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Fulgent Genetics, Inc. Common Stock (FLGT) Q3 2021 Earnings Call Transcript

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FLGT earnings call for the period ending September 30, 2021.

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Fulgent Genetics, Inc. Common Stock (FLGT 0.79%)
Q3 2021 Earnings Call
Nov 09, 2021, 4:30 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good day, and welcome to the Fulgent Genetics third quarter 2021 earnings conference call. At this time, I would like to turn the conference over to Nicole Borsje, investor relations. Please go ahead, ma'am.

Nicole Borsje -- Investor Relations

Great. Thanks. Good afternoon, and welcome to the Fulgent Genetics third quarter 2021 financial results conference call. On the call today are Ming Hsieh, chief executive officer; Paul Kim, chief financial officer; Dr.

Larry Weiss, chief medical officer; and Brandon Perthuis, chief commercial officer. The company's press release discussing its financial results is available in the Investor Relations section of the company's website, An audio replay of this call will be available shortly after the call concludes. Please visit the Investor Relations section of the company's website to access the audio replay.

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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 results, 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 risk factors that may cause actual 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, 2020, which is available on the company's Investor Relations website. Management's prepared remarks, including discussions of earnings and earnings per share, contain financial measures not prepared in accordance with accounting principles generally accepted in the United States or GAAP. Management has presented these non-GAAP financial measures because it believes they may be useful to investors for various reasons, but they should not be viewed as a substitute for or superior to the company's financial results prepared in accordance with GAAP.

Please see the company's press release discussing its financial results for the third quarter of 2021 for more information, including a description of how the company calculates non-GAAP income and income per share and a reconciliation of these financial measures to income and income per share, the most directly comparable GAAP measures. With that, I'd now like to turn the call over to Ming.

Ming Hsieh -- Chief Executive Officer

Thank you very much, Nicole. Good afternoon, and thank you for joining our call today to discuss our third quarter 2021 results. We had a very good, strong third quarter with our core business being green momentum, while our resurgence of COVID infections with Delta variant drove a meaningful uptick in our COVID testing warning in the quarter. I will cover some highlights from the third quarter before turning the call to our Chief Commercial Officer, Brandon Perthuis, to discuss the products and the go-to-market updates.

And Paul Kim will discuss our financial results and our outlook in detail. Taking a look at our third quarter results. Revenue totaled $228 million, up 124% compared to the third quarter of 2020 and up 48% sequentially. We delivered approximately 2.2 million tests in the quarter, more doubled the volume of our third quarter last year.

Paul will cover the details on the breakout between our core and COVID business in the quarter. For the high level, both segments of our businesses outperformed the guidance we set for last quarter. Our core business grew almost 300% year over year to over $40 million due to the strength across the key areas, including KSI, CSI and our revenue from JV in China. We also saw a meaningful increase in revenue from our contract with the CDC due to the widespread increase we have seen in COVID positive rate.

We continue to drive strong profitability and generated $3.93 per share in GAAP EPS and $152 million in operating cash flow. We were pleased to achieve the results this quarter that exceeds our expectations across the board. While our business has benefited from unpredicted spikes in demands for COVID testing, we have continued to see the strength in our core businesses as we execute our strategy to expand the footprint in core NGS business confirmed by the CSI and our operations in China. One particular highlight for us in the third quarter is the initial attraction we are seeing in the acquisition of CSI.

While still in very early increase in synergy across our business, we're pleased that the CSI staff and a small sales team is fully supporting our continued operations, and we are beginning to expand our sales team to support growth of the organization. We are also working to build our West Coast lab, which will duplicate the enhanced CSI oncology testing capabilities, particularly in hematology and oncology. We've also supplement CS venue with our next-generation sequencing capabilities as a part of the integration of CSI where we already see a meaningful increase in our test volume that is being reimbursed by insurance. We are encouraged by the expanded relationship we have for third-party payers and look forward to build on this momentum as we continue to scale and expand our test menu.

