Fulgent Genetics, Inc. (NASDAQ:FLGT) Q4 2023 Earnings Call Transcript February 28, 2024

Fulgent Genetics, Inc. beats earnings expectations. Reported EPS is $0.28, expectations were $-0.3. Fulgent Genetics, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to the Fulgent Genetics fourth quarter and full year 2023 conference call and webcast. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require Operator assistance during the conference, please press star, zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Melanie Solomon, Investor Relations for Fulgent Genetics. Please go ahead.

Melanie Solomon: Thank you. Good morning and welcome to the Fulgent fourth quarter and full year 2023 financial results conference call. On the call 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 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 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 prescribed 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 the 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, 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 these measures 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 2023 for more information, including a 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 per share 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 fourth quarter and the year ended December 31, 2023, then Brandon will review our product and go-to-market updates from the fourth quarter and Paul will conclude with the financials and the 2024 outlook before we take your questions. We are pleased with our results in the fourth quarter with $70 million of total revenue. Due to our successful collection efforts, we recognized $4 million of revenue on previously billed COVID-19 tests. As you will see in our 10-K, we are now reporting our business in two segments: one, our laboratory service business, which we previously referred to as our clinical diagnostics business, and second, our therapeutic development business.

We have renamed our clinical diagnostics business to better represent the inclusion of technical laboratory services and professional interpretation of lab results by licensed physicians. This will now be called laboratory service. As a reminder, core revenue is the total laboratory service revenue from the company without COVID-19 test revenue. Fourth quarter core revenue of $66 million was driven by the momentum in precision diagnostics and the better than expected revenue from anatomic pathology and bio pharma services. After raising full-year guidance twice in 2023, we outperformed the full year by $2 million in core revenue from the latest raise in guidance, with a positive impact on margins and earnings. Moving onto our therapeutic development business, we are continuing to make good progress with Fulgent pharma.

Our novel nanoencapsulation technology includes our 40 issued or active patents and active patent applications and a targeted therapeutic platform designed to improve therapeutic window and pharmacokinetic profile for both new and existing cancer drugs. Our lead drug candidate, FID-007, has shown promising results in clinical trials to date for the treatment of numerous cancers, including head and neck, ampullary and pancreatic, with manageable safety profile observed in trials performed to date. An abstract on preliminary head and neck cancer clinical trial results from our Phase Ib study has been submitted for the 2024 ASCO annual meetings, which will be held in the second quarter. Our Phase II clinical protocol for the second line treatment of head and neck cancer has been accepted by the FDA and we expect to enroll the first patients early in the second quarter of this year.

We are excited about reaching these next milestones for pharma and bringing FID-007 to more patients in the clinical setting. In addition, using the same [indiscernible] drug delivery platform, we are also advancing our second drug candidate, FID-002, a nanoencapsulated SN38 [indiscernible] and expect to file an IND, or investigational new drug application, by the end of the year, while irinotecan, a pro-drug for SN38, has been approved by the FDA for colon cancer treatment. Formulations used in active [indiscernible] SN38 have not been successful [indiscernible] so far primarily due to poor drug solubility and toxicity safety issues. We believe our nano drug delivery platform has the potential to address these challenges. On the R&D front, building up our clinically proven nana particle technology while also developing a next generation antibody drug conjugate technology platform that could potentially prove even broader [indiscernible] towards heterogeneous cancer cells than those ADC with bystander killing effects.

Our ADC platform is not target dependent and thus could potentially be applied to many different targeted ADCs, particularly for new targets with low antigen expression where existing ADC platforms have failed to show effectiveness. Overall, we believe we have been good stewards of cash and maintain a strong balance sheet with which to execute our strategy. I’d like to thank our employees, partners and stakeholders for your loyalty during the past year. We look forward to a strong year in 2024 and capitalizing on the momentum we see ahead. I’ll now turn the call over to Brandon Perthuis, our Chief Commercial Officer to talk about our laboratory service business results during the fourth quarter. Brandon?

Brandon Perthuis: Thank you Ming. It was a solid year for Fulgent, slightly exceeding our overall core revenue guidance, ending the year at $262 million, shattering our 2022 record by $81 million, an increase of 44% year-over-year. These numbers exclude any COVID-19 testing revenue. We hit many new company milestones in 2023, which I will reflect on momentarily. At a high level, precision diagnostics continues to be the main growth driver, and it’s precision diagnostics where our technology shines the brightest. Precision diagnostics performed well in 2023, contributing $132 million to the business. The main product outperforming was our Beacon expanded carrier strain. Beacon has proven to be a very well received product in the IVF space, offering gene content flexibility up to 787 genes and rapid turnaround time of approximately two weeks on average.

