Fulgent Genetics Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 4, 2023

There are 8 speakers on the call.

Operator

Hello, and welcome to the Fulgent Genetics Q2 2023 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 Salomon, Investor Relations for Fulgent. Please go ahead, Melanie.

Speaker 1

Thanks, Kevin. Good morning, and welcome to the Fulgent Second Quarter 2023 Financial Results Conference Call. On the call with me today are Ming Hsieh, Chief Executive Officer Paul Kim, Chief Financial Officer and Brandon Perthuse, Chief Commercial Officer. The company's press release discussing the financial results is available on the Investor Relations section of the company's website, www.solgent.com. Replay of this call will be available shortly after the call concludes on the Investor Relations section of the company's website.

Speaker 1

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 than what is described in or implied by these forward looking statements.

Speaker 1

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 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 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 Q2 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, With that, I'd now like to turn the call over to Ming.

Speaker 2

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 product and go to market updates for the Q2. And Paul will conclude We are pleased with our results in the Q2 with another record core revenue reaching $67,000,000 and less than $1,000,000 of COVID revenue for a total of just under $68,000,000 of revenue. Our core revenue was driven by strong results across all three areas of our Diagnostics business.

Speaker 2

Precision Diagnostics, Anatomic Pathology and Pharma Services, including our expanded BEACON We are encouraged by the outperformance in the first half of the year and seeing good sales momentum as we move into the second half of the year. We continue to make good progress with our therapeutic business. Zogen Pharma, our Now, we'll now encapsulation technology, including our 4 d patents and the target therapy platform designed to improve therapeutic windows and the pharmacodynamic profile of both new and existing cancer drugs. Our lead drug candidate FID-seven has shown promising results for treatment of numerous cancers, including head and neck, ancillary and the pancreatic with reduced side effects. In June, we presented safety and efficacy data from the ongoing Phase Ib study At the American Society of Clinical Oncology Annual Meeting in Chicago.

Speaker 2

In summary, Over 40 heavily treated patients of various cancer types with a weekly dose level from 50 milligram per square meter 260 milligram per gram in 2. 18% had a partial response And 35% had a stable disease. 3 out of 4 squaring cell carcinoma of head and neck cancer patients With a partial response had previously been treated with taxane. No high grade neuropathy was noticed. FID-seven demonstrate the preliminary evidence of anti tumor activity in heavily pretreated Patients across various tumor types.

Speaker 2

Based on the overall tolerability pharmacodynamics And the efficacy, 125 milligram per square meter has chosen as recommended Phase 2 dose. We received a positive response for the data from medical community and Continue to optimize our manufacturing process as well as preparing the initial Phase 2 We look forward to share additional update of the start of that trial by end of the year. We also have This pipeline in preclinical development focusing on targeted therapies for additional cancers. I'd like to thank our employees and shareholders for your loyalty during the quarter. We look forward to the second half of the year and the momentum we are creating with our combined business.

Speaker 2

I will now turn the call over to Brandon Perthes, our Chief Commercial Officer to talk about our Diagnostics business results during the quarter. Brandon? Thank you, Ming.

Speaker 3

We had a record quarter for our core business, driven by strong growth in our Precision Diagnostics division. Precision Diagnostics was up 40% year over year and 12% sequentially. We are seeing strong demand for our reproductive services, specifically our BEACON expanded carrier screening product, as we have now cemented ourselves as one of the market leaders. During the quarter, we saw our other divisions meet expectations with Pharma Services having another strong quarter. However, as we We expect Pharma Services to be a bit lumpy depending on the timing of the service contracts.

Speaker 3

Looking forward, our Pharma Services pipeline and backlog remains strong As we continue to leverage our expanded capabilities in multiomics and spatial biology. Not since COVID-nineteen was up 112% year over year. We were able to take on this volume with minimal incremental investments and we're able to perform the services with only minimal temporary increase in turnaround time. We feel time and time again, we are showing real world evidence of the power of the Folger technology platform and overall lab operations and capabilities. We stated before that we are a laboratory founded, Our mission was to create a differentiated lab operation using automation, AI and informatics During the quarter, we also installed additional sequencers, the most recent and highest throughput to date, allowing us to additionally expand our capacity and lower the cost of We have also recently begun consolidating our 2 West Coast lab operations into 1.

Speaker 3

Historically, we occupied 2 buildings a few miles apart. Bringing them together should lead to new operational and cost efficiencies. We aim for the move to be completed by the end of Q3. Beacon Expanded Care Screening continues to be a key growth driver for our company. Fulgent stands out in this space as one of the few labs that controls the end to end product offering, allowing us to have a better handle on cost and turnaround time.