We'll also continue to make progress on the development and the launch of HelioLiver with our partners at Helio Health. We announced some very promising data yesterday, and the team will be conducting a post presentation on the performance of HelioLiver at the liver meeting in 2021, which will be held virtually in upcoming weeks. Brandon will discuss in more detail about where we are very encouraged by the progress we are seeing in the development of HelioLiver and hope to achieve the commercial launch in the coming months. Another exciting recent announcement is our partnership with Olink Proteomics.

We'll be offering Olink Proteomics, as seen through our lab, in the U.S. and China, which will create more streamlined multi-omic solutions for our clinical and pharma customers. And finally, we're very pleased with the activity we've seen through the operations in China. We are seeing growing sales in our NGS test menu in China, while our sequencing service is also gaining a traction.

We believe there is a very large opportunity to ramp up our presence in the local Chinese market, and we are in the early stage of growth. I'm very pleased with the ongoing progress we are making with the expansions to our core business, while our COVID-19 testing solutions continue to drive strong cash generation from our bottom line. While the volatility around COVID-19 testing puts some unpredictability in our businesses near term, particularly as the therapeutic treatments may become available in the near future, we remain very optimistic about our post-COVID strategy and the opportunity we have built to drive sustainable growth in the years ahead, armed with our capital and technology product [Inaudible]. Now I'll turn the call over to Brandon Perthuis, our chief commercial officer.


Brandon Perthuis -- Chief Commercial Officer

Thanks, Ming. We continue to fire on all cylinders as we have made great progress with our core business, our new HelioLiver liquid biopsy test, integrating the CSI acquisition, launching the Olink collaboration and continual response to the COVID-19 pandemic. I will address each of these in detail, but I would first like to comment on the overall performance of the business. We recorded $228 million in revenue in the third quarter, an increase of 124% year over year.

While a bulk of this was driven by COVID-19 testing, our core business grew to over $40 million, an increase of approximately 300% year over year. As we have discussed over the course of the year, we have continued to diversify the business outside of pediatric rare disease. And in this quarter, we were able to continue that trend in a big way with the addition of many new oncology services. As we mentioned on the last call, Fulgent has made a strategic investment in Helio Health and has secured exclusive rights to commercialize lab-developed tests in the United States and Canada.

The first test we announced is a novel liquid biopsy test for hepatocellular carcinoma, HCC, called HelioLiver. HCC is one of the fastest growing and deadliest cancers in the United States, and early detection is critical to successful outcomes, especially among high-risk populations. In the United States, more than 100 million people have nonalcoholic fatty liver disease, which is a major driver of liver cancer. HelioLiver leverages next-generation sequencing technology to test 28 genes from 77 CpG methylation sites in AFP/AFP-L3 and DCP.

For over a decade, there has been little to no improvement in the way HCC is detected. Today, the standard of care in ultrasound, which is a relatively ineffective method of detection with some quoting sensitivity in the 40% range. Ultrasound results are highly variable depending upon the size of the lesion, the location of the lesion, the body mass index of the patient, the equipment used and the experience of the operator. Considering the survivability of HCC is dramatically better in early stages, specifically, approximately 50% survivability at stage 1 and approximately 12% and 3% at stages 3 and 4, respectively, a better test has been needed for some time.

In addition, early stage detection allows a more potentially curative treatment options such as ablation and transplantation. The Fulgent HelioLiver test has shown much better efficacy with sensitivity of 76% for early stage HCC and 92% for late stage at a specificity of 91%. These numbers could improve as we gather more data, but already show a major improvement over ultrasound. Another critical aspect of detecting HCC early is routine screening and surveillance of high-risk patients every six months.

These include patients with cirrhotic liver, hepatitis B and hepatitis C. Unfortunately, many do not follow through with the current ultrasound monitoring for reasons, including difficulty in scheduling, traveling to medical centers, etc. With the HelioLiver test, it's a simple blood draw. This can be done at any physician office or phlebotomy service.

This should allow for better adherence to the six-month monitoring guidelines. In summary, benefits of the novel Fulgent HelioLiver test include increased patient adherence, higher sensitivity, more curative treatment options, ease of use and lower cost of care. Expanding on that last point, cost of care is estimated at $466,000 for a patient in late-stage treatment versus $132,000 in early stage. HelioLiver becomes a more cost-effective test versus current standard of care, which should prove to be important as we have discussions with payers.

