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Exagen Inc. (NASDAQ:XGN)
Q2 2020 Earnings Call
Jul 28, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Greetings and welcome to the Exagen, Inc. second-quarter 2020 earnings call. [Operator instructions]. I would now like to turn the conference over to your host, Mr.

Mark Hazeltine, senior vice president of finance and corporate development for Exagen, Inc. Thank you. You may begin.

Mark Hazeltine -- Senior Vice President of Finance and Corporate Development

Good morning and thank you for joining us today. Early this morning, Exagen, Inc. released financial results for the quarter ended June 30, 2020. The release is currently available on the company's website at www.exagen.com.

Ron Rocca, president and chief executive officer; and Kamal Adawi, chief financial officer, will host this afternoon'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, the impact of the COVID-19 pandemic on our business, our current and future product 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. For a list and description of the risks, uncertainties associated with our business, please see our filings with the Securities and Exchange Commission including our Form 10-K and any subsequent filings. The information provided in this conference call speaks only to the live broadcast today, July 28, 2020.

Exagen 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 Ron Rocca, president and CEO of Exagen.

Ron Rocca -- President and Chief Executive Officer

Thanks Mark, and thanks to everyone joining the call today. We appreciate your continued support of Exagen. We all understand that 2020 has been a challenging year for every business, whether public or private. One thing however has not changed.

Autoimmune disease continues to affect millions of people throughout the U.S. and the world. These very serious diseases do not take a break during a pandemic and neither do we. With that backdrop, the second quarter was a good one for Exagen.

AVISE testing volumes are steadily recovering from their April trough and have continued to trend higher in each successive month. Testing revenue in the quarter was $6.8 million, with 18,522 of our flagship AVISE CTD tests performed. Adopter stickiness was 96% for the period and a very good percentage given the circumstances. The COVID-19 pandemic highlights and increases the need to transform the care continuum for patients suffering from debilitating and chronic autoimmune disease by enabling timely differential diagnosis and optimizing therapeutic intervention.

Our AVISE test and SIMPONI often meet that need. Importantly, the SIMPONI co-promotion agreement with Janssen was amended in June 2020. We are very pleased to report that during the second quarter, we recognized $2.1 million in revenue from our promotional efforts. With our amended agreement, we have the option to renew our contract for an additional year to the end of 2022.

SIMPONI's unique value proposition as the once per month self-injectable anti-TNF biologic for rheumatoid arthritis is well positioned for today's environment. On the reimbursement front, we also are very excited about our agreement with Humana Military, a managed care support contractor for TRICARE East which makes available all of our AVISE test as a covered in-network benefit to six million lives. We continue to negotiate with many large healthcare plans throughout the country and hope to announce new agreements in the coming months. Although testing bottomed in April, we have experienced sequentially monthly AVISE CTD test volume increases from April 2020 of approximately 45% in May and 52% in June.

The company saw lumpiness and geographic irregularities entering Q3 driven by resurgence in COVID-19 cases in the U.S. lending uncertainty to the broader recovery curve for our test in SIMPONI. While on the subject of our test, I'd also like to say a few words around R&D. A key strategic focus is expanding our product offering, and we remain committed to investing in R&D.

We believe this is the key to growing our leadership position within rheumatology testing space. We are excited about our agreement with Ohio State Innovation Foundation for the development and marketing rights of a blood test to differentially diagnose fibromyalgia. This promises to be the first rule in, rule out test for very difficult to diagnose disease with a large total addressable market. Proof-of-concept for the fibromyalgia test has been completed.

We are also developing a prognostic test to help determine the risk of thrombosis in patients with lupus. For both tests, further clinical validation studies are ongoing and planned. We believe new products like these will strengthen the testing franchise that has given us the commanding presence in rheumatology and make Exagen well positioned to execute on our vision of owning the rheumatology hilltop. I would now like to turn over the call to Kamal to discuss our financial results.