In addition, using our in-house developed informatics, databases and pipelines, we are able to deliver reliable detection rates in difficult genes such as pseudogenes, or genes with high sequence homology. Our mix of clients for carrier screening services at this time is mostly IVF clinics, as well as robust B2B partnerships. A few months ago, we announced the new Beacon 787 expanded carrier screening panel and we recently followed that up with launching the new Beacon preconception panel. Beacon preconception includes an additional focus on manifesting carriers in mild disease compared to standard Beacon panels, making it a better fit for some clients working with gamete donors or in the IVF clinic. We see Beacon continuing to be an important growth driver in 2024 as a result of additional market shake-up, as well as sales and R&D execution.

Recently, we announced a new partnership with Cooper Surgical, a global leader in fertility and women’s health, to offer exclusive newborn genetic screening panels to core blood registry families. Utilizing our Picture Genetics platform, CBR, the largest private newborn stem cell bank in the world now offers a range of testing options to its families, including CBR Snapshot, which screens children for over 250 genes related to metabolic disorders, blood disorders, cancers, cardiovascular disorders, hearing loss and vision loss. Snapshot focuses on screening for conditions where early detection provides actionable information and may be managed with medication, diet, or other therapies. Secondly, CBR Portrait screens children for over 600 genes covering everything in CBR Snapshot, along with additional genes related to hearing loss, actionable epilepsy, immunodeficiency, heart conditions, and neonatal diabetes.

CBR Portrait includes more than twice as many genes as CBR Snapshot and may identify more rare causes of these conditions, and if negative, the results further reduce the likelihood that a patient has the conditions included on the test. Lastly, CBR Landscape screens children for over 1,500 genes and more than 1,000 conditions, and include a pharmacogenetic component that identifies the potential for adverse reactions to more than 100 medications. Switching to AP, while anatomic pathology is critical to our mission of being a one-stop shop for physicians and contributes meaningfully to our overall revenue, we are seeing some headwinds in the business. That said, we have recently expanded our commercial footprint, plan to continue to layer on new sales hires, and we are committed to growing the business.

In addition, we are making significant investments in operations, digital pathology and AI to improve our efficiency. We estimate seeing these investments beginning to pay off late in 2024. Previously, we reported on pharma services when we provided a breakout of revenue. For clarity purposes, we have renamed this breakout of revenue to bio pharma services to include any revenue related to clinical testing for pharma, biotech, CRO, or research organizations, of which approximately $4 million had been previously classified under precision diagnostics in 2023. Regarding bio pharma services, we exited 2022 with tremendous momentum, and 2023 took off at a very fast pace. However, unrelated to Fulgent, some of our bio pharma clients have had issues and some of those projects have either pulled way back or been terminated altogether.

Unfortunately, this did affect two of our larger clients. That said, we believe our bio pharma services capabilities are stronger today than ever, offering an impressive multiomic platform including technology for single-cell multiomics, rounding out our capabilities in whole genome, whole exome, RNA sequencing, tumor profiling, methylation sequencing, liquid biopsy, single cell sequencing, spatial biology, and pathology. The focus for 2024 is to forge new relationships and expand on existing ones. We’d like to thank all of our employees who have dedicated so much energy into making Fulgent a great success. We have an amazing team. As one of our important clients recently said, quote, Fulgent seems to have a magic wand - we don’t, it would certainly be easier if we did, but we do have an absolutely amazing team.

That said, 2023 has come to pass and now all focus and energy shifts to 2024. It’s a fast paced, dynamic market, and we look forward to keeping our investors updated throughout the year. I’ll now turn the call over to Paul Kim, our Chief Financial Officer. Paul?

Paul Kim: Thanks Brandon. Revenue in the fourth quarter totaled $70 million compared to $68 million in the fourth quarter of 2022. $4 million came from COVID-19 testing in Q4, which was not part of our guidance. Revenue from our core business totaled $66 million, which slightly exceeded our guidance of $64 million and grew 21% year-over-year. Gross margin was 36%. The increase in gross margin year-over-year was primarily related to $4 million of COVID-19 revenue recognized on previously billed tests due to successful insurance collections and the current year, and to charges which resulted from the wind down of COVID-19 business in Q4 of the prior year, including inventory reserves and accelerated equipment depreciation. Before turning to operating expenses, I would like to explain an impairment charge we took this quarter.

