Fulgent Genetics, Inc. (NASDAQ:FLGT) Q4 2022 Earnings Call Transcript

Fulgent Genetics, Inc. (NASDAQ:FLGT) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Hello and welcome to the Fulgent Genetics Q4 and Fiscal Year 2022 Earnings Conference Call and Webcast. 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 afternoon and welcome to the Fulgent Genetics fourth quarter and full year 2022 financial results conference call. On the call are Ming Hsieh, Chief Executive Officer of Fulgent; Paul Kim, Chief Financial Officer of Fulgent; and Brandon Perthuis, Chief Commercial Officer of Fulgent. The company’s press release discussing the financial results is available on the Investor Relations section of the company’s website, www.fulgentgenetics.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 from 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 in 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 filings with the Securities and Exchange Commission, including the previously filed 10-K for the year ended December 31, 2021 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 fourth quarter and full year of 2022 for more information, including the description of how the company calculates non-GAAP income and earnings per share and a reconciliation of these financial measures to income and earnings per share to the most directly comparable GAAP financial measures.

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

Ming Hsieh: Thank you very much, Melanie. Good afternoon and thank you for joining our call today. I will start with some comments on the quarter and the year. Then Brandon will review our product and go-to-market updates from the first quarter. And Paul will conclude with the financials and our 2023 outlook before taking your questions. Looking at the fourth quarter, we exceeded our revenue guidance, reflecting 97% growth in our core business compared to 2021. We have integrated our recent acquisitions and are seeing those benefits in our annual results. For 2022, our core businesses grew across all diagnostic segments, Precision Diagnostics, Anatomic Pathology and Pharma Services with the momentum in oncology and reproductive service.

With the Inform Diagnostics businesses boosted our capability in Anatomic Pathology and adding significant revenue, we will see pressure on our bottom line in the near term which Paul will address. However, in long-term, we believe this acquisition will make a good strategic sense for us. We continue to be the leader in Precision Diagnostics due to our NGS platform capabilities. An example of our successful COVID-19 testing program between 2020 and 2022, led by our contract, Fulgent delivered 19.3 million RT-PCR COVID-19 tests, generated over $1.7 billion in revenue for Fulgent. With the pandemic largely behind us, we’re not inhibiting additional COVID revenue in 2023. We are proud of what we scaled our business so quickly and contribute so minimal to the testing efforts to fight the pandemic.

We’re seeing a similar opportunity to scale our platform to address the growing demand by our customers for our Beacon Carrier Screening Test. Today, we announced an expansion, Beacon787 which Brandon will talk more about it. And we are anticipating associated annual growth of more than 300% in Beacon sales as we grow this portion of our business. We believe this activity will further secure our leadership position in NGS and it is an important factor in our annual guidance provided today. For 2023, our revenue guidance of $240 million, assuming 32% growth in our core business, driven by continued growth across all the areas of our diagnostics business, including expansion and oncological carrier screening through Beacon787 announced today.

Through our internal efforts and those of our lab partners, we are leveraging our proprietary NGS platform to broad applications. Fueled by our ongoing R&D effort, we have a long runway of opportunity in the core business and has seen diagnostics as a continued and dependable source of revenue and the growth for Fulgent in the years ahead. In the fourth quarter, we announced the acquisition of Fulgent Pharma. We believe this acquisition has the potential to gradually transform Fulgent from a genetic diagnostic service business into a fully integrated precision medicine company focused on oncology. We joined by our team of talent individuals, integrating our company to address the continuum of care in that we believe begins with diagnostics and patient care and monitoring.

Fulgent Pharma has developed a novel nanoencapsulation and targeted therapy platform technology designed to improve therapeutic window and pharmacokinetic profile for both new and existing cancer drugs. Our lead drug candidate, FID-007, has achieved proof-of-concept for the treatment of numerous cancers, including head and neck, ampullary, pancreatic, lung and breast. We continue to encourage the early data from this program and are working on clinical path forward, including additional clinical trials toward approval. We’re fully — we have full control of our manufacturing process and can be very efficient. Given the current — we have fully converted the GMP nano materials production plans, operating with experts and scientists who are now integrated into our organization.

We have submitted updated clinical Phase Ib data to ASCO for presentation at the 2023 Annual Meeting in June. We look forward to share additional progress on the pharma business as we move throughout the year. We ended 2022 with a strong cash position, affording us the flexibility to pursue additional strategic opportunities as they arise. Earlier this year, we were pleased to expand our Board of Directors with the addition of Reggie Groves. Reggie possesses a diverse business skill set and a global perspective that we believe will be invaluable to our Board. We entered a new chapter in precision medicine with our current acquisition. Her expertise as a leader and an officer in various senior roles and with clinical and regulatory functions, particularly from her 13 years at Medtronic will add important insights into our business as we advance our mission to build a holistic platform that provides comprehensive solutions and services across the cancer care continuum from early detection, diagnostics, monitoring, drug discovery and development.