Kamal Adawi -- Chief Financial Officer

Thank you Ron, and good morning everyone. Total revenues in Q2 2020 were $8.9 million driven primarily by AVISE CTD testing volumes of 18,522 compared with 26,993 a year ago due to impacts experienced from the COVID-19 pandemic. The number of ordering healthcare providers was 1,442 for Q2 2020 compared with 1,450 for Q2 2019 and 1,692 in Q1 2020. AVISE CTD test revenue was $5.4 million in Q2 2020 and other testing revenue was $1.4 million.

Revenue from the SIMPONI co-promotion agreement was approximately $2.1 million as we benefited from an amended prescription baseline. Overall, we are very pleased with the trajectory of our testing business following the April bottom which, as a reminder, saw a 56% year-over-year decline. We experienced sequential monthly AVISE CTD test volume increases from April 2020 of approximately 45% in May and 52% in June. Initial indications suggest that July may be in line with June volumes as some areas are reinstating stay-at-home orders.

Cost of revenue was $3.3 million in Q2 2020 resulting in a gross margin of 63% compared to 52% in Q2 2019 and 53% in Q1 2020. The improvement in gross margin was driven by higher SIMPONI revenues and is a good illustration of how the Dx/Rx model offers positive leverage to our financials. Operating expenses in Q2 2020 were $12.4 million compared with $14.8 million in Q1 2020 due to cost-cutting efforts and a reduction in business activity, such as sales, T&E and direct testing costs. In Q2, we continue to take steps to reduce costs and conserve cash.

We eliminated 12 sales positions and three other positions, leaving us with 50 sales reps and 56 territories which provides a reach and frequency we need at this time. The net loss in Q2 2020 was $3.4 million compared with $2.8 million in Q2 2019. Looking to our balance sheet, cash and cash equivalents as of June 30 were approximately $63.7 million. We believe we are well capitalized under any economic uncertainty associated with the COVID-19 pandemic.

Regarding 2020 guidance, we do not believe that it is prudent to offer formal guidance at this time due to a lack of visibility caused by the fluctuation in COVID-19 activity. We will now open up the call for questions.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from the line of Chris Lin from Cowen. Please proceed with your question.

Chris Lin -- Cowen and Company -- Analyst

Hey. Good morning. Thanks for taking my questions. Based on your commentary, it appears that overall volume was about 95% abnormal in June.

Is this right? And I know you talked about comparable trends in July. But as we look to the balance of Q3, would it be reasonable to expect a return to growth now be limited?

Ron Rocca -- President and Chief Executive Officer

Yeah. Good question, Chris. The volume we saw coming back on a daily basis, and it was and it continues to be approaching the pre COVID levels on a daily basis. So we like to see that volume come up, and it continues to do so.

Predicting the future is really hard with this COVID as we look out and we see that certain states are continuing to stay close and others that were open or closing. We're evaluating that on a daily basis. I think the important point here is this, there is no cure for lupus which is a very serious disease that could lead to lupus nephritis or death. Those patients aren't going away even if the city is closed.

So we fully anticipate there's a bolus of patients as these states open up, they come back into the market. And we get right back to our pre COVID trajectory which was very solid. As you recall, 2019 was a record, January was terrific. February was terrific.

So coming back from this and looking into the future, I think we'll see a return of these patients simply because there is no cure, but we do have to wait until the market, until the states open up, and some of these local municipalities also allow patients to go back into the doctor's office.

Chris Lin -- Cowen and Company -- Analyst

Got it. That's actually a good segue to my next question. Could you help us perhaps quantify the bolus of customers or really how much pent-up demand do you think there could be once things return to normal?

Ron Rocca -- President and Chief Executive Officer

Yeah. What we heard from the physicians because we are doing a lot of telehealth and telemarketing and getting a pulse on what's going on out there, is that their normal course of patient load on average for a community rheumatologist, call it anywhere from 10 to 15 patients a day, they're down in some of these areas by half or even 75%. So that bolus, they fully anticipate will return. They're just patients right now searching for it.

What we're seeing is a lot of inbound calls from patients asking for doctors in the local areas when they can't find one. So we know that the demand is there. To quantify the exact number, I would say that you were missing roughly 50% of those patients, and they're going to come back in a big way. I will comment this, Chris.