HelioLiver is scheduled to launch this year, and we will certainly be keeping the market updated on developments regarding this exciting new test. Another notable development from the third quarter was our acquisition of CSI, which closed in August. As a reminder, CSI offers over 400 unique tests in molecular oncology, flow cytometry, FISH, cytogenetics and histology. We have completed the integration of CSI with nearly 100% employee retention and 100% client retention.

We are now focused on the expansion of the business on a national level and the build out of our cancer lab on the West Coast to better serve clients nationally. A key piece of our growth strategy with the addition of CSI and HelioLiver is the expansion of our sales team. Historically, Fulgent has run a very small but very experienced sales team. However, considering the size of the addressable market for the new HelioLiver and CSI business, we are aggressively expanding our sales organization.

On the HelioLiver side, we are onboarding approximately 10 new sales managers who will be responsible for the product. From a go-to-market perspective, key markets include New York, California, Illinois, Texas and Florida, all of whom have high incidence of HCC. However, this will be a national rollout. As we gain sales experience during the early launch, we anticipate the number of salespeople to expand rapidly as there are over 7,000 hepatology providers in the United States that are immediate call points and over 15,000 gastroenterologists as secondary call points.

We have invested in data resources to assist in our account targeting and planning, allowing us to focus on those high-volume positions with high spend on ultrasound and MRIs. On the CSI side, historically, their team has also been small with only three to four salespeople. This number doubled this quarter, and we aim to double it again in the fourth quarter. We believe we have superior turnaround time, service and quality for cancer diagnostics and look forward to leveraging an expanded sales team to take the services national.

On the partnership front, we were also excited to announce the addition of Olink Proteomics' capabilities to the Fulgent platform. Through this partnership, we will enable customers to leverage Olink's high-throughput protein biomarker discovery technology through our lab, which creates an end-to-end platform for biomarker research, discovery and clinical trials. We are creating a one-stop shop for pharma and clinical research customers by offering our extensive next-generation sequencing menu, oncology testing solutions and now Olink's proteomic assays across a single sample at our labs. This partnership will make it faster, easier and more efficient for researchers to carry out their projects as it enables them to send their samples to one location and access all of the results from one portal.

Fulgent is one of a handful of labs offering Olink's capabilities in the United States, and we look forward to providing this enhanced service to our research customers. And finally, as Ming mentioned, we saw a big rebound in COVID-19 testing in the third quarter driven by the highly contagious Delta variant. We completed approximately 2.2 million COVID-19 tests in the quarter, which marked our third highest quarter for COVID-19 testing behind the first quarter of 2021 and the fourth quarter of 2020. These tests continue to come from a variety of sources, including counties, drive-through sites, hospitals, clinics, etc.

We also saw schools go back in session, which restarted the flow of back-to-school samples. At this time, we are serving over 1,000 schools. We are also supporting the back-to-work mandate and verification programs with our newly launched online platform. This new system allows employees to upload their vaccine records or their weekly testing results and provide dashboards and quick access to employers to track compliance.

While symptomatic testing ebbs and flows with the positivity rate, the back-to-work and back-to-school programs are more predictable long-term contracts. During the quarter, we also saw a record in terms of our COVID-19 next-generation sequencing test due to the elevated number of cases and increased positivity rate. We believe genomic studies of the virus will continue to play a pivotal role in fighting and understanding COVID-19. We are pleased with our third quarter results and excited about the future prospects of our business.

We continue to have a pipeline of assets we are evaluating and expect to see continued activity on the M&A and strategic investment front. I'll now turn the call over to Paul Kim, our CFO. Paul?