Speaker 3

As we ramp volume, we are focused on process improvement to continue to lower cost and improve turnaround time. We've done a good job capturing meaningful market share in the infertility space and we will look to penetrate the OB market in the future. While most clinicians today are using a panel of around 400 genes as standard of care, we've already built the next version, which includes 787 genes, and we are seeing more and more adoption of this larger panel. Our thought process is that clinicians will continue to look for broader coverage, which is what we've seen over the last few years, going from approximately 100 genes to approximately 400 genes. Before too long, the most efficient test could be an exome, at which time we'll be ready to address with our proprietary sequence alignment tools, bioinformatics and capture probes along with our robust sequencing capacity.

Speaker 3

Our anatomic pathology division continues to perform well with a lot of our focus on continuing to improve operations. These improvements include standardization of systems, revenue cycle management, logistics and managed care among others. In addition, we have been investing heavily in digital pathology. Digital pathology is revolutionizing the space leading to better turnaround time, cost and quality. For example, shipping prepared glass slides to our labs and to our clients had the burden of at least one day shipping and associated costs plus the physical storage.

Speaker 3

Now we can scan, digitize and share electronically immediately. In addition, we have built one of the only end to end solutions to allow our clients to view the digital images or even sign out their own cases. Turning to full gen oncology. Now with both our LUMIRA solid tumor profile and our LUMIRA Heme NGS approved and priced by MolDX at $3,288 $2,950 respectively, we turn our attention to expanding beyond our soft launch on the West Coast. We have placed a small number of reps in strategic territories across the nation and expect this team to continue to grow.

Speaker 3

Armed with a multidisciplinary portfolio, Community Oncology segment beyond the West Coast and establish ourselves as a national contender in precision cancer diagnostics. As Ming mentioned, we are pleased with the performance during the Q2, and we remain encouraged by the business prospects we see moving forward. I'll now turn the call over to our CFO, Paul Kim, to walk through the detailed financials. Paul? Thanks, Brandon.

Speaker 3

Revenue in the Q2 totaled $68,000,000

Speaker 4

compared to $125,000,000 in the Q2 of 2022. Less than $1,000,000 came from COVID-nineteen testing in Q2, which was not part of our guidance. Revenue from our core business totaled $67,000,000 which exceeded our guidance of $62,000,000 and grew 48% year over year. Gross margin was 30.3%. The decline in gross margin year over year is primarily related to the higher Cost of anatomic pathology revenues from InformedDx, which we purchased in Q2 of 2022.

Speaker 4

Non GAAP gross margin was 33.8%. We are pleased to have achieved a 2 point improvement in our gross margin sequentially over the prior quarter As we see efforts to create efficiencies across our acquired businesses pay off. Now turning over to operating expenses. Total GAAP operating expenses were $40,400,000 for the 2nd quarter, down from 43 point $6,000,000 in the Q1 of 2023. The non GAAP operating expenses totaled $30,400,000 down from $33,800,000 in the Q1 of 2023.

Speaker 4

Non GAAP operating margin increased 8 compared to a positive $37,700,000 in the Q2 of 2022. On a non GAAP basis and excluding equity based compensation expense And intangible asset amortization loss for the quarter was $2,400,000 or $0.08 per share Based on 29,800,000 weighted average shares outstanding. Turning over to the balance sheet. We ended the 2nd quarter with approximately $847,000,000 in cash, cash equivalents and marketable securities. The decrease from the Q1 is primarily due to cash used Approximately $25,000,000 to pay off our margin loan in full and to purchase real estate.

Speaker 4

From operations, Cash provided by operating activities for the Q2 was a positive $9,700,000 Moving on to our outlook for 2023. Given the outperformance in the Q2, we're raising our core revenue guidance to 260,000,000 The number does not anticipate additional revenue from COVID-nineteen testing. Looking ahead, we expect gross margin and operating margins We continue to improve as we implement efficiencies through our integration efforts with our recent acquisitions. The margin improvement is forecasted For the full year 2023, utilizing an estimated 28% tax rate and a share count of 30,000,000, We now expect our non GAAP losses to narrow to $0.95 per share from the previous expectation of 1.25 Our shareholders excluding stock based compensation, amortization of intangible assets as well as any one time charges. Overall, we have further strengthened our core business, bolstered our portfolio through strategic acquisitions and are already seeing improved financial performance Thank you for joining the call today.

Speaker 4

Operator, you may now open it up for questions.

Operator

Thank you. We will now be conducting a question and answer session. Our first question is coming from Dan Leonard from Credit Suisse. Your line is now live.

Speaker 5

Thank you and good morning.

Speaker 2

Good morning.

Speaker 5

Paul, your revenue guidance implies a decline in your sales run rate from Q2 levels. Why would that be?