When they come back, the test that is a solution for them is our AVISE CTD test because it's not only the lupus test but with one blood draw, you're getting the 11 generic markers of those diseases that most often overlap with SLE too. So as you recall, before we joined the market, lupus was diagnosed basically by serial testing. They would do one test every other week or every three weeks and bring the patient back. With one blood draw, you can do it all with AVISE CTD.

So we think it's the appropriate test for what's going to happen when all these patients do return.

Chris Lin -- Cowen and Company -- Analyst

Got it. OK. And maybe for my last question, I believe even if you exclude the co-promotion revenue in Q2, gross margin was about flat on a year-over-year basis. Is this right? And it seems pretty -- it's quite impressive given that diagnostics revenue declined 33% year over year.

So can you just help us understand what drove this margin result? And how should we think about the sustainability of this performance going forward?

Kamal Adawi -- Chief Financial Officer

Thanks Chris. I'll take this question. You're right. The improvement we found in gross margin was driven significantly from the revenue on the SIMPONI co-promotion.

The $2.1 million of SIMPONI revenue was at 100% gross margin. But we aggressively cut the variable comp in the lab to match the decline in volume. The only thing we couldn't cause a cut were the fixed costs.

Chris Lin -- Cowen and Company -- Analyst

OK. And then just how should we just think about the sustainability of that performance in Q3? Are there other...

Kamal Adawi -- Chief Financial Officer

Yes, we're going to...

Chris Lin -- Cowen and Company -- Analyst

Sorry, go ahead.

Kamal Adawi -- Chief Financial Officer

Yes. I was going to say that we're going to continue to flex our spend, especially in the lab to match the volume as we continue to through the COVID-19 pandemic.

Chris Lin -- Cowen and Company -- Analyst

Got it. Thanks for taking my questions.

Kamal Adawi -- Chief Financial Officer

Thanks Chris.

Operator

Our next question comes from the line of Brian Weinstein with William Blair. Please proceed with your question.

Brian Weinstein -- William Blair and Company -- Analyst

Hey. Good morning. I know it's an early morning for you guys, so I appreciate you doing this so early. A couple of questions.

First, on SIMPONI and the co-promote there. That $2.1 million, was that some sort of a kind of a catch-up payment for kind of getting you guys to a certain level at the end of the quarter because obviously there was negotiations going on throughout the quarter? So just curious what that $2.1 million represented. But then also on SIMPONI, if you could comment on the potential range going forward? I think it's right around $1.3 million to $1.6 million, something like that is where we're coming for future quarters based on the new deal. And then anything else on negotiations with Janssen for additional co-promotes there.

So that's the SIMPONI side, and then we'll do some others.

Ron Rocca -- President and Chief Executive Officer

Great. Thanks Brian. Appreciate it. And yes, it is very early here.

The $2.1 million was a performance for Q2 and strictly Q2. And that's what impressed us a lot. And it will also impress their -- our J&J partners as well. So that was absolutely Q2 performance.

Because if you think about SIMPONI, the only anti-TNF that's once a month and you could take it home, it does have a lot of utility. Again, that's a good solution for today's problems with COVID. So we're happy to see that. As far as the range, as we disclose, we have a range, and we are continuing to look at that range, and we think that the -- we're going to try to achieve everything we can to get to the top end of that.

The agreement is for a 5% above baseline as our cap, and we will have a bottom which is 300,000 guaranteed which is not what we're doing as far as the bottom. We are going to -- we have that extension option which I think is spectacular and shows the commitment that J&J has in us. The relationship is really strong, Brian. They really appreciate our efforts.

We're out there, really making sure that the patients are being taken care of with their anti-TNFs in the community rheumatology offices. So relationship is strong. We continue to have talks about other things we can do together. But at this point, we're really focused on driving SIMPONI to the high levels that it should be.