We incurred a one-time non-cash goodwill impairment charge of $120 million. This charge resulted from a sustained decline in our share price and associated market capitalization compared to the book value of our equity as of quarter end. I want to reiterate that the non-cash goodwill impairment charge was due to generally accepted accounting principles given the current market capitalization. It’s important to note that the goodwill impairment charge does not affect the company’s cash position and we do not believe it will have any impact on our future operations, and we remain highly encouraged with the momentum we see ahead, as discussed earlier by Ming and Brandon. The GAAP operating expenses were $176.4 million in the fourth quarter, an increase from $39.6 million in the third quarter of 2023.

Non-GAAP operating expenses totaled $45.1 million, an increase from $29.4 million in the third quarter of 2023. Non-GAAP operating margin decreased 40 percentage points sequentially to a negative 24.8%, primarily due to lower COVID-19 testing revenue recognized, higher bad debt reserve, and one-time legal fees. Adjusted EBITDA loss for the fourth quarter was $6.8 million compared to $15.1 million in the fourth quarter of 2022. On a non-GAAP basis and excluding equity-based compensation expense, goodwill impairment loss and intangible asset amortization, income for the quarter was $8.3 million or $0.28 per share on 30 million weighted average shares outstanding. Turning to the balance sheet, we ended the fourth quarter with approximately $848 million in cash, cash equivalents and marketable securities.

We were active with our share repurchase program during the fourth quarter of 2023. We repurchased approximately 873,000 shares of our common stock at an aggregate cost of $22.9 million at an average price of $26.15 under the stock repurchase program announced in March of 2022. As of December 31, 2023, a total of approximately $150.7 million remained available for future repurchases of our common stock under the stock repurchase program. Now moving onto our outlook for 2024, starting with revenue, we may have some minimal revenue from COVID-19 testing in 2024 but we’ll be guiding to core revenue, which is total laboratory services revenue for the company without COVID-19 testing. We expect total core revenues to be approximately $280 million for 2024, representing a core growth of 7% year-over-year.

Breaking down this guidance between precision diagnostics, anatomic pathology and bio pharma services, the expected 2024 revenue is estimated as follows: $173 million from precision diagnostics, $96 million from anatomic pathology, and the remaining $11 million from bio pharma services. On precision diagnostics, which includes all of our clinical NGS revenue - oncology, reproductive services, rare disease, neurogenetics, B2B relationships with labs, and our joint venture in China continues to be the highest growth area for the company in 2024. As Brandon discussed, we have seen strength in reproductive services from our Beacon product line. Given the timing of certain lab arrangements, there may be variability quarter to quarter. Both anatomic pathology and bio pharma services will continue to be major contributors to revenue in 2024; however, we are expecting a decline in both these revenue streams in 2024 as compared to 2023.

For anatomic pathology, which includes the business we have integrated from Inform Diagnostics, pricing pressure and lower contract rates are impacting revenue. Bio pharma services, which includes sequencing as a service, which we sell to pharmaceutical businesses and is dependent on these partners, has been impacted by projects that have terminated or have scaled back significantly. There is no revenue from our therapeutic development business anticipated for our 2024 guidance. Turning to expected margins in 2024 excluding COVID-19 revenue and stock-based compensation, we expect non-GAAP gross margin to improve as we see the efficiencies of our integration efforts take effect, reaching the mid-30% range and positioning us to approach our target of 40% by the end of the year.

We expect to see lower non-GAAP operating margins in the quarters ahead as we further invest resources to grow our business, with operating margin of approximately minus-20% for the year. We remain focused on managing our spend and continue to believe that our foundational technology and platform supports a long term, strong margin profile. We expect associated cash burn for our therapeutics business of about $15 million to $17 million this year, which is contemplated in our EPS and our cash guidance provided today. For the full year 2024, utilizing non-GAAP tax provision and average share count of 31 million, we expect our non-GAAP loss to be approximately $1.05 per share for our shareholders, excluding the stock-based compensation and amortization of intangible assets as well as any one-time charges.

Moving onto cash, our cash position remains strong. We expect to have significant cash outlay of over $15 million this year as we build out and move into our brand new 96,500 square foot facility in the Dallas area. This facility will have state-of-the-art operations which include both pathology, neuropathology, and the NGS lab which broaden our diagnostics reach, as well as further streamline our clinical operations. Excluding any stock repurchases or any other expenditures outside ordinary course, we still anticipate ending 2024 with approximately $800 million of cash, cash equivalents and investments and marketable securities. Overall, we see strength in our core business, which has grown organically and through strategic acquisitions, and we see good momentum ahead.

Thank you for joining our call today. Operator, you may now open it up for questions.

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