Speaker 3

Excuse me? The revenue run rate for

Speaker 4

can you repeat the question?

Speaker 5

Yes. You're guiding for $260,000,000 in revenue for the full year. You did $67,000,000 in Q2. You're guiding for $65,000,000 in Q3, which is a decline and it looks like $65,000,000 in Q4 as well. So I'm wondering why

Speaker 4

performance in Q1 and Q2. We're still digesting the heavy increase in volume, and we feel very good about our momentum. There definitely is potential based on what we have posted in Q1 and Q2 to outperform again. And we certainly reserve the right to post higher numbers.

Speaker 5

Understood. And then a follow-up, Paul. I know at one point you were hoping to get gross margin to 40% by the end of the year. What is the new target and what are

Speaker 4

Yes. So the gross margin target for 40% a year, that's still our hope. We certainly are pleased with the gross margin jump, which had a low point of, I believe, in the 20% to 25% in Q4. We had a significant jump from that to what we posted in the Q1. In the Q1, the gross margin on a non GAAP basis was 32%.

Speaker 4

We see a we saw a 2 point improvement from Q1 to Q2, which takes us up to 34. We certainly anticipate the gross margin numbers to grind higher into Q3 and Q4. Where we end up At the end of the year, it could certainly be at 40%. But as long as the trajectory is correct as well as the rate of the change, we think that, that indicates further strengthening of our overall business model. I think the other thing, right, that we're also taking a look at aside from just a percentage It's the absolute contribution from gross margins, and we're very, very pleased to raise our revenues twice this year, given the fact that it's only the middle of the year.

Speaker 3

Great. Thank you.

Operator

Thank you. Next question today is coming from David Westenberg from Piper Sandler. Your line is now live.

Speaker 6

Congrats on a very strong performance this quarter. Can you remind us how much of the G and A is dedicated to COVID testing and if there's an opportunity now to get more cost savings by just exiting that business

Speaker 4

So, from an overall perspective, The majority of the activity has been flushed out related to COVID testing. During the Q2 specifically, we had approximately a $2,000,000 Adjustment, it was actually a credit related to the AR reserve for COVID testing. That's part of the reason on why you saw the growth I mean, not the growth, but the G and A expenses being light. We had a few other items that are in there. As we look ahead into Q3 and Q4, We anticipate the G and A expenses to bounce back to something that we had in Q1 or maybe higher levels.

Speaker 4

But kind of back to your question of is COVID relatively flushed out, the short answer is yes. I think the reason why I comment on the expense structure is even with the bump up in G and A for Q3 and Q4, From an overall perspective, we see very good efficiencies throughout the operating expense categories of the organization. And that's being further being added if we take a look at the overall business model. With the overall strength that we're seeing with the top line as well as the gross margin improvements.

Speaker 6

Very helpful detail there, Paul. Thank you very much. And then can you just remind us about any the close date last year of Inform, Just trying to think about the organic revenue growth as we look in the back half of the year. I believe the only acquisition you made in the back half of the year would have been the, Fulton Pharma, if I'm correct. I know this is probably a short just clarity question here.

Speaker 4

Yes. So Inform DX closed during Q2 Of 2022, I was about halfway through the Q2. When we take a look at the contributions of revenue From the 3 categories that we have, anatomic pathology, pharma services and precision diagnostics, we see absolute growth in all three of those areas, when we compare it against the numbers from last year. But what really excites us is where the acceleration of the business Coming from, so we first started off the year at $240,000,000 of revenues, and we had contributions from anatomic pathology, which is InForm Dx. And then Precision Diagnostics evenly split with about $13,000,000 from Pharma Services, which added to the $240,000,000 But as we take a look at the updated guidance now at 260,000,000 all of that is coming from either Precision Diagnostics or pharma services, which are very, very lucrative and attractive markets.

Speaker 4

And it's the area that we perform very, very well in, where you have sequencing and a large amount of interpretation. So we really like the way that the business is headed as we look out at the end of this year and into 2024.

Speaker 6

Got it. No, thank you very much. Just one last question on the gross margin. Can you talk about the different levers? I know you just you're buying a new sequencer.

Speaker 6

In terms of carrier screening, for example, which I know you're outperforming in, There's a lot of prep work. So can you just run us through all the different levers that you're thinking about in the next year to really drive those gross margins higher?

Speaker 3

And that's my last

Speaker 4

Yes. So there's a lot of blocking and tackling that we're doing in terms of improving policies and attracting higher talent. But the fundamental reason on why We have the gross margin improvement is through automation and the utilization of our technology platform. And I'll turn it over to Ming, You can reiterate the differentiation that we have in the utilization of our technology compared to other companies.