Brian Weinstein -- William Blair and Company -- Analyst

Got it. And then on spending, you mentioned that you cut some sales reps here. How does that impact your view on kind of the business outlook longer term in your ability to kind of get back to the growth rates that we had seen? How critical is it to have those additional numbers of sales reps in order to do that? And do you expect to rehire those positions as things get better or is this kind of the level that we should expect going forward?

Ron Rocca -- President and Chief Executive Officer

Yeah. A really good question and one we talk about a lot and here, Brian. We flexed the head count, the FTEs. We just flat out flexed them to the needs that we need today in order to optimize the performance of the company.

And I think we did -- and in fact, I'm confident we did the right thing to flex through the areas that we did. Going long-term, we'll continue to monitor the reach and frequency of the field to see if it's necessary to add more FTEs or not. That's something we're going to do as we see what happens with COVID, obviously. It doesn't make sense to hire a rep in let's say a state that you can't -- the doctors can't even practice because they can't get out of their houses.

But it does make sense to keep your in-house sales growing. So we've always had a good provider relationship department internally. These are people that answer the phone that augment what the decentralized sales representatives do. We've beefed that up and we're going to continue to beef that up because as doctors get used to doing Zoom calls, we find that at least right now, it's been very effective we're getting to get a lot of a time and attention with office staff and so forth.

And it's very efficient from a cost standpoint, because when you're here centralized, you can make a lot more phone calls and so forth. So to answer your question about long-term, we're going to monitor it. But this telehealth and telemarketing maybe a staple of companies in the future regardless of what happens with COVID as we find it to be an effective way to communicate the value of your products to the doctors.

Brian Weinstein -- William Blair and Company -- Analyst

Got it. And along the lines of kind of what the future may look like here, have you guys found about and have you worked with anybody about implementing any kind of mobile phlebotomy to work with your physician partners to be able to test people in their homes for other autoimmune diseases?

Ron Rocca -- President and Chief Executive Officer

Yeah. We have quite a few mobile phlebotomy contracts now, and we continue to do those. We also find doing contracts with community hospitals to be an effective way to get the phlebotomy as well. So we'll look at whatever it takes.

We often remind doctors that they can -- they know how to draw blood too. They did go to medical school, and those doctors can draw blood. And if they see the value of the test, they do it themselves. So we'll continue to add more mobile phlebotomy.

There's really no national company to contract with. So it's almost on a state-by-state or even a ZIP code by ZIP code level. But when necessary, we have no problem doing that, if it enables the proper utility to get the blood to us. We also have two capillary tests, just to remind everybody, and those tests are at-home tests.

So you can test your methotrexate, the most widely used drug in rheumatology today. It's usually used for RA or you can measure your HCQ, your hydroxychlorine with their touch test. These are capillary tests that patients can do at home. But for our big test for AVISE CTD, we will do whatever we can to enable the proper phlebotomy for those patients.

Brian Weinstein -- William Blair and Company -- Analyst

Great. Last one for me is on Humana and the deal that you struck for being in-network. Can you give us some idea about where pricing came in? Obviously, you won't be exact here, but relative to your average test now -- average reimbursement now. And I think it was the $700 million that you talked about in your dossier.

Can you give us some idea about kind of the range where this fell in? And I'm assuming this will be nicely accretive to your ASPs?

Ron Rocca -- President and Chief Executive Officer

Yeah. We're really excited about it because obviously this is how you get it started, right? So we did the dossier. We got the demand. And now you start to get in-network and covered through these payers.

So we're really excited about TRICARE and Humana and all the other negotiations that are ongoing because our dossier really does illustrate the value it has to the patients and the payers, to your point, that healthcare economic study showed that you can actually save money by using our test upfront. We're not revealing each contract -- contract-specific on the ASP but I'll let you know what this does do, it opens up our test to a lot more patients. And that's the key too. So we're excited about this, Brian.

We think it's a contract. It's the first of many to come. And we're excited to see where it leads. But the rest of this year will continue to drive more contracts and definitely march toward that higher ASP.

That is a goal with these contracts. That's why we do those going forward. When you start these, like the first one we have, we're also looking at increasing the utility of the brand beyond just a few patients, but enabling to be used on many, many more patients within the system.

