Fulgent Genetics Q3 2023 Earnings Call Transcript

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November 3, 2023

There are 7 speakers on the call.

Operator

Hello, and welcome to

Speaker 1

the Fulgent Genetics Q3 2023 Earnings Conference Call 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.

Speaker 2

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 recall, Paul Kim, Chief Financial Officer and Brandon Pertheus, Chief Commercial Officer. The company's press release discussing the financial results review 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.

Speaker 2

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, report the results of the company's results, uncertainties and changes in circumstances that may cause actual results to differ from those described in the forward looking statements. The 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 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 refer to these forward looking statements contained in the company's filings with the Securities and Exchange Commission, including the previously filed 10 ks for the year ended report on December 31, 2022, and subsequently filed reports, which are available on the company's Investor Relations website.

Speaker 2

Management's prepared remarks, including discussions of earnings and earnings per share, contain financial measures not prepared in accordance with accounting principles Management has presented these non GAAP financial measures because it believes they may be useful to investors refer to the company's financial results prepared in accordance with GAAP. Please see the company's press release discussing its financial results for the Q3 of 2023 for more information, including the description of how the company calculates non GAAP income or loss, With that, I'd now like to turn the call over to Ming.

Speaker 3

Thank you, Melanie. Good morning, and thank you for joining our call today. I will start with some comments on the quarter, And Paul will conclude with the financials and outlook before we take your questions. We are pleased with our results in the 3rd quarter with $85,000,000 of total revenue. Due to our successful collection effort, we recognized additional $90,000,000 of revenue recall from previously billed COVID-nineteen test.

Speaker 3

Our core revenue of $66,000,000 was driven by momentum In precision diagnostics, as we expected, the revenue for the anatomic should Pathology were seasonally lower in the 3rd quarter. Farmer service, which we had said is a lumpy business, look at the full year of $260,000,000 of core revenue. We continue to make good progress with our

Speaker 2

Welcome

Speaker 3

to the Jyn Pharma, our novel nano encapsulation technology, include over 40 patents and the targeted therapy platform designed to improve therapeutic windows And the pharmacokinetics profile of both new and existing cancer drugs. Our lead drug candidate FID-seven has shown promised results for the treatment of numerous cancers, including

Speaker 4

head and neck, temporary

Speaker 3

refer to the FDA, with reduced side effects.

Speaker 4

We can

Speaker 3

present additional data, including all Annual meeting going on now in San Diego. We'll then have the post available on our website. From this data, we are moving forward with Phase 2 studies in head and neck cancer. We have submitted our refer to Phase 2 clinical protocol to FDA and expect the initial study in the Q1 of 2024. We are excited I'd like to thank our employees and shareholders for your loyalty during the past quarter.

Speaker 3

We're looking forward to close out a strong year and the capital is on the momentum we see ahead. I will now turn over the call to over to Brandon, our Chief Commercial Officer, to talk about our Diagnostics business results during the quarter. Brendan?

Operator

Thank you, Ming. We had yet another solid quarter led by continued momentum in our Precision Diagnostics division. Core revenue for the Q3 totaled $66,000,000 down 2% sequentially and up 17% year over year. Breaking it down further, Precision Diagnostics came in at $37,500,000 an increase of 15% 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.

Operator

This was the case for the Q3. Pharma Services came in at $3,700,000 look 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 multidisciplinary team experience 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.

Operator

As a reminder, carrier screening assesses risk of passing on certain genetic conditions to children. This test is for anyone who is currently pregnant, consider pregnancy or planning to become pregnant in the future. Our BEACON test menu now includes 7 preset panels ranging from 6 refer 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.

Operator

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 Q3, we entered into a new agreement with Progyny for Beacon Care Screening. Progyny is a leading benefits management company specializing should review the Q2 of 2019, we will review the

Speaker 3

Q3 of 2019.

Speaker 2

This new agreement allows us

Operator

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 refer to R and 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 giving well defined options to providers.

Operator

Our focus panels are now closely align 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 should genes and candidate genes that may provide information about the cause of the cancer in the family, but may not be associated with actionable guidelines at this time. Our comprehensive offerings for hereditary cancer testing, coupled with our test menu for solid tumors and hematological malignancies, Makes this an attractive choice for clinicians. We are often asked about further M and A or strategic investment opportunities. This is an area we spend a lot of time on, consistently evaluating companies and technologies.

Operator

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 and 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 Q3. Paul?