Speaker 2

Yes. Thanks, Paul. But David, bottom line is how could we use the technology to handle more Bluetooth? That's really the area that we put a lot of focus. We continue to apply the technology, which we call the AI.

Speaker 2

Does the areas that we started since 1990s. But since the past 30 years, over 30 years, definitely AI has make the tremendous impact in our life. We have been riding with this technology with my experience for past 30 years. We continue seeing that technology will be applied to the in the Diagnostics business and then we continue to invest and improve the technology.

Speaker 6

Got it. Thank you very much Ming.

Speaker 4

Thank you. Next

Operator

question is Coming from Andrew Cooper from Raymond James. Your line is now live.

Speaker 7

Hey, everybody. Thanks for the question. Maybe first kind of tagging on to the back end of that, You talked about the automation and the improvements there. I think you did mention in the prepared remarks a little bit of turnaround time increase as volumes ramped as much as Can you just give us a little bit more color on sort of how much that was, whether it's worked lower And how we should think about the turnaround times as you continue hopefully to grow the volumes on the inbound side?

Speaker 3

Yes. Thanks, Andrew. Good question. The turnaround time did increase, but it was a short window, right? We did a much better job capturing market share than perhaps we were anticipated and that's great execution by the sales team in our company.

Speaker 3

But the increase in volume was tremendous. So and I'm proud of the lab and how they were able to digest it. I mean, the turnaround time maybe had 25% to 50% increase for a couple to a few weeks. As Ming mentioned, during that time, We began to improve additional processes and procedures and streamline. And at this point, turnaround time is back on track.

Speaker 3

I mean, I think we're around 14 or 15 days for carrier screening and exomes are back down. So it was a temporary increase and really allowed us to go into the systems and make those improvements and get it back on track. And turnaround time is something we monitor very, very closely. It's incredibly important for our clinicians while we talk about it, while we mentioned it in our script. And going forward, We intend to meet our turnaround time, which depending upon the product could be anywhere between 2 6 weeks, but especially in the reproductive space, that's where a 2 week to 3 week turnaround time is critical and we're sort of back on track and don't see any disruption to that in the future.

Speaker 4

Okay. That's super helpful.

Speaker 2

Yes. Remember, Brandon mentioned, we also made the lab consolidation during the quarter. So we are not only trying to handle increase the volume, but they will also try to make the lab operation more efficient by consolidating 2 location. Those also caused a bit of the transition, but we do see it's a good trend for the long term to continue to handle the higher volume and improve the turnaround time.

Speaker 7

Okay, great. Super helpful. And then Maybe just one more on sort of the portfolio. I think there was they mentioned in the call as well of looking to penetrate The OB space in terms of carrier screening, a lot of times I feel like we hear people talk about that being bundled with NIPT. So just the latest and greatest thinking there.

Speaker 7

And then kind of related, I think on the Flushing Oncology side, you mentioned that a near one stop shop. So just remind us, What do you feel like still needs to be added in the portfolio? How do we think about addressing some of those factors and what the timelines might be?

Speaker 3

Yes, certainly. Thanks again for the question. We actually have Doctor. Larry Weitz with us today. So I'll let him address the full gen oncology question here in a moment.

Speaker 3

But In terms of our carrier screening market penetration, yes, it's mostly been in the infertility space. We've landed some fantastic long term clients that are mostly infertility clinics are REIs. And you're correct in that to penetrate the OB space, it is much, much easier to do so if you can bundle it with NIPT. As you're aware, we currently don't have an NIPT test. That doesn't prevent us from selling to the OBs.

Speaker 3

Again, it's just easier to do when you can bundle it. So we will be able to target the OBs, especially the OBs that are referring into some of these new clients we have and be able to leverage the continuity there. But NITC is something we've been looking at for a long time. We continue to evaluate the space. We continue to evaluate how we can deploy our technology in that space.

Speaker 3

So Fulgent has ongoing R and D across a lot of areas, NICT being one of them. So But again, I think with what we've done with carrier screening, with our turnaround time, our ability to interface and integrate Some of the clinical advantages we've built with Beacon in terms of copy number and dealing with pseudo genes and proprietary I think there's still a great story to tell to the OB market, even in lieu of having an NIPT test at this time. So Larry, you mentioned he asked a question about sort of what's missing to be sort of the full one stop shop, but I'll let you take that one. Well, I'll tell you we recently launched liquid biopsy

Speaker 7

Great. I'll stop there.

Speaker 4

Thanks. Thanks, Andrew.

Operator

Thank you. We reached the end of our question and answer session. I'd like to turn the floor back over to management for any further or closing comments.

Speaker 2

Thank you very much for joining our call today. And we are looking forward to update you about our business performance during the next few quarters. Thank you very much.

Operator

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day.

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Fulgent Genetics Q2 2023
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