Brian Weinstein -- William Blair and Company -- Analyst

Got it. Thank you.

Ron Rocca -- President and Chief Executive Officer

Thanks Brian.

Operator

Thank you. [Operator instructions] Our next question comes from the line of Kyle Mikson with Cantor Fitzgerald. Please proceed with your question.

Kyle Mikson -- Cantor Fitzgerald -- Analyst

Hey guys. Thanks for taking the questions. So now you talked about patient flow and the backlog at your practices that you're in contact with, but can you just talk about some of the current trends at -- in those regions or markets that are experiencing surges in COVID infections right now like Texas, Arizona, Florida, I know you have a soft footprint in those areas. So I'm just curious if you could provide any color there.

Thanks.

Ron Rocca -- President and Chief Executive Officer

Sure. Thanks Kyle. Good question. So we saw Florida do extremely well early on, then they went back and shut down.

And what's interesting here is because we are at CLIA lab, I know today how many orders we got yesterday. So I know what cities are open and closed. So we saw Florida come back roaring and then slow down. Same thing happened actually in a lot of the ZIP codes in Georgia, Texas as well as Arizona.

Those are strongholds for us, and that definitely affects us. What's interesting though is we've been doing a lot of telehealth and telemarketing with those doctors there and they're unwavering. So we know when those patients return. Those doctors because they are adopters, as you can tell, over 90% stickiness, they will come back to using our test.

And again, I want to remind everybody that our test AVISE CTD is not only the best lupus test, but it has all the other markers. So it's a very convenient test for when this bolus comes back. They can't do -- well, they can, but it's going to be difficult for them to do -- to go back to serial testing when you have a waiting room full of patients and a whole bunch more waiting to get in. So the convenience of one blood draw that can do it all, I think it's going to play in real well as this bolus of patients come back.

As far as the trends per state, we monitor it constantly. It does appear to be -- in Texas, it appears to be coming back. Florida is a little flat. Georgia is coming back nicely.

And Arizona partially because it's July in Arizona. We're seeing that slow down as the snowbirds go. Now we'll say this with the Sonora Quest agreement we have in Arizona. We do have high expectations for Arizona coming out into the fall when the snowbirds come back to Arizona.

Anything else, Kyle?

Kyle Mikson -- Cantor Fitzgerald -- Analyst

No. I mean, that's pretty helpful. It's actually great color. So I was curious also about payer mix and how that kind of trended throughout the quarter as well.

And I guess how it's going to look in July also? And maybe what you're expecting in the second half of the year as well just given elevated unemployment rates and etc.?

Ron Rocca -- President and Chief Executive Officer

Yeah. Good question. So we have a lot of programs. If patients call in, we have a lot of programs to enable them if they can't afford the product and try to get them to do -- get them on a payment plan and so forth.

So we have mechanisms there to help those patients as their COBRA ends actually which is coming up soon for a lot of patients. The payer mix hasn't really changed. We get paid by everybody because we do CPT code stack if we're not covered in-network. So we do get paid.

As we march forward and get more of the contracts, it goes back to the earlier question, that's how we're going to drive our ASP going forward. But the payer mix has been consistent, and we don't see any reason why it wouldn't be for the remaining part of this year.

Kyle Mikson -- Cantor Fitzgerald -- Analyst

OK. And then on the ASP, I know you touched on it earlier. But I think that in TRICARE, it's kind of phased reimbursement on Medicare rates. And so I'm just wondering if you think there's going to be a material impact on ASP just due to this new TRICARE coverage? And then also on the TRICARE agreement, yes, very encouraging.

But just given that Humana is the contractor for TRICARE East, is that going to kind of help your relationship with Humana in terms of expanding coverage to the rest of Humana's business as well?

Ron Rocca -- President and Chief Executive Officer

Well, that's obviously the desire. We do have meetings with Humana's setup, and we're continuing to schedule more. We have meetings with TRICARE West, and they're payer as well, they're contractor as well. So all those payers, we are driving forward to meet them.

