an annual basis, I do expect this to continue to grow. There's a lot of opportunity, a lot of pharma development. You see new diseases getting approved for biologics in this space. Sjogren's, for example, is one that just came with Novartis. There's other diseases as well that people are looking for biomarkers and better diagnostic biomarkers and better markers of disease activity, and we believe we're well positioned or well suited for that. Also given that our base methodology within AVISE is flow cytometry, I think that we're well positioned to offer something unique there as well. So we'll continue to refine our business plan, our business model, understand how we can add value. I'll just give you one example, but when a pharma organization comes to a service provider, what they're looking for is speed -- at times, what they're looking for is speed to get some of these assays validated and available for them in clinical trial testing at a high-quality level. We generally meet the quality thresholds given our commercial pipeline and the fact that we have access to so many patients and so many different samples, our ability to validate assays and develop new assays, I think, is really substantial and a huge competitive advantage for us. So that's part of the differentiation we're able to offer amongst many other things, but we'll have to see how it progresses. But yes, it's trending in the right direction.

Our next question comes from Mark Massaro of BTIG.

This is Vidyun on for Mark. So just one on the sales force expansion. I understand that you just hired these reps. But could you just remind us how you're thinking about targets in terms of per rep and kind of the time that it takes for them to reach maturity and hit their stride?

So from our perspective, we set profitability targets for -- on a per territory basis. And that has to do with both the compensation structure. So once you reach a certain scale, there's profitability bonuses that end up coming into play. But then as it relates to opportunity, we're looking for a minimum level of profitability or contribution margin that at least sustains the price of having a field-based presence in that area. And so that naturally relates to number of tests, but it also changes as our ASP changes. So from our perspective, we tend to split our largest territories provided we still believe or have done enough research to believe that there's substantial opportunity there. And so that's really the mechanism that we're approaching the sales expansion process with. And it generally takes -- I mean, it's always tough to generalize, but it generally takes around 9 months for -- 6 to 9 months for someone to start to contribute. There's multiple exceptions of that, and I tried to highlight that in the prepared remarks. But we've got 2 in the Southeast where 2 territories where they were our highest growth by percentage and 2 of our top 5 nationally were some of these expansion territories. So that's exciting for us. I guess it reinforces that we made the right choice from a personnel standpoint. We found the right person to join our team, but we're also doing a really nice job evaluating the opportunity there. So we'll continue to do that, but somewhere in the 6 month to 9 month range. So I would expect by year-end, heading into '26, we start to really realize the full potential of now this 45.

Okay. Perfect. And then just a follow-up on the kind of slower-than-expected traction with ASP lift for the new biomarkers. Can you just help us think about steps you can take in terms of driving payment for these biomarkers or what it is exactly that's holding up payment here?

Yes. Great question. So as it relates to extra color on the ASP side. From our perspective, some of the denials that we're seeing are related to basically medical policy for these new markers and it's the diagnostic code in conjunction with the procedural code being used is not approved from a payer standpoint. We believe that through an appeals process, a robust appeals process that we've architected and implemented now here over the last couple of years that we can be successful long term, but initial denials are higher than I had originally expected. So that's really the basis for it. There's some other nuances there that we think we can improve upon, for example, out-of-network denials and things like this, but these are unique markers, and we're the only lab that's offering them. And so there is no in-network alternative, especially for this suite of analytes. So from our perspective, it has to do with revenue cycle operations probably being the most effective lever in this space. Still working on some physician efficacy advocacy along with patient advocacy, but those will be secondary or tertiary tactics that we employ, and then we'll have to take it from there.

Our next question comes from Ross Osborn of Cantor Fitzgerald.

This is [ Matt ] on for Ross today. I guess just one for me. You reiterated a path to mid-60s gross margin over time. I guess can you kind of expand on what the key unlocks are to get there, whether it's further automation, volume scale, repair mix normalization and how you're thinking about that timeline to start seeing incremental leverage?

Sure. Yes. How's it going? This is Jeff. Yes, I'll take that. I think multiple levers, right? I think we continue to say and believe that ASP expansion will be the best way to accelerate margin into that mid-60 range. And so as John laid out, there is a strategy to continue to expand ASP with just better revenue cycle management and continued improvements there. We also, as I mentioned, are seeing our COGS per test on AVISE CTD actually well below target, which is very encouraging. And that's been a function primarily of just better optimization of labor, and we really haven't had to make the significant investment in labor that we would have expected to keep up with the volume, particularly with the new biomarkers. All of that has come before any real optimization we've made in either assay development or lab operations. So we do think there is real opportunity for further optimization in workflow. But I would say that the biggest driver is going to be the ASP expansion. And just to add some more color to that. John mentioned that we did see a pullback, and we lost a pretty high volume -- relatively high-volume, high ASP account. If you were to normalize for that, we would already be above the 60% gross margin range for the quarter. So we're still tracking, and we're really encouraged because our COGS profile is much below where we expect it to be.