Speaker 4

Thanks, Brandon. Revenue in the Q3 totaled $85,000,000 compared to $106,000,000 in the Q3 of 2022. Approximately $19,000,000 came from COVID-nineteen testing in Q3, which was not part of our guidance. Revenue from our core business totaled should $66,000,000 which exceeded our guidance of $65,000,000 and grew 17% year over year. Gross margin was 47%.

Speaker 4

The increase in gross margin year over year is primarily related to COVID-nineteen revenues of $19,000,000 recognize on previously billed tests due to successful insurance collection on appeals. Now turning to operating expenses. Total GAAP operating expenses were $39,600,000 for the 3rd quarter, down from $40,400,000 in the Q2 of 2020 3. Non GAAP operating expenses totaled $29,400,000 down from 30 sequentially to 15.4%, primarily due to COVID-nineteen testing revenue recognized in the quarter. We recognized a tax expense of $20,000,000 in the 3rd quarter as we put up a reserve against our deferred tax assets.

Speaker 4

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 3rd 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 Q3 was $18,100,000 compared to $19,700,000 in the Q3 of 2022. On a non GAAP basis and excluding equity based compensation expense of intangible asset amortization, Loss for the quarter was 11,700,000 should or $0.39 per share based on 30,000,000 weighted average shares outstanding. Turning to the balance sheet, we ended the 3rd quarter with approximately Securities increased $4,000,000 from Q2, of which $3,000,000 was an increase in investments.

Speaker 4

We were active with our share repurchase program in the Q3. We repurchased approximately 80,000 shares of our common 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 13,700,000 As of October 31, 2023, a total of approximately 159 Moving on to our outlook for 2023, we're reiterating core revenue guidance of $260,000,000 This number does not include additional revenues from COVID-nineteen testing. Excluding the $19,000,000 of COVID-nineteen revenues, The non GAAP gross margins improved 2 percentage points in Q3 to 36%, and we estimate should Q4 non GAAP gross margins to remain relatively the same or slightly higher. We expect that our ongoing integration efforts For the full year 2023, utilizing a non GAAP tax provision and average share count of $30,000,000 we maintain participate this year and we continue to be active with our share repurchase program.

Speaker 4

Our core business is performing well And we have some welcome through unexpected COVID-nineteen testing revenues. As such, excluding any should look at the company's earnings call, we have strengthened our core business, Thank you for joining our call today. Operator, now you may open it up for questions.

Speaker 1

Certainly. We will now be conducting a question and answer session. Our first question today is coming from David Westenberg from Piper Sandler. Your line is now live.

Speaker 5

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, are is there any COVID update remaining or how should we think about that as an option from here out?

Speaker 3

Yes. Brandon, you want to take that question?

Operator

Yes, 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 I think that's what you're seeing today.

Operator

I think you're seeing the payoff of a robust revenue cycle management team and the payoff of a company that should 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 tests that we ran during the spike of COVID.

Speaker 4

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 point to is our overall efficiencies and the way that we're conducting our business, whether it be appeals or the way that we're running the operations. So, we're 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.

Speaker 5

Yes. 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

Operator

Yes, there is. Our collection efforts are ongoing. Our appeals efforts are ongoing. So Is there a chance we have additional collections from COVID-nineteen in Q4 and beyond? Yes, something we're counting on, no.

Operator

But yes, I mean, we're continuing to do work on those appeals and on those collections, Yes.

Speaker 5

Okay, great. And then, how you mentioned, the pharma revenue being a little bit lumpy. Just overall and across the industry, we are seeing pharma taking a little bit more of a conservative With their spending, how confident are you and is this is lumps and maybe not just kind of weakening macro Overall, because there is across the industry, we are seeing some of that weakening macro.

Operator

Yes, 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, something we're building out. So I think What Foljet 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 So I think for us, it's just sort of a timing thing. The pipeline does look strong.

Operator

We are onboarding new partnerships and new clients. So I don't think we're seeing that macro shift. I think 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.

Speaker 4

David, Brandon and I have been commenting on Pharma Services and the nature of that business being lumpy, as Brandon mentioned. The other thing is the sales cycle is longer in terms of duration. But if you kind of take a step back and look at the overall perform at the Pharma Services, we did approximately $10,000,000 in 2022. And in 2023, even with the lumpiness, We're anticipated within our guidance to do approximately $21,000,000 $22,000,000 So we're anticipated to have over 100% increase In that business, we anticipated the pharma services revenues to be lower in Q3 and Q4, Anticipating when the work will be serviced and recognizable in terms of revenues. But as Brandon indicated, We are really excited about this business and our funnel is full.