We think this is such an important test in an area that has such a great unmet need. I do want everybody to recall that this is potentially a deadly disease or could lead to lupus nephritis or removal of the kidney. And if you can treat these patients early because you diagnosed them correctly early, you can actually save them a lot of pain and heartache and extend their life to a normal range. So it's really important to get there.

And the fact that the dossier is done, and it's now the -- the demand is up to a point as we have these contracts and as we have these negotiations, we fully expect coverage in in-network in most of the payers going forward. Getting back to your question as far as the ASP, it should increase as we get these contracts. The first few are always the most difficult. But as you get to that tipping point and you have momentum, actually, it gives us a lot more confidence in being able to negotiate a higher ASP as it gets going.

You have to get it started and get the momentum going. So some of the early contracts may not be at the highest level that we desire. But going forward, as we get each one, if it comes -- again, we get a little bit more confidence in as we negotiate these.

Kyle Mikson -- Cantor Fitzgerald -- Analyst

OK, thanks. That's interesting. And then I just -- I want to squeeze one more in here about the pipeline. So have you begun planning for your fibromyalgia dossier yet? And then just remind us of the time lines in terms of the fibro tests and when we could expect some revenue contribution from that as well.

I'm just recognizing that it's probably a few years out, but I'm just curious.

Ron Rocca -- President and Chief Executive Officer

Yeah. This is really exciting for us. The fibro is a very, very difficult disorder to diagnose. It also often appears clinically like lupus which is really important to understand.

These patients end up in a rheumatology office, and they present like a lupus patients, I got rash, I got a headache, I got tired, fatigued, I got brain fog. And clinically, the doctor has to differentiate which is a potentially chronic disease or is a potentially deadly disease. And that's a big differentiation. One takes steroids, lupus, one does not take steroids.

You'd hurt the patient. So understanding the difference between those two at the community rheumatologist level is really critical. The time lines, we're pushing as fast as possible, but science takes time. And we do quality science here.

The Ohio State collaboration is terrific. They got a lot of really smart people. We have incredible amount of smart people here with our CSO and CMO, so it's going to take time. We'll try to speed it up as much as possible, but not at the risk of not doing the right studies for the dossier.

On appointment of dossier here too, is as we talk to payers, they realize that these fibro patients do eat up a lot of economics in an office. They hang around a lot, they doctor shop because they know something's wrong with them, and they can't get a definitive diagnosis. So we think we're going to have a willing participant to make sure we differentiate fibro from lupus going forward. So this is a really, really important project for us.

We'll step on the gas as much as possible as long as we don't risk the quality of science.

Kyle Mikson -- Cantor Fitzgerald -- Analyst

OK. Very helpful. Thank you so much and I'll leave the rest for follow up. Congrats again.

Ron Rocca -- President and Chief Executive Officer

Thank you Kyle. Appreciate it.

Operator

Thank you. [Operator instructions] Our next question comes from the line of Mark Massaro with BTIG. Please proceed with your question.

Mark Massaro -- BTIG -- Analyst

Hey guys. Thanks for taking my questions. Congratulations on recognizing the revenue for SIMPONI. I know historically, your baseline, I believe, was at 29,000 units per quarter.

Ron, I think you talked about some metric about 5% above our particular baseline. I guess, was the baseline lowered in the quarter? And if it wasn't, can you just speak to what drove the success in Q2?

Ron Rocca -- President and Chief Executive Officer

Yeah. I'll take the last one first. What drove the success I think was the fact that the quality of the representatives we have is outstanding, and we have the methotrexate test. So methotrexate is used along with the anti-TNFs.

It's actually in their package inserts. So being able to discuss the methotrexate level along with the anti-TNF, I think engages the doctor in a more meaningful subject matter. And I think that has a lot to do with it. Also, what can't be lost is the fact that if you're a immunocompromised patient, do you really want to go to an infusion center with a bunch of other immunocompromised patients during this COVID period? It seems to me to be a safer alternative.