The next question comes from Andrew Brackmann of Will Blair.

Maybe just on the volume front, accelerated volume growth again here in the quarter. A lot has been asked sort of on rep productivity. But as you sort of think about the drivers of that volume growth, how should we sort of parse out the sort of levers between the expanded commercial team, more efficient rep productivity, but then also just the launch of markers from earlier this year and then there's still just the massive penetration that you have in front of you, the penetration potential that you have in front of you?

Andrew, thanks a lot for the question. So maybe more of a qualitative answer. It's always tough to pinpoint or address this with precision. But from my perspective, having something innovative and clinically useful to discuss with our client base has reinvigorated our sales team for sure, but also the interest on the customer side. So I think the fact that we launched these new markers is very much a positive, and we're seeing that energy, I guess, kind of rekindle here in the second half of the year with the recent launch of these additional markers -- especially now that we've got unique marker set specific to rheumatoid arthritis, it really does open up the clinical conversation and provide that additional value for folks. So that's where I would rank that at the top. We've talked at length about having stability and such a high-caliber team in our organization. And I really believe that, that's a significant contributing factor to our growth right now. We've got groups of folks who really take learning the science seriously, really work hard, and you're seeing the results of that. I mean as long as you pretty consistently stay customer-centric, work to satisfy the needs of your customer and are generally concerned with adding value to their clinical practice, I think you can be relatively successful. And this area of medicine is highly driven by relationships. It's very clear that even the patient clinician approach here, it's chronic disease management, the relationship there is very key, and it is with our organization as well. And we we've really worked to build trust and establish that trust. We want testing performed where it's going to be useful. And not widely -- our test is not useful in every clinical context when you're trying to diagnose the connective tissue disease. So we really want to understand how clinicians where they're struggling and where this can add value. And our team, I think, as master is probably too strong of a word, but come close and continue to improve in this area. And I think we're seeing the results of that. So the new markers, I think, are a very strong contributing factor, stability in the team, along with a heightened focus in the clinical messaging, and that's what you're seeing here.

Okay. That's great color. And then just on the loss of that large direct bill customer, any more color you can maybe give on the magnitude of the headwind that, that caused ASPs in the quarter? And then as you look at that entire book of business for direct bill, any other risks out there that you might see popping up in terms of other customers going down this route?

Yes. So maybe I'll just share a little bit of how I think about the direct bill opportunity. I think it's an interesting opportunity. It's approaching 20% of our revenue. It's on the order of 8% to 10% of our volume. So it gives you a sense of that relationship there. I think it's an interesting part of the business. in the sense that the people or the entity that you're negotiating with from a pricing standpoint also handle medical policy for all intents and purposes, right? So it's a combination negotiation, if you will. And it allows those entities to get access to more innovative technology sooner. In that sense, they can determine when and if they want access to certain technology. But it also tends to put that offering and that relationship at risk at times because they can decide to switch just as quickly. And so our understanding of this transition was it was a financially motivated decision, didn't really take into account the clinical impact or, to be honest, the desires of the rheumatology group at this organization. But nevertheless, it was made and from their perspective in their best interest. And -- but they're still offering our test, using it in clinical practice. We're just converting more to commercial insurance. And so we know that that's a little bit longer road in terms of getting back to the ASP that we ultimately aspire to, but it's one that we're well versed in and know the appropriate tactics. So the client bill opportunity is interesting. I think we're probably at close to the max level of client bill business that I want to take for organization. We'll see if other opportunities arise. But long term, I think it's better that we work with insurers. I think it's a better relationship in that regard. It can be tougher short term. But longer term, I think that's a better competitive advantage and a more reliable approach.

Our next question comes from Bill Bonello of Craig-Hallum.

I just want to follow up on the question that Andrew was just pushing on to just make sure I understood what you said. So in terms of that client, they are still ordering the test. They simply moved from being client bill to third-party bill? Or -- and then if that's correct, was there sort of any associated impact on volume at that client? Or are you seeing steady volumes and just the change in ASP?