Over the year, we have expanded and strengthened our Board, adding additional expertise in diagnostics, therapeutic drug development and commercialization. Now I’d like to thank our employees and shareholders for your support, that was a transitional and transformative year for Fulgent. I would look forward — I’m looking forward to the years ahead and the momentum we are creating within our combined business. I’ll turn over the call over to Brandon, our Chief Commercial Officer, to talk about our diagnostics business results during the fourth quarter. Brandon?

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Brandon Perthuis: Thanks, Ming. With COVID-19 mostly behind us as well as our integration efforts for our acquisitions, we are able to intensely focus our efforts on our base business. We exceeded our expectations for the fourth quarter driven by an outperformance in our reproductive health business line and our Pharma Services division. At a high level, our core revenue was $55 million in the fourth quarter compared to $28 million in the same period the prior year and $56 million in the third quarter of 2022. Starting with our Beacon Expanded Carrier Screening product, for some time, we knew we had a successful product in service. Backed up against competitive products in the field, Beacon frequently excels as it relates to detection rates, our ability to discern pseudogenes, reliable copy number calls with our proprietary CNV exome algorithm plus other features.

Our optimized workflow for variants with pseudogene interference has been validated and externally published as a method for analysis of genes with pseudogene interference and/or sequence homology issues, allowing for improved testing accuracy. This method also optimizes the turnaround time and reduces the need for unnecessary confirmatory testing to identify point mutations, copy number variants and gene conversion events in genes with pseudogene interference that other labs may not be able to detect. Using this pipeline, we can quickly distinguish positive and negative cases with NGS sequence misalignment, avoiding testing delays due to redundant confirmatory testing. Most bioinformatics methods do not discriminate genomic regions with extensive homology.

This can lead to false negative or false positive variant calls and/or produce incorrect copy number calls due to misalignment of reads. Our bioinformatics algorithms compare read depth between homologous regions to identify sequence misalignment. In terms of the panel content, we have been offering one of the largest carrier screening panels in the market, customizable up to approximately 430 genes. Included in our panel are all of the American College of Medical Genetics and Genomics, ACMG, Tier 3 genes which ACMG published in their last practice guidelines for carrier screening, recommending that all pregnant patients and those planning of pregnancy, they offer this set of genes as an equitable pan-ethnic screening approach. The ACMG list includes genes with a carrier frequency of greater than 1 in 200 for autosomal recessive conditions and disease prevalence of greater than 1 in 40,000 for X-linked conditions.

This totals 113 genes. Our Beacon panel includes all of these with most major competitors typically only covering between less than 60% to 90%. Historically, we were not able to fully leverage our Beacon product without managed care contracts. However, now armed with in-network coverage, we are seeing tremendous momentum. Our monthly carrier screening volume is setting company records only second to what we saw with COVID-19 testing. In addition to our direct sales, we have also partnered with other large national labs to outsource some of their carrier screening tests to Fulgent. And finally, we announced this afternoon, we have launched the new Beacon787. This further expands our capabilities and provide the most comprehensive test available today.

Turning to Pharma Services, another area with big momentum. While we do not discuss our client name due to confidentiality and competitive reasons, we are proud to say that we now work with 6 of the top 10 pharma companies in the United States. In addition, we are working with 3 of the largest global CROs to perform NGS testing. With the acquisitions of Inform Diagnostics and CSI, we were able to further broaden our offering to our pharma clients by adding tests such as IHC, FISH, Flow Cytometry, et cetera. Recently, our Pharma Services launched a powerful solution for spatial phenotyping using multiplex immunofluorescence. The speed and accuracy of advanced digital imaging technology, combined with the precision of multiplex immunofluorescence allows you to quickly assess phenotypes in a variety of cell types.

This technology, along with our experienced scientific team allows more custom solutions for our clients and their drug programs. We anticipate continued momentum in this space as we build new partnerships, drive deeper relationships with existing partners and continue to launch new services. While slightly tangent to Pharma Services but in a similar scope of work, we have partnered with a large DTC testing company to sequence thousands of human genomes. We believe our quality, test menu, turnaround time and cost structure make us an attractive solution for B2B relationships as well as our core Pharma Services clients. We are pleased to report that Fulgent Oncology regionally launched in the second quarter of 2022 has become one of the fastest-growing segments of our business.