Paul Kim -- Chief Financial Officer

Thanks, Brandon. Revenue in the third quarter totaled $228 million, an increase of 124% compared to the third quarter of 2020, well exceeding our guidance of $125 million to $150 million. Billable tests in the quarter totaled almost $2.2 million, more than twice the volume of Q3 last year. Breaking down the revenue a bit further, roughly $188 million came from COVID PCR testing, which exceeded our guidance by approximately $100 million and grew 105% year over year, while roughly $40 million came from our core business, which exceeded our guidance of $32 million and grew approximately 300% year over year.

As a reminder, our core revenue includes our NGS business, contribution from our Chinese JV and now contribution from CSI. It also includes contribution from our CDC COVID-NGS testing agreement, which we saw a meaningful uptick in activity this quarter due to increasing COVID positivity rates that met the Delta variant spread. We recognize that COVID NGS testing volume from the CDC can vary dramatically depending on COVID positivity rates. So if we exclude the impact we saw from the CDC in the quarter, our Q3 core revenue still grew by more than 160% year over year compared to Q3 of 2020.

While demand for COVID testing remains extremely volatile, we remain well-positioned to capture this demand if and when it fluctuates higher, which we saw in the third quarter a reversal relative to the slowdown we saw in the second quarter. We have continued to take a conservative stance on any expected revenue from COVID testing given the inherent challenges in predicting COVID spikes or the emergence of other variants. We remain focused on executing on our post-COVID growth opportunities, which include expanding the reach of CSI's capabilities, working with Helio on our joint commercialization opportunities, growing on the footprint on our China operations and launching new initiatives such as the only partnership Brandon discussed. Our ASPs in the third quarter was $105, slightly higher than the $99 we saw in the second quarter.

Our ASPs remained relatively stable over the last few quarters, trending modestly higher as our test mix shift more to NGS testing. Cost per test in the quarter was $20, slightly lower than the second quarter due to the efficiencies inherent in our platform as our testing volume scales. Gross margin increased to 80.9%, up more than 6 whole percentage points year over year and up 4 percentage points sequentially given our higher overall volumes and the continued operational efficiency of our technology platform. Now turning to operating expenses.

Total GAAP operating expenses were $25.1 million in the third quarter, up from $18.9 million in the second quarter. Non-GAAP operating expenses totaled $21.7 million, up from $16 million last quarter. Our operating expenses increased primarily due to ongoing investments in strategic head count across our organization, as well as fees and services associated with our heightened M&A activity. Non-GAAP operating margin increased over 5 percentage points from the second quarter to 71.8%.

Our expense structure remains very lean, enabling us to drive significant profitability from our revenue outperformance. Adjusted EBITDA for the third quarter was $167.3 million, compared to $67.4 million in the third quarter of 2020. On a non-GAAP basis and excluding equity-based compensation expense and intangible asset amortization, income for the quarter was $126.3 million or $4.05 per diluted share based on 31.2 million weighted average diluted shares outstanding. This takes into account the tax effect for stock-based compensation and intangible asset amortization in the quarter.

Turning to the balance sheet. We ended the third quarter with $877 million in cash, cash equivalents and marketable securities. We also generated $152 million from cash from operations during the quarter, fueling our cash balance. Despite the cash investments we have made this year, including the cash investment of $43.4 million for CSI, which closed in the third quarter, $20 million for Helio and $19 million for controlling interest in the China JV, we are on our track to reach our goal of reaching $1 billion in cash, cash equivalents and marketable securities on the balance sheet before the end of the year, excluding any additional M&A announcements, which is certainly a possibility.

Now moving on to our outlook. Starting with COVID revenue, as we've discussed, COVID revenue continues to be volatile due to many factors outside our control. As cases trend higher, we tend to see a positive correlation in test volumes. At the same time, government agencies and schools have put regular testing protocols in place to both supplement vaccination programs and monitoring potential breakthrough cases.

With that, we expect COVID revenues for the year will be at least $815 million, up from our previous guidance of $690 million. This increase of $125 million accounts for the outperformance in Q3. As a reminder, COVID revenue guidance includes only revenue from RT-PCR COVID testing, including picture at-home COVID kits. Moving on to our core revenue guidance, which includes revenue from our core NGS testing, COVID NGS testing and the impact from CSI.