Yes. Bill, opportunity to expand a little bit more. So specifics related to this account, which happy to go into, probably won't go into as much detail with each of these instances. But with this account specifically, one -- when the contract was terminated, and we were given fairly short notice here, talking about a few days, when the contract was terminated, access to the testing was suspended. So the hospital system froze the EMR and actually paused access for their clinician base. They actually stopped drawing it with their in-house laboratory as well drawing the blood, et cetera. So really, everything came to a halt initially. Given our close relationships with the rheumatology division there and their desire to continue to have access to this test, they pursued an alternative route, and we worked with them on the logistics to revive that. So where we're at now is the volume has returned because we've been able to logistically provide phlebotomy access for them along with helping them establish a new ordering process, et cetera. And we're not back exactly to where we were, but it's certainly trending in the right direction and much better than when we were informed of the transition. So you did have some suspension related to volume. I believe we're trending back in a very positive way there with optimism on the trajectory. And then most of the impact has been ASP.

Okay. That's really helpful and nice to see the acceleration in volume growth even with that. situation. So the second thing because to me, volume growth really seems like the exciting story here, the uptick, but ASP obviously matters. So just on the higher denials than you had expected, a couple of questions. Why do you think that's happening? Why do you think you're seeing greater denials than you had expected? And then is that dynamic exclusively related to the new markers? Or are you seeing an uptick in denials across the board?

Yes, that's a great question. So our base business, no notable changes in payer behavior that are worth going into a level of detail on this call, right? So we remain on a positive trajectory for the base business. It is related to the new markers as to why we're seeing a higher level of scrutiny than I expected. Well, I think it comes down to incentives for the most part, insurers are oftentimes profitable organizations, and they're looking for ways to curtail utilization. And this is one way, either through prior authorization, implementations, medical record requests. They throw a lot of hurdles in place to see if the clinicians truly really want this type of offering. And that's what we're seeing. So some of it is related to the ICD-10 code, the diagnostic code being used in conjunction with billing, but this is what we're provided by the client. So not a lot that we can do there. Just tough to simulate all of these situations ahead of time. I think we did a reasonable job on our end in estimating this and still believe that long term, that $90 aspiration is within reach. We're climbing to it. I think we're in the mid-high 70s now. We were in the low 70s a quarter ago. So even over a 3-month period of time, you've seen almost a 10% change in that new marker reimbursement for the positive. It just is going to take us a little bit of time to work through this. And ultimately, where do we land? Not entirely sure. Is it $85? Is it 95? I don't know. But I just think it's important and prudent to be transparent with this, and that's kind of what we're working on.

That's really helpful. And then just the playbook, is it radically different what you're trying to do here in terms of working through denials and eventually getting these additional markers paid for than sort of what you've done over the past 2 years where you've driven a sort of massive increase in ASP through revenue cycle management? Just trying to understand how unique this particular situation might be relative to what you've done in the past?

Yes. Tactically and procedurally, it's very similar. And so that's why I feel confident that from an architecture standpoint, from a process standpoint, we have the infrastructure in place to address this at scale. On the content, now that's obviously going to change because most of what we've been doing is having discussions around AVISE lupus and what the body of evidence is behind that in terms of clinical validity and utility. Now these are new markers. And so the body of evidence is not as deep, although with the rheumatoid arthritis markers, they've been studied for many years, RA33, body of literature out there for 20-plus years, the PAD4 autoantibodies, body of literature out there. So we're able to leverage some of that science that's been conducted by other institutions and infuse that into our appeals process, but it does require us to update the appeal letters and to structure that content a little bit differently. And there's going to be a learning curve naturally with some of that. But the process and tactics remain the same.

The next question comes from Matthew Parisi of KeyBanc.

This is Matt Parisi on for Paul Knight at KeyBanc. You've previously mentioned ALJ hearing wins during the prior quarters. And I was wondering if there has been any further ALJ hearing wins for Exagen in 3Q?

Matt, none that we disclosed publicly. We have continued a robust appeals efforts. We are, I think, making some material progress there. This past quarter, we actually presented in front of multiple medical directors at various plans. And so we're getting the attention and the audience and the opportunity that we've sought out strategically, and we'll continue to make incremental progress there. We have filed for future ALJ hearings, but no notable update in that regard.

Our next question comes from Dan Brennan of TD Cowen.

Great. Maybe just one more on the account, the direct account. I know it was asked, like did you size it just so we can get a sense of as we look forward, if that's still in the comp, kind of we can back that out. And then like what's the difference between the direct realized price versus the commercial realized price?

