Autoimmune Diagnostic Adoption Will Drive Strong Long Term Upside Potential

Catalysts

About Exagen

Exagen develops and commercializes advanced autoimmune diagnostic tests that improve disease detection, treatment decisions and patient monitoring.

What are the underlying business or industry changes driving this perspective?

• Rapidly expanding adoption of AVISE CTD and new rheumatoid arthritis biomarkers, supported by record test volumes and rising ordering physician counts, positions Exagen to compound revenue growth as autoimmune diagnostics become more deeply embedded in routine care, lifting top line and operating leverage.
• Sustained improvement in realized pricing per test through revenue cycle optimization, payer engagement and layering of higher value biomarkers creates a clear pathway toward the $500 to $600 ASP range, structurally expanding gross margin and accelerating earnings power.
• Growing pharma and CRO services demand in autoimmune drug development, underscored by a rising contract backlog and successful initial projects, diversifies the model and adds a high incremental margin revenue stream that can meaningfully enhance total revenue and EBITDA over time.
• Highly capital efficient innovation, exemplified by new biomarkers developed for under $3 million with expected payback in less than two years, enables Exagen to continuously broaden its test menu and competitive moat without straining the balance sheet, supporting margin expansion and free cash flow generation.
• Scaling commercial footprint with disciplined territory expansion and increasing per territory productivity allows Exagen to tap large underpenetrated regions in rheumatology and related specialties, driving multi year volume growth, better fixed cost absorption and improving net margins.

Assumptions

This narrative explores a more optimistic perspective on Exagen compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Exagen's revenue will grow by 16.7% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -29.9% today to 1.0% in 3 years time.
• The bullish analysts expect earnings to reach $1.0 million (and earnings per share of $0.05) by about December 2028, up from $-19.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $-26.3 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 608.4x on those 2028 earnings, up from -8.5x today. This future PE is greater than the current PE for the US Biotechs industry at 19.0x.
• The bullish analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.35%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The path to higher reimbursement for new biomarkers is proving slower and more complex than management anticipated, with elevated initial denial rates and payer scrutiny on novel RA markers that may cap realized ASP well below the targeted $500 to $600 range over a multi year period, limiting revenue growth and constraining gross margin expansion and earnings.
• Exagen remains heavily dependent on a small number of large, high ASP client bill relationships and specific payers, as illustrated by the recent loss of a major Northeast hospital system contract that immediately pressured pricing and temporarily disrupted test access. This highlights ongoing concentration and reimbursement risk that could impede sustainable revenue growth and delay a turn to positive net margins.
• While pharma and CRO services revenue is growing from a small base, management repeatedly flags that this line is structurally lumpy and tied to discretionary clinical development budgets. This means macro slowdowns in biotech funding or autoimmune R&D could stall this emerging, higher margin revenue stream and dampen overall revenue diversification and EBITDA improvement.
• Despite record volumes, Exagen is still loss making with net loss widening year over year and operating expenses stepping up to support pipeline and sales expansion. Any slowdown in test volume growth, sales productivity ramp or ASP gains in a tougher reimbursement environment could prolong cash burn and push out the timeline for sustained positive free cash flow and earnings.
• The long term strategy relies on continuous biomarker innovation in autoimmune disease and broader adoption of advanced diagnostics in routine care. However, rising payer cost containment, potential shifts toward alternative technologies and stricter medical policies around expensive specialty testing could structurally limit test utilization and pricing power, putting downward pressure on long term revenue growth, gross margins and the valuation multiples embedded in this narrative.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Exagen is $18.0, which represents up to two standard deviations above the consensus price target of $15.43. This valuation is based on what can be assumed as the expectations of Exagen's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $18.0, and the most bearish reporting a price target of just $12.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $101.1 million, earnings will come to $1.0 million, and it would be trading on a PE ratio of 608.4x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $7.11, the analyst price target of $18.0 is 60.5% higher.
  
• 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.