Fulgent Genetics, Inc. (NASDAQ:FLGT) Q3 2023 Earnings Call Transcript

Fulgent Genetics, Inc. (NASDAQ:FLGT) Q3 2023 Earnings Call Transcript November 3, 2023

Operator: Hello, and welcome to the Fulgent Genetics Q3 2023 Earnings Conference Call and Webcast. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Melanie Solomon, Investor Relations. Please go ahead.

Melanie Solomon: Thanks, Kevin. Good morning and welcome to the Fulgent third quarter 2023 financial results conference call. On the call today are Ming Hsieh, Chief Executive Officer; Paul Kim, Chief Financial Officer; and Brandon Perthuis, Chief Commercial Officer. The company’s press release discussing the financial results is available on the Invest Relations section of the company’s website, www.fulgent.com. A replay of this call will be available shortly after the call concludes on the Investor Relations section of the company’s website. Management’s prepared remarks and answers to your questions on today’s call will contain forward-looking statements. These forward-looking statements represent management’s estimates based on current views and assumptions, which may prove to be incorrect.

As a result, matters discussed in any forward-looking statements are subject to risks, uncertainties, and changes in circumstances that may cause actual results to differ for those described in the forward-looking statements. The company assumes no obligation to update any of the forward-looking statements it may make today to reflect actual results or changes in expectations. Listeners should not rely on any forward-looking statements as predictions of future events and should listen to management’s remarks today with the understanding that actual events, including the company’s actual future results, may be materially different than what is described in or implied by these forward-looking statements. Please review the more detailed discussions related to these forward-looking statements, including the discussions of some of the risk factors that may cause results to differ from those described in these forward-looking statements contained in the company’s filing with the Securities and Exchange Commission, including the previously filed 10-K for the year ended December 31, 2022, and subsequently filed reports which are available on the company’s investor relations website.

Management’s prepared remarks including discussions of earnings and earnings per share, contain financial measures not prepared in accordance with accounting principles generally accepted in the United States or GAAP. Management has presented these non-GAAP financial measures because it believes they may be useful to investors for various reasons, but they should not be viewed as a substitute for or superior to the company’s financial results prepared in accordance with GAAP. Please see the company’s press release discussing its financial results for the third quarter of 2023 for more information, including the description of how the company calculates non-GAAP income or loss, earnings or loss per share, and adjusted EBITDA and a reconciliation of these financial measures to income or loss and earnings or loss per share, the most directly comparable GAAP financial measures.

With that, I’d now like to turn the call over to Ming.

Ming Hsieh: Thank you, Melanie. Good morning, and thank you for joining our call today. I will start with some comments on the quarter. Then, Brandon will review our go — products and go-to-market update from the third quarter. And Paul will conclude with the financials and outlook before we take your questions. We are pleased with our results in the third quarter, with $85 million of total revenue due to our successful collection effort. We recognized additional $19 million of revenue from previously built COVID-19 test. Our core revenue of $66 million was driven by momentum in precision diagnostics as we expected. The revenue for the anatomic pathology were seasonally lower in the third quarter. Pharma Service, which we had said is a lumpy business, decreased in the third quarter as we anticipated.

Given these results, we are pleased to affirm our guidance for the full year of $260 million of core revenue. We continue to make good progress with our [Technical Difficulty], our novel nanoencapsulation technology includes over 40 patents and a target therapy platform designed to improve the therapeutic windows and the pharmacokinetics profile of both new and existing cancer drugs. Our lead drug candidate, FID-007, has shown promise results for the treatment of numerous cancers including hand, neck, ancillary and pancreatic with reduced side effects. In the weekend, we will present additional data, including all ongoing studies of FID-007 at Society for Immunotherapy of Cancer annual meeting ongoing on now in San Diego. We’ll then have the poster available on our website.

From this data, we are moving forward with Phase II studies in head and neck cancer. We have submitted our Phase II clinical protocol to FDA and expect an initial study in the first quarter of 2024. We are excited about reaching this next milestone for pharma and bringing FID-007 to more patients in clinical settings. I’d like to thank our employees and the shareholders for your loyalty during the past quarter. We’re looking forward to close out a strong year and capitalize on the momentum what we see ahead. I will now turn over the call over to Brandon, our Chief Commercial Officer, to talk about our Diagnostics business results during the quarter. Brandon?