Speaker 5

Got it. Great. I'll just ask One more and let Andrew have some more questions. So just, I know you're going to begin Phase 2, I think early next

Speaker 3

should

Speaker 5

In R and D spend associated with that as a step up. Thank you.

Speaker 3

Yes, David. I think our budget projection still solid. We are still around the $15,000,000 annually burn rate. So for the Phase 2 study, It's going to be the Phase 2 study at the second line of therapy for the head and neck cancer patient. So it is a combining combination therapy, which is suggested by the experts in this field, we feel very good about this our position and the market potential.

Speaker 3

By the interim's R and D spending, the $50,000,000 that we allocated is not only for the clinical trials, But as all the new drug development effort combined together, so we still expect about $50,000,000 annual burn rate.

Speaker 5

Thank you so much.

Speaker 1

Thank you. Next question today is coming from Andrew Cooper from Raymond James. Your line is now live.

Speaker 6

Sorry, I had myself muted. Thank you for the questions. I guess just want to maybe first ask a little bit about the guidance, just the sequential revenue, The core being sort of flattish, maybe down a touch is sort of what you're pointing to. So maybe just a sense for how much of that might be seasonality in your minds versus Maybe something that is moving a little bit more materially from quarter to quarter?

Operator

Thanks for the question, Andrew. No, it certainly is some seasonality in it, Especially as it relates to our anatomic pathology division, that's something we are planning on. In addition, it Still goes back to some of our pharma services and needing to get those projects through the door, get them signed out so we can book those revenues. So That's another thing we're planning on in Q4, just seeing some additional lumpiness in the pharma services business. Should The Precision Diagnostics still has tremendous momentum.

Operator

Beacon volumes are doing incredibly well. Our oncology business is doing well. So we expect to see that continued momentum into the Q4, but again taking a bit of a conservative approach as it relates some of the seasonality around AP and some of the pharma services.

Speaker 6

Okay, helpful. And a couple of those are areas I wanted to hit on as well. So maybe starting With AP, if I have my numbers right for Precision Diagnostics and pharma services for this quarter, I think AP was a little bit lower than We were looking for and I think lower than you were sort of looking for at least at the start of the year when you originally guided for that segment. So What's going on there? Can you give us a little bit of an update in AP and how we should be thinking about that business given it is a pretty hefty should The chunk of the overall, but not the one that we've talked about much today?

Operator

Yes, certainly. No, it is. And we're still continuing to sort of position and doing the work there to implement our technologies, our procedures and the focus has been improving the operation I mean, improving those margins. I think we're making some good progress there, but perhaps taking a little bit longer than we anticipated work through that acquisition, but things are generally trending in the right direction. It's a pretty stable business, you're right.

Operator

Should So the little bit of a downturn that we saw could be a little bit of seasonality into the back half of the year. We are monitoring our account for profitability, so to a very small degree we've exited some areas where maybe we didn't have favorable reimbursement or For whatever reason, the mix wasn't a profitable account for us. So we are looking into some account level profitability, that may play a small role in it. But long term, we're continuing to invest in that business. We've made some changes into the go to market strategy and sales structure.

Operator

We are on boarding some additional sales people in the back half of this year and early next year. We believe we have an incredible product offering in AP. Our sub specialty trained pathologists are some of the best The United States turnaround times are fantastic. So we do believe it's an area we can grow. And hopefully some of the investments we've made recently and are continuing to invest will pay off into next year.

Speaker 6

Okay, great. That's helpful. And then just on Fulgent Oncology, I know last quarter we talked about Adding some incremental head, starting to build that rollout beyond the West Coast where you initially started. So would love just an update on sort of how that's going, what the reception Maybe where you are in some of those hiring processes that I know don't happen overnight?

Operator

Yes, thank you. They certainly don't happen overnight. And As you've seen, we are quite selective with who we onboard into the sales team. We have brought on 2 new headcounts. They're not on the West Coast.

Operator

There are in different other territories, so that geographical expansion we talked about is happening. There is Obviously, a ramp period for these new reps. They don't step in selling on day 1, even though they would love to. But these reps we've brought on board are Industry veterans, they're industry experts. So they do bring with them that client level expertise and market expertise.

Operator

So we are enthusiastic about their Long term to drive new sales for FOLGE in oncology and we're continuing to look for additional sales talent. So but again, it's sort of more of an opportunistic thing when we find the right people in the right territories, we don't have a ton of open positions right now that we're just trying to fill. So we'll continue to do that. The product offering is going well. I think we've done a good job with that rollout.

Operator

So It's something that's a long term vision for the company and we'll continue to layer on capabilities and salespeople as we move

Speaker 1

forward. Okay.