It's the only once a month anti-TNF that you can take at home. And I think doctors are realizing that. The baseline is 26,000, and what we're looking at is 5% above the baseline for Q3 and Q4. We like this product from a financial standpoint because it's almost 100% gross margin.

And we like it from the standpoint, it validates the Dx/Rx model. And also, it's a relationship which we think is a very important company, Johnson & Johnson.

Mark Massaro -- BTIG -- Analyst

That's super helpful. I also wanted to ask sort of a bigger picture pipeline question. Recognizing that lupus can certainly cause damage to kidneys and other vital organs, where are you guys as you think about developing product or maybe talking to partners about advancing organ, whether it's organ transplant or kidney damage?

Ron Rocca -- President and Chief Executive Officer

Yeah. A really good question, Mark. So the great thing about the complement system in CB-CAPs itself which is the fragment that cleaves off a C3/C4 and primarily bonds to a cell. The great thing about that is when it comes to transplants, complement has an active role.

So I can share with you that our scientists are very interested in looking at more of that. We have had ongoing discussions to look at markers to better enable perhaps a stronger lupus nephritis product. So that is an area we're interested in, in a broader way to your point. I can't divulge too much other than to say that it's on our radar.

Mark Massaro -- BTIG -- Analyst

Understood. And then maybe a final question for me. How is your conversation with commercial health plans going relative to your expectations? I know that you had a lot of meetings on the schedule after having submitted the dossier. But how should we think about commercial health plans potentially coming on in Q3 and Q4 here?

Ron Rocca -- President and Chief Executive Officer

Yeah. We have a lot of meetings set up. It's a little more difficult with Zoom in that you have to bring in so many people and coordinate it, but we are continuing to push forward with these meetings. There's a couple of things to keep in mind.

One is, there is a recognized problem with trying to diagnose systemic lupus erythematosus correctly and early. And the payers know it, we know it, the patients know it, the doctors know it; it is well documented. Two is our dossier is done, and it answers the questions of clinical validity, clinical utility. So we answer those questions.

And from a healthcare economic, we don't really burden the system. So we think we're in a really good position to have the discussions because the payers want to help the patients, we want to help the patients, and right now based on the solutions that are out there, we think CB-CAPs offers the best solution to help these patients correctly get diagnosed and treated, so they can lead a more normal life. And at the end of the day, as healthcare companies, that's what we're about. So I'm looking forward to these discussions going forward and having a lot more discussions about how we can help more of these patients.

Mark Massaro -- BTIG -- Analyst

Last question for me. I know you guys had a pharma royalty kind of roll off. I think it was in January of this year. When should we see the benefit of that roll off benefit your gross margins?

Kamal Adawi -- Chief Financial Officer

Yeah, Mark. That royalty expense came off on January 7. It was paid for royalty pharma, and it was 10% on our CB-CAPs. Now any test done before January 7, but collected after January 7, is still going to have an expense come across.

So every quarter, we're going to see that amount decrease. So it's slowly coming off the books. We do anticipate it to be completely off within 12 months of the January 7 date.

Mark Massaro -- BTIG -- Analyst

Understood. Thanks guys for taking my question.

Ron Rocca -- President and Chief Executive Officer

Thank you Mark.

Operator

Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Rocca for any final comments.

Ron Rocca -- President and Chief Executive Officer

All right. I just want to thank everybody for their time this morning, early morning. Do appreciate it. We're very, very happy with the way Q2 turned out.

We have a mission here to help patients, and that's our drive. That's what keeps us focused. And we think we have products that will enable the doctors to assist those patients even better. So again, thank you for your time.

We look forward to discussions in the future. Take care and have a wonderful day.

Operator

[Operator signoff]

Duration: 37 minutes

Call participants:

Mark Hazeltine -- Senior Vice President of Finance and Corporate Development

Ron Rocca -- President and Chief Executive Officer

Kamal Adawi -- Chief Financial Officer

Chris Lin -- Cowen and Company -- Analyst

Brian Weinstein -- William Blair and Company -- Analyst

Kyle Mikson -- Cantor Fitzgerald -- Analyst

Mark Massaro -- BTIG -- Analyst

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