Our oncology portfolio launched under the brand name Lumera includes our marquee product, Lumera Xpanded NGS for Solid Tumors, Lumera Comprehensive Hematology Profile, a full menu of pathology and molecular assays and a suite of NGS germline tests. This full-service approach gives Fulgent a unique one-stop shop provider position in the space of Precision Diagnostics. To further differentiate our offering, we will be expanding the Lumera menu in a few weeks to include a Comprehensive Heme NGS Profile, Lumera Heme NGS will be positioned as a disruptive 670 gene profile that will include analysis across mutation type and simultaneous analysis of DNA and RNA, allowing for optimal detection of fusion genes in addition to indels and SNVs. This panel recently received MolDx approval, robust coverage determination and a CMS reimbursement rate of approximately $2,850.

Our new Heme Profile will further position Fulgent Oncology as a leader in a dynamic space, giving us a competitive advantage over the many single assay or single technology providers in Precision Diagnostics. We anticipate continuing to expand our oncology portfolio throughout 2023 and Fulgent Oncology aimed to be the undisputed leader in oncology, specialty testing and Precision Diagnostics in the U.S. A quick update on the sales team, the overall head count remains mostly unchanged. However, we have done intense training so that our national sales team is better able to handle multiple product lines and to look for opportunities to cross-sell. This is showing early signs of success as we have seen legacy Fulgent sales reps be able to close Anatomic Pathology sales, for example.

We remain open to expanding the sales team over time and are always looking for key additions to our team as talent presents. One area that may expand a bit more rapidly is reproductive health. We have a small team there. However, we are seeing huge momentum in the space. In addition, we have ongoing R&D to launch new products and services for reproductive health. Depending on the near-term momentum and the timing of our product launches, there is a possibility we could do an expansion in the summer, as well as M&A. We are excited to enter 2023 with a wind in our sales and we look forward to another great year. I’ll now turn the call over to Paul Kim, our Chief Financial Officer. Paul?

Paul Kim: Thanks, Brandon. Revenue — full year revenue totaled $619 million compared to $993 million in 2021, exceeding our overall guidance of $611 million. GAAP income was over $143 million or $4.63 per share. Revenue in the fourth quarter totaled $68 million compared to $252 million in the fourth quarter of 2021, exceeding our overall fourth quarter guidance by approximately $60 million. We are no longer reporting billable tests as we believe that revenue is a better measure of how the business is progressing rather than volume. Breaking down revenue a bit further, roughly $13 million came from COVID-19 testing in Q4 compared to our guidance of $8 million. Revenue from our core business totaled $55 million which exceeded our guidance of $52 million and grew 97% year-over-year.

Gross margin was 19.2% , down 56 percentage points year-over-year and down 24 percentage points sequentially. The reduction in gross margin was, again, due to test mix, including higher costs associated with our core genetic testing portfolio, including pathology testing and also due to inventory reserves and our accelerated equipment depreciation related to COVID-19. Now turning to operating expenses. Total GAAP operating expenses were $49.5 million for the fourth quarter, up from $45.7 million in the third quarter of 2022. Non-GAAP operating expenses totaled $38.7 million, up from $37 million in the third quarter of 2022. Non-GAAP operating margin decreased 45 percentage points sequentially to a negative 34%. While the expense structure of our legacy Fulgent business remains lean, we have incurred a number of incremental expenses as a part of our recent acquisitions as expected.

So we have made significant investments in people, infrastructure and operations to support our growth and these investments are putting pressure on our operating margins. We remain confident that these investments will translate into demonstratable ROI and drive outsized future growth of our core business. At the same time, we’re pleased with our ability to still generate positive cash flow during this transformative time for our business. Adjusted EBITDA for the fourth quarter was a negative $15.1 million compared to a positive $158.8 million in the fourth quarter of 2021. On a non-GAAP basis and excluding equity-based compensation expense, intangible asset amortization, restructuring costs and acquisition costs related to Fulgent Pharma, the loss for the quarter was $14.2 million or $0.48 per share on a 29.6 million weighted average shares outstanding.

Now turning to the balance sheet. We ended the fourth quarter with approximately $872 million in cash, cash equivalents and marketable securities, including investments pending settlement. We generated $33.2 million of cash from operations during the quarter despite the significant investments we made in our business for the quarter. I would also like to highlight that we were active with our share repurchase program in the fourth quarter. We repurchased over 815,000 shares of our common stock at an average cost of $35.65 under the stock repurchase program announced in March. As of December 31, 2022, a total of approximately $175.7 million remained available for future purchases of our common stock under the repurchase program. Now moving on to our outlook for 2023.

We will not be guiding total revenue for the company without COVID testing revenues. In other words, the guidance that we have provided of $240 million as well as the guidance for the first quarter is solely for core revenues. We expect total revenues to be approximately $240 million in 2023, representing core growth of 32% year-over-year. Given the tough comps this year for revenue, we want to provide more information on what we have been calling core revenue or the rest of the diagnostics business ex COVID. We expect growth this year in all areas of our core business, including Precision Diagnostics, Anatomic Pathology and Pharma Services. We will reference these 3 areas of our business going forward as we talk about our revenue trends. Precision Diagnostics includes all of our clinical NGS revenue, oncology, reproductive services, rare disease, neurogenetics, B2B relationships with labs and our business in China.