Speaker 6

That's helpful. And then maybe just one on Beacon as well. Pretty big immediate step up early in the year in terms of the volumes and the share gains there. So just would love any commentary on sort of whether that stabilize, are you continuing to take share in that IVF setting? And then what are some of the guideposts we should really be looking for as we think about that build out and that initial Effort to make the transition into the OBGYN setting as well.

Operator

Well, as we've discussed before, I mean there was massive disruption in that Right. So clients were left without a provider on short notice. So those clients had to find a new lab relatively quickly. So It was certainly hectic there for a while for the clients as well as for Fulgent and other laboratories. But most of that business had to find a new home and it did.

Operator

And like as you said, Folgiant benefited tremendously from that. I think what we're seeing now is some of those clients were a bit rushed in their decision making process And perhaps not entirely pleased with some of the laboratories they've chosen for a variety of reasons, whether it's panel content, turnaround time, Customer service. So now what we're seeing is, the clients have had the time to digest everything, Now seeing that Foljeet may have been a better choice. So while the like you said, the mad dash kind of happened, now it's more of a grind to find the clients where Fulji can be a better service provider than what they're currently getting. In terms of the OB space, it's something we have It's a bright spot on our radar.

Operator

It's a huge TAM. It's a big opportunity for us. We've commented historically that Often NIPT and carrier screening are coupled together. That's true. But I think what we're seeing right now with the dynamics in carrier screening, I do believe that there is a subset of that market that would be willing to separate the 2.

Operator

I think with our turnaround time, which is Again, right now around 12 days, we're signing some of these out as fast as 9 days. I think the OB and the infertility Clinics appreciate that turnaround time. Our ability to customize these panels from anywhere between a handful of genes all the way up to almost 800. So I think we've done A phenomenal job going to market with Beacon and even in lieu of NIPT, I think we can get the attention of some of these OB doctors with Beacon.

Speaker 4

And Andrew, the numbers, they back that up, meaning that earlier, Brandon talked about some of our assumptions in anatomic pathology And that being relatively muted. But if you take a look at the performance that we had in Precision Diagnostics, Which is the most lucrative part of the market. And that's the area that we believe that we shine in terms of our capabilities and services. In Q1, the revenues for Precision Diagnostics, it was a little under $29,000,000 In Q2, It was between $32,000,000 $33,000,000 and in this quarter, it's between $37,000,000 $38,000,000 So In terms of the growth rate and the acceleration and the performance that we've been having in this particular sector, within a very short time It's been really impactful on the company.

Speaker 6

No, that's helpful and certainly appreciate that Maybe just one more for me kind of higher level. When we think about the FDA LBT regulations, I think we'll see whether they go in, how they're written or not. But how do you think about that and what that means to some of the pitch that you make? Obviously, the turnaround time piece isn't affected, but that ability to look at the turnaround time piece isn't affected, but that ability to customize under sort of a tweaked or really overhauled How do we think about what that might mean and sort of what's the plan to the degree that this does go in as written Because those customizations presumably become at least more difficult. So just would love kind of your thoughts on 1, the regulation in general and 2, How that specifically plays in for Fulgent and the strategy you guys take, especially with Beacon?

Operator

I mean, it's a good question. We're monitoring it as closely as Every other lab out there, right. I mean this they've been exercising jurisdictional discretion for many years, have leaned on LDTs with CAP and CLIA validation. So like there's something like 20 2,000 genetic tests on the Fulgent test menu. We're not sure how the FDA will approach regulating 22,000 tests per lab, for example.

Operator

We think they're going to target some of the higher risk genetic testing, some of the higher volume genetic testing. But Look, it's hard to say, it's hard to predict. However, it shakes out, we'll be prepared, right. We have the subject matter expertise. We have the operational expertise.

Operator

So It's something we're watching and waiting. I think it is quite a difficult task to step in and try to do this after all these years and all these genetic testing, but again, we will watch it, we will monitor it and we will respond Accordingly, with the expertise we have here in that area. Larry, you have some additional feedback on the FDA? Yes. Our quality systems are in place and are Very professional.

Operator

So whatever the FDA throws at us, we feel that we can respond in a timely fashion. Agreed. Andrew, it sounds like you have some connectivity issues.

Speaker 6

I just said I would stop there. Hopefully, you can hear me. My apologies.

Operator

Yes, we can. Thank you, Andrew.

Speaker 1

Thank you. We've reached the end of our question and answer session. And ladies and gentlemen, that does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.

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Fulgent Genetics Q3 2023
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