Yes. Dan, thanks for the question. So in terms of in-quarter ASP impact, you're talking on a blended rate, a little north of $20, right? So you've got a headwind of about $20 for the in-quarter ASP impact of that account alone. Volume-wise, we didn't cut it out or carve it out because we believe that volume is continuing to come back over time. And so we'll just have to see. It will be a slight headwind near term, but hopefully returning to normal levels or even improving as we continue to add more clinical value in that context. But the ASP should also start to improve as we develop a history and a better relationship with the payers in that region. So hopefully, that gives you a little bit of a feel. So it was significant, but also something for us opportunity-wise to work on. Does that help?

Yes. No, that helps. I mean your trailing 12-month ASP, right, still has been ticking up nicely even this quarter, another $13 or so sequentially. So I guess within the context of the $65 million to $70 million guide, is the assumption that the ASP continues to go up? Or is it like maybe flat because of this kind of account loss? Just how do we think about that realized price in 4Q from a trailing 12-month basis?

Yes. We don't split it out by ASP or volume. And you can see -- I think one of the things is over the course of this year, that $65 million to $70 million guide has generally stayed about the same with a little bit improved clarity at the end of Q1 or Q2, but generally stayed about the same. And we believe that we'll fall within that range even despite some of these headwinds. So again, I'm proud of the team for executing in multiple ways. And I think given the fact that we do have progress on ASP and volume simultaneously, put us in a good position to reach those objectives. From a Q4 specifically, I think we've got a few different ways to get there. We -- even as it relates to the year-end cash flow positivity objective. From our perspective, we have some things in the works with various payers that could get us there for sure. ASP will be the most sensitive lever to get us there, but we'll also have to see how volume comes in. I think we should be cautiously optimistic as it relates to volume progression because -- just because of the holiday season really.

And Dan, just to add to answer your question on the guide, I think about it -- the way to think about it is that the low end of the range would assume very little, if any, ASP expansion in the fourth quarter, right? And clearly, obviously, the high end of the range would include continued and maybe some accelerated expansion, but the low end would really assume that we don't do much in the way of ASP expansion in the fourth quarter.

Got it. I got that. comps, you've done a really nice job, obviously, on the volume as you've kind of optimized for the profitability and the cash burn, and you've had really nice volume growth in Q3 and kind of year-to-date. As we look ahead, like comps do get more difficult. Obviously, the market is large. I mean, is double-digit growth like reasonable to think about as we go into 2026?

So we've not set a base guide or objective for our top line growth. We think it will be driven by 2 factors. Volume, we've said likely to grow in the mid- to high single digits, and we're seeing that, if not a little bit higher for this year as we've really established a strong sales organization, but also with the new marker launch. ASP is inherently difficult to project and especially timing. And I think you're seeing that play out real time here with these quarterly results, but also just in the past, we've had periods of time where we've seen pretty extreme acceleration. And I think as long as that trajectory continues upwards over time, we'll be in a pretty good spot organizationally with both factors contributing.

Got it. Maybe just one final one. There's been a bunch of questions on denials and payment and your confidence, obviously, with these differentiated markers that you guys will be successful. I think in the past, like when we -- a lot of diagnostic companies, including yourselves, commercial payers tend to really drag their heels and investors like to look at like what the opportunity is over time, maybe not in the next 6 months or 12 months, but maybe over the next 2 years, 3 years, like what's that opportunity set for like where can realized price get to? So I think in the past, maybe you guys have talked about something $500, $600. Like any way to think about as we look ahead, no timetable attached to it, but is there any change in kind of what's happened here that would dissuade you from thinking you can get to like kind of $600 plus or minus? Or how do we think about the longer-term opportunity on realized price capture?

Yes. Our relatively near-term goal remains that half of Medicare rate. I think that's still a viable objective for us to meet in that time frame. And so that would put us kind of at that $600 range. And as we achieve that, that continues to dramatically transform our organization. We believe that current volume, we'd be a cash flow positive organization at the $500 range. So we're close, and we're close to transforming the organization in a very positive way, and I still think that's a reasonable expectation for us. Longer term, it should be higher.

Higher than the $600 or the $500?

Yes, than the $60.

Ladies and gentlemen, with no further questions in the question queue. I will now hand over to John Aballi for closing remarks.

Thanks so much. Year-end has come or is coming fast. And I really just want to thank the team here at Exagen for their continued dedication and performance. We have an ambitious quarter ahead with key milestones to accomplish, and I look forward to finishing the year strong. Thanks to everyone on the call for their partnership as we work to establish a dominant company in the autoimmune space. Thanks for your time this morning.