Biomarker Launch And AVISE CTD Expansion Will Drive Future Success

Key Takeaways

• New biomarkers and biopharma partnerships are expected to drive revenue growth and enhance diagnostic capabilities, accelerating earnings growth.
  
• Improvements in ASP and sales efficiencies are expanding gross margins, with strategic plans set to boost test volumes and revenue growth.
  
• Strategic changes and reimbursement shifts at Exagen could hinder immediate revenue and volume growth despite efforts to reach profitability and enhance operations.

Catalysts

Designs, develops, and commercializes various testing products under the AVISE brand in the United States.

• The recent launch of new biomarkers has been well received, showing promise in enhancing diagnostic capabilities and increasing test adoption, which is likely to drive higher future revenue through increased reimbursement rates and test volumes.
  
• Improvements in average selling price (ASP) for the AVISE CTD test, along with operational efficiencies, have expanded gross margins and are expected to continue doing so, thus potentially increasing net margins in the near future.
  
• The strategic reduction and optimization of sales territories have led to a focus on profitable growth. With plans to expand sales territories in 2025, there is an anticipated increase in test volume, thereby boosting revenue growth.
  
• Continued strong performance in securing reimbursement for new and existing tests is expected to contribute to sustained ASP growth, improving the company's earnings as collections increase.
  
• The anticipated growth in biopharma partnerships, leveraging Exagen's unique diagnostic offerings for conditions like SLE, could represent a new revenue stream and accelerate earnings growth in the coming years.

Exagen Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Exagen's revenue will grow by 15.1% annually over the next 3 years.
• Analysts are not forecasting that Exagen will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Exagen's profit margin will increase from -27.2% to the average US Biotechs industry of 15.9% in 3 years.
• If Exagen's profit margin were to converge on the industry average, you could expect earnings to reach $13.5 million (and earnings per share of $0.71) by about May 2028, up from $-15.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.6x on those 2028 earnings, up from -8.1x today. This future PE is lower than the current PE for the US Biotechs industry at 20.4x.
• Analysts expect the number of shares outstanding to grow by 3.02% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.74%, as per the Simply Wall St company report.

Exagen Future Earnings Per Share Growth

Risks

• The company experienced an 11% decline in test volume in 2024, which is attributed to the strategic reduction of sales territories and the prioritization of profitable volume, potentially impacting future revenue growth and scalability.
  
• Exagen's reimbursement improvements, while increasing average selling prices, have led to volume decline as some doctors were unable to support necessary partnerships, which might hinder potential revenue growth.
  
• The company anticipates continued investment to enhance sales territories and laboratory operations, but the pace and efficacy of these investments may not yield immediate returns, affecting operating expenses and net margins.
  
• There is uncertainty regarding the full financial impact of newly launched biomarkers, which could affect projected revenue growth and the ability to achieve positive adjusted EBITDA as anticipated by the end of 2025.
  
• Although Exagen expects to achieve positive adjusted EBITDA by Q4 2025, the trajectory towards volume growth is uncertain, and cash flow positivity may be delayed beyond what is expected, impacting overall earnings.

Valuation

• The analysts have a consensus price target of $6.75 for Exagen based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $8.0, and the most bearish reporting a price target of just $5.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $84.9 million, earnings will come to $13.5 million, and it would be trading on a PE ratio of 11.6x, assuming you use a discount rate of 6.7%.
• Given the current share price of $6.88, the analyst price target of $6.75 is 1.9% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.