We expect our core NGS business will continue to see strong growth as we further capitalize on our investments. We expect core NGS revenues will total approximately $95 million, consistent with our previous guidance. For COVID NGS revenue from the CDC, we're raising our guidance to $20 million from $15 million given the strength we saw in this program in Q3 due to higher positivity rates. Altogether, we expect our total core revenues will be $115 million for the year.

With the $815 million in COVID revenues and with $115 million in core revenue, we expect total revenues will be approximately $930 million for the year, up from our previous guidance of $800 million. We acknowledge that the vast majority of this increase will be coming from COVID-related testing, but remain confident in our core business and believe we're at the very early stage of ramping on our numerous opportunities as we're focused on our core business. From a profitability standpoint, we continue to expect to show ongoing leverage in our business, which drops to the bottom line and drives cash flow generation. Our foundational technology platform that underpins our business operations continue to drive extremely growth -- extremely high growth in operating margins.

That being said, we could see some fluctuations in the near term as we continue to adjust investments and head count and M&A. For the full year 2021, utilizing an estimated 27% tax rate and a share count of $31 million, we expect net non-GAAP income of approximately $502 million or $16 per share for our shareholders, excluding stock-based compensation. Our updated guidance is posted on slides on our Investor Relations website, which shows the details that I just discussed. We feel very good about the positioning headed into the fourth quarter as we have set ourselves up to benefit from a number of long-term strategic initiatives.

We are excited about the potential to drive sustainable growth in our core business in the quarters ahead. Armed with a large cash balance and capital structure, we're also continuously evaluating more and more M&A opportunities that could be complementary to our expanding platform. Thank you for joining our call today. Operator, now you can open it up for questions.

Questions & Answers:


Thank you. [Operator instructions] Our first question comes from Kevin DeGeeter with Oppenheimer.

Kevin DeGeeter -- Oppenheimer and Company -- Analyst

Hey, guys. Thanks for taking my questions. Congrats on a really nice quarter here. A few things.

I think Ming highlighted in his prepared comments progress on commercial reimbursement across the portfolio. I guess maybe two points on that. Can you kind of quantify the portion of revenue that came from third-party reimbursement? And just kind of more generally, how do you measure, going through the next couple of quarters, continued strength in gaining expanded reimbursement? Is it being able to disclose specific coverage or in-network decision with national payers? Is it lives covered? Is it percentage of revenue? Just kind of what's the best way to measure improvement on that metric.

Ming Hsieh -- Chief Executive Officer

Yeah. Thanks, Kevin. I think in general, our insurance in terms of life coverage, we have about 160 million lives covered under our insurance contracts. But in terms of revenue, most of our COVID revenue is still reimbursement.

So we also have the noninsurance contract, which should be our relationship with the biopharma companies. So Paul, Brad, you can take over to add some color for Kevin's questions.

Brandon Perthuis -- Chief Commercial Officer

Ming, it's Brandon here. I just think that --

Kevin DeGeeter -- Oppenheimer and Company -- Analyst

Brandon, just by way of --

Brandon Perthuis -- Chief Commercial Officer

Go ahead, Kevin.

Kevin DeGeeter -- Oppenheimer and Company -- Analyst

[Inaudible] I'm referring to non-COVID.

Brandon Perthuis -- Chief Commercial Officer

Right. So the synergies between Fulgent and CSI in terms of leveraging the contract really hasn't begun to be realized, meaning we've been focused on integrating CSI and not cross-selling traditional Fulgent tests with CSI sales force and contracts. So long story short, those efficiencies have not been recognized yet. So the insurance billing we would see to date would be the traditional CSI business, flow, IHC, FISH, cytogenetics, those products and services.

In terms of -- on a go-forward basis, we continue to put effort into becoming more in-network. I think we're really happy to be able to sit here and say today that we have $160 million covered lives, but it's a never-ending feat. We continue to go after these sort of smaller regional contracts, some of the Blue Cross Blue Shield contracts we don't have yet. So we do have resources working on that on a daily basis to continue to improve and increase the number of covered lives we have.