Current strength in this segment points to reproductive services and oncology as Brandon and Ming both discussed. Given certain lab arrangements, there may be variability from quarter-over-quarter. Anatomic Pathology includes the business we have integrated from Inform Diagnostics which had strong growth in 2022 that we expect to continue in 2023, particularly in urologic and dermapathology , including digital pathology. Pharma Services include sequencing as a service which we sell to our pharmaceutical business partners and is dependent on these relationships, so it may be lumpy from quarter-to-quarter. We’ve been building on this business and expect consistent growth. The expected 2023 revenues from these 3 areas are estimated as follows: $114 million from Precision Diagnostics, $113 million from Anatomic Pathology and the remaining $13 million from Pharma Services.

Given the nature of these businesses in our guidance provided today, we’re comfortable with the growth projections we have given. Looking at margins going forward, given the non-COVID and the acquired revenue profile of the company, we will see gross margins coming down. This is due to the absence of revenues from COVID-19 testing as well as a larger contribution from Anatomic Pathology revenues which are lower margin than our corporate average. We expect to see lower operating margins in the quarters ahead as we integrate and further invest resources in our recent acquisitions. Long-term, our foundational technology platform supports a strong margin profile and we will continue to manage our spending with discretion to drive operating leverage.

For the full year 2023, utilizing an estimated 29% — 28% tax rate and a share count of 31 million, we expect non-GAAP loss of approximately $1.25 per share for our shareholders, excluding stock-based compensation, amortization of intangible assets, restructuring costs as well as other onetime charges. Last quarter when we acquired the pharma business, we said we would report on this business separately. Revenue from this business is not anticipated in our 2023 guidance and we expect associated cash burn for this business of approximately $15 million to $17 million this year which is included in our EPS guidance provided today. Overall, we have strengthened our core business and bolstered our portfolio through strategic acquisitions and we 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. Our first question is coming from Dan Leonard from Credit Suisse.

Unidentified Analyst: This is Lilly on for Dan Leonard. I think first question on the guidance. I think previously, we were talking about $200 million base line revenue for core Fulgent. So just wondering what is the difference, like what are the growth drivers on the ’23 guidance of the $240 million?

Paul Kim: Yes, that’s an excellent question. So I’ll first comment on the numbers and I’ll turn it over to Ming and Brandon, who can talk about where they see growth and penetration within certain markets based on our overall capabilities. So we talked about having a core revenue base of approximately $240 million. And given what we’re seeing based on the prospects of our core business, our guidance is $240 million for the year. Now one of the things that actually surprised us during the fourth quarter is the stickiness of our core revenues and that’s giving us additional confidence in our ability to achieve $240 million. And the other thing that happened, right, during the quarter and we stripped out completely is COVID revenues.

We think that there will be some COVID revenues that we get in 2023. But for the purposes of this earnings call and the strategic focus of our company, we strip that out. A little bit more color on — from a numbers perspective on our core revenues. We anticipate Q1 as we stated in the press release to be approximately $56 million for the core revenues. And regardless of like seasonality that we might have for the parts of our business, we see the momentum behind our core revenues increasing throughout the course of the year. But I’ll turn it over to Brandon, who can talk more about the areas that we’re excited about that gives us confidence within the $240 million.

Brandon Perthuis: Yes, certainly. Thanks, Paul and thanks for the question. We’re seeing strength across all business lines as we’ve now broken them out a bit to give some more granularity. But in particular, we’re seeing strong growth in reproductive health as well as our Fulgent Oncology. Now granted, Fulgent Oncology is coming off a base of essentially 0. It’s a new product launch for us that happened in 2022. But the reproductive health space, we’ve been in for some time However, we didn’t have the contracts we needed to really penetrate that market. So we are seeing tremendous momentum in reproductive health. There’s been some market dynamics that have opened up some tremendous opportunities for Fulgent. But both of those areas are showing tremendous momentum. So I think we have a lot of confidence in the guidance for 2023 and look forward to delivering on it as the year progresses.

Unidentified Analyst: Got it. That’s very helpful. I’m sorry, go ahead.

Ming Hsieh: Yes. Adding the comments from both Paul and Brandon, I do see the long-term investment from Fulgent’s R&D team in the — into the artificial intelligence and data mining technique, I do see the — continue to see the benefit for us to provide the leadership in the NGS space and continue to build the technology which should provide our revenue growth.

Unidentified Analyst: Got it. That’s super helpful. Brandon, I think just one follow-up on the contracts. So do you have any updates on the contract roll up? I think in the last call, you expect everything to be done by end of 2022. Is that still on track or like can you give us any color on that?