Brandon Perthuis: Thank you, Ming. We had yet another solid quarter led by continued momentum in our Precision Diagnostics division. Core revenue for the third quarter totaled $66 million, down 2% sequentially and up 17% year-over-year. Breaking it down further, Precision Diagnostics came in at $37.5 million, an increase of 16% sequentially and 45% year-over-year. As we have mentioned in previous calls, because of the nature of the contracts and awards, our Pharma Services business will be lumpy. This was the case for the third quarter. Pharma Services came in at $3.7 million, down 50% sequentially and up 19% year-over-year. That said, our Pharma Services pipeline looks strong with new partnerships coming online. In addition, our capabilities today are broader than ever before, giving our clients the opportunity to work with a multi-disciplinary team experienced in pathology, multiomics, oncology, spatial transcriptomics, liquid biopsy, single-cell sequencing, proteomics and more.

We are confident that the pharma services will be an integral part of our success going forward. Our Beacon carrier screening portfolio of tests continues to be a significant growth driver for Precision Diagnostics. As a reminder, carrier screening assesses risk of passing on certain genetic conditions to children. This test is for anyone who is currently pregnant, considering pregnancy or planning to become pregnant in the future. Our Beacon test menu now includes seven preset panels ranging from six to 787 genes. However, we have the ability to customize panels for our clients, which is something not widely available in the market. This is proving to be an important differentiator. Turnaround time has been stable and is now one of the fastest in the industry with a mean turnaround time of 12 days.

The focus now is to continue to gain market share in the infertility space and begin initial planning for a rollout to the OB market. During the third quarter, we entered into a new agreement with Progyny for Beacon carrier screening. Progyny is a leading benefits management company specializing in fertility and family-building solutions. This new agreement allows us to provide reproductive genetic testing to the Progyny member network. This is an important agreement for Fulgent since many of our reproductive clients see Progyny patients. Along with our robust managed care contracts, this new agreement puts Fulgent in a strong position for coverage and reimbursement. An area of focus for R&D during the quarter was to update our hereditary cancer panels.

As the field continues to generate more and more data, we need to continually look at what we’re offering to make sure our panels are as clinically relevant for patients and providers as possible. In making these updates, our team focused on getting well-defined options to providers. Our focus panels are now closely aligned with the latest NCCN guidelines and genes included on these panels are high to moderate risk factors for cancer as noted in the guidelines and associated with direct actionability. The comprehensive panels are broader and include the focus genes as well as low-risk genes and candidate genes that may provide information about the cause of the cancer in the family, but may not be associated actionable guidelines at this time.

Our comprehensive offerings for hereditary cancer testing, coupled with our test menu for solid tumors and hematological malignancies makes us an attractive choice for clinicians. We are often asked about further M&A or strategic investment opportunities. This is an area we spend a lot of time on, consistently evaluating companies and technologies. However, we are being highly selective. We are seeing the investments we have made in our business pay off with meaningful organic growth and continuing strengthening of our position in the market. While there are likely opportunities for us to strengthen through M&A, we will continue to be measured in our approach. I’ll now turn the call over to our CFO, Paul Kim, to walk through the detailed financials for the third quarter.

Paul?

Paul Kim: Thanks, Brandon. Revenue in the third quarter totaled $85 million compared to $106 million in the third quarter of 2022. Approximately $19 million came from COVID-19 testing in Q3, which was not part of our guidance. Revenue from our core business totaled $66 million, which exceeded our guidance of $65 million and grew 17% year-over-year. Gross margin was 47%. The increase in gross margin year-over-year is primarily related to COVID-19 revenues of $19 million, recognized on previously built tests due to successful insurance collection on appeals. Now, turning to operating expenses. Total GAAP operating expenses were $39.6 million for the third quarter, down from $40.4 million in the second quarter of 2023. Non-GAAP operating expenses totaled $29.4 million, down from $30.4 million in the second quarter of 2023.

Non-GAAP operating margin increased 27 percentage points sequentially to 15.4%, primarily due to COVID-19 testing revenue recognized in the quarter. We recognized a tax expense of $20 million in the third quarter as we put up a reserve against our deferred tax assets. Due to being in a loss position, we reserve for these deferred tax assets in full. With our performance in gross margins and operating margins in the third quarter, had we used the previous statutory rate instead of booking the valuation allowance, we would have further exceeded our projections. Adjusted EBITDA for the third quarter was $18.1 million compared to $19.7 million in the third quarter of 2022. On a non-GAAP basis and excluding equity-based compensation expense of intangible asset amortization, loss for the quarter was $17.7 — I’m sorry, $11.7 million or $0.39 per share based on 30 million weighted average shares outstanding.

Turning to the balance sheet. We ended the third quarter with approximately $851 million in cash, cash equivalents and marketable securities. Cash, cash equivalents and marketable securities increased $4 million from Q2, of which $3 million was an increase in investments. We were active with our share repurchase program in the third quarter. We repurchased approximately 80,000 shares of our common stock at an aggregate cost of $2.2 million at an average price of $27.65 under the stock repurchase program announced in March of 2022. Subsequent to the end of the quarter, as of October 31, we have since repurchased approximately 533,000 shares at an aggregated cost of $13.7 million. As of October 31, 2023, a total of approximately $159 million remained available for future repurchases of our common stock under the stock repurchase program.