Kevin DeGeeter -- Oppenheimer and Company -- Analyst

Got it. And with regard to the sales force expansion for CSI and the oncology franchise, I think your comments suggest somewhere around 15 reps by the end of the year. At least with the current portfolio, how do you think about appropriate sizing for clinical oncology sales force over, say, an 18- to 24-month horizon?

Brandon Perthuis -- Chief Commercial Officer

Much bigger than that, right? What we're doing, Kevin, from a go-to-market perspective is looking at those states where we're particularly strong with managed care. And we think that's a good place to start in terms of increasing our head count. As we mentioned, historically, CSI has been a wonderful business. They run that business very well for a long time, but it's been a bit focused in the Southeast region.

Our first objective is to take that laboratory national, expand outside the Southeast region. We believe we have the managed care contracts to do that, and we believe in certain states we're particularly strong in managed care. So that's where we're placing our head count. I think over time, that number must be bigger.

It is a massive market with a ton of call points. We are differentiating a little bit as it relates to oncologists versus pathologists, and we may have some subspecialty salespeople for oncology. But I think it's a number that's going to continue to grow, especially as we land additional managed care contracts in those states. So I think we'll be reporting likely each quarter sort of how this head count expands.

But I could see in 2020, that number being significantly more than 15. And that's -- I'm specifically talking about the CSI sales force, not the Helio sales force, which would be a different call point.

Kevin DeGeeter -- Oppenheimer and Company -- Analyst

Understood. And then just with one more and then I'll get back in the queue. With regard to balance sheet, maybe Paul, with your guidance of close to $1 billion on the balance sheet by the end of the year, and that's equivalent to 40% cost of current market cap, how do you think about buybacks or just balance sheet management here just kind of given the current balance sheet profile relative to the current stock price?

Paul Kim -- Chief Financial Officer

Yeah. Thank you for that question, Kevin. Buyback and other options are certainly things that we can consider. But our primary focus is investing in this business and executing on our post-COVID M&A strategy.

If you take a look at our core revenues, the amount of core revenues that we threw up in 2019 was $32 million. The amount of core revenues that we had in 2020 was $36 million. The amount of core revenues that we had in a single quarter now is $40 million. Even if you strip out the NGS from the CDC, because it's hard to predict which way COVID is going to go, we still had accelerated core revenues in a massive way.

And this was possible because of our expanded operational capabilities, our quality, our reputation, quality of people, and there are more senior people that are gravitating toward Fulgent, as well as progress in our reimbursement. If you take a look at our strategy, particularly for M&A, what we're doing is we're using the capital, being very conscious about which assets and which companies to evaluate. And we're doing both. So for example, CSI, it bolstered and strengthened traditional capabilities for us in the cancer market, being able to provide an end-to-end solution.

And then for Helio and investments such as -- in that area was evolving newer markets for liquid biopsy. We also made an investment in China now taking over controlling interest, which will expand our footprint on an international basis. So if you take a look at the approach that we're taking, we're using the massive amount of capital that we continue to generate additional cash with, and we're deploying that from an M&A perspective. And we're bolstering the traditional markets, as well as looking forward, all utilizing our technology and our operational platform.

So the long and short of it is buybacks are certainly an option, but it's our intention to deploy this capital externally, as well as investing aggressively within our internal structure.

Kevin DeGeeter -- Oppenheimer and Company -- Analyst

Thanks for taking our questions. 


And there are no further questions at this time. I will now turn the call back to Ming Hsieh for closing remarks.

Ming Hsieh -- Chief Executive Officer

Again, thank you very much for joining our conference. We are very, very excited for the opportunity we are facing. And definitely, we have the means of capital and technology and we'll be the major player in this very exciting genomic diagnostic market. So thank you very much for joining the call and looking forward to update you in the next quarter.

Thank you.


[Operator signoff]

Duration: 37 minutes

Call participants:

Nicole Borsje -- Investor Relations

Ming Hsieh -- Chief Executive Officer

Brandon Perthuis -- Chief Commercial Officer

Paul Kim -- Chief Financial Officer

Kevin DeGeeter -- Oppenheimer and Company -- Analyst

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