Moving on to our outlook for 2023. We’re reiterating core revenue guidance of $260 million. This number does not include additional revenues from COVID-19 testing. Excluding the $19 million of COVID-19 revenues, the non-GAAP gross margin improved 2 percentage points in Q3 to 36%, and we estimate Q4 non-GAAP gross margins to remain relatively the same or slightly higher. We expect that our ongoing integration efforts with our recent acquisitions will create efficiencies that will result in improved gross margins and operating margins in 2024. For the full year 2023, utilizing a non-GAAP tax provision, an average share count of 30 million, we maintain net non-GAAP loss of $0.95 per share for our shareholders, excluding stock-based compensation and amortization of intangible assets, as well as any onetime charges.

Given our strong balance sheet and cash position and the way we’ve been balancing our investments, we wanted to provide guidance on our expected cash position at the close of the year. Our investments in our therapeutics business have been lower than anticipated this year, and we continue to be active with our share repurchase program. Our core business is performing well and we have some welcome through unexpected COVID-19 testing revenues. As such, excluding any stock repurchases since Q3 or other expenditures outside the ordinary course, we expect to end the year with approximately $830 million of cash, cash equivalents and investments. Overall, we have strengthened our core business, bolstered our portfolio through strategic acquisitions and improved our financial performance in 2023.

We’re pleased with our trajectory and see good momentum ahead. Thank you for joining our call today. Operator, now you may open it up for questions.

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Q&A Session

Operator: Certainly. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from David Westenberg from Piper Sandler. Your line is now live.

David Westenberg: Hi, thank you for taking the question and congrats on the strong work here. So can you talk about any of the COVID reimbursement payment? I mean, I think you guys have mostly exited COVID. I mean, is there any COVID testing remaining or how should we think about that as an option from here out?

Ming Hsieh: Yes. Brandon, do you want to take that question?

Brandon Perthuis: Yeah, certainly. Thanks, Dave. There’s very little ongoing COVID testing that is accurate. However, we continue to appeal claims and continue to collect on AR from when COVID testing was much higher. So I think that’s what you’re seeing today. I think you’re seeing the payoff of a robust revenue cycle management team and the payoff of a company that is going to do all we can to collect on the work that we’ve done. So it was essentially a collections effort and proud of the team to — they’ve done a good job to collect on the test that we ran during the spike of COVID.

Paul Kim: David, at the beginning of the year, we stripped out COVID from our core guidance and from an operational perspective. And when we did that, we commented that the assumptions that we made and not including that, we felt was conservative. So these kinds of adjustments that you’re seeing are — we’re pleased to report that they’re on the positive side. And I think the other thing that it points to is our overall efficiencies in the way that we’re conducting our business, whether it be appeals or the way that we’re running the operations. So we certainly are pleased with the uplift that we’re getting from COVID, but we’re going to continue to not have that within our guidance.

David Westenberg: No, I appreciate the conservatism on not having in the guidance, but I would ask, is there any potential for any one more time payment? And I realize like on a go-forward basis, I mean, this isn’t necessarily how we all are going to value the company, but just for mechanical purposes or…

Brandon Perthuis: Yeah, there is. Our collection efforts are ongoing. Our appeals efforts are ongoing. So is there a chance we have additional collections from COVID-19 in Q4 and beyond? Yes. Something we’re counting on? No. But yeah, I mean we’re continuing to do work on those appeals and on those collections, yes.

David Westenberg: Okay. Great. And then you mentioned the Pharma revenue being a little bit lumpy. Just overall across the industry, we are seeing pharma taking a little bit more of a conservative approach with their spending. How confident are you? And is this lumps and maybe not just kind of weakening macro overall because there is — across the industry, we are seeing some of that weakening macro.

Brandon Perthuis: Yeah. I think we’re starting with a little bit smaller number perhaps. So I don’t think what we’re seeing is a macro environment change. I think we have — we don’t yet have a large client base for these services is something we’re building out. So I think Fulgent needs to do is continue to get more clients, needs to continue to get more market share and needs to continue to get out to our existing clients to sell the new services we’ve launched in that division. So I think for us, it’s just sort of a timing thing. The pipeline does look strong. We are onboarding new partnerships and new clients. So I don’t think we’re seeing that macro shift. I think for us, it’s just a timing. And ultimately, to have a more steady trajectory, we need to continue to fill that sales funnel, need to continue to onboard new partnerships and continue to get those clients to take advantage of all the new products and services we’ve launched.