During the COVID-19 pandemic, Fulgent Genetics (FLGT 0.39%) was in the right place at the right time. Fulgent became a key provider of COVID-19 testing in 2020 and saw its revenue explode by almost 1,300% over the prior year. Few companies benefited more during the pandemic -- and few have a bigger cloud of uncertainty hanging over them as investors worry about what comes next.
The good news is that Fulgent isn't a one-trick pony. The company is going through a metamorphosis, strengthened by a reinforced balance sheet and a growing core business in an attractive genetic testing market. Investors should prepare to shift their perspective.
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This is not a dying business
Before the COVID-19 testing opportunity came along, Fulgent's core business was a small but fast-growing next generation sequencing (NGS) genetic testing service primarily focused on pediatric rare diseases.
That segment is still expanding fast. In the first quarter ended March 31, NGS volume grew 185% year over year from 13,000 to 38,000 tests, while corresponding revenue grew 115% to $16.7 million. Management is projecting NGS revenue of over $100 million in 2021, representing 170% year-over-year growth.
Fulgent has an efficient technology and operating platform generating gross margins of about 80% and operating margins above 70%. As a result, liquidity is a real bright spot for Fulgent. At the end of Q1, it reported $697 million in cash, cash equivalents, and marketable securities. Management expects to close the year with more than $1 billion in short-term liquidity, excluding any merger- and acquisition-related activity.
The encouraging growth in the core business is understandably offset by a rapid reduction in COVID-19 testing revenue. Unless there is a flare-up of infections from virus variants, COVID-19 testing revenue will continue to fall dramatically. Management is projecting $418 million in COVID-19 testing revenue for the remainder of the year, compared with $312 million in Q1 alone.
This precipitous revenue falloff is an operational challenge, but Fulgent has an experienced management team that over the past year has proven to be strong operators in building and scaling the business.
The best is yet to come
Fulgent will report quarterly earnings in early August. Smart investors will keep an eye on these three areas for signs management is executing on the long-term growth potential:
1. Continued COVID-19 testing
While testing volumes are declining, the endpoint is not zero. Fulgent has proven to be a high-quality, low-cost, fast-turnaround provider of gold-standard RT-PCR tests. Many screening programs are not allowing less sensitive antigen or rapid molecular tests to be used. As a result, Fulgent has been able to secure contracts for "return to normalcy" testing, particularly with school systems and the government.
The Department of Health and Human Services announced it will invest $12 billion in COVID-19 testing through the American Rescue Plan, with $10 billion going to schools. Fulgent management estimates that more than 1 million tests per day will be needed with this new program. Look for contract wins and continued testing volume in the near term.
2. Growth catalysts
Fulgent is expanding into additional genetic testing areas, including hereditary cancer, which is a high-growth area. There are more than 550 ongoing clinical trials for oncology genetic therapies, which will drive the need for more genetic testing and higher reimbursement over the coming years. Pharma companies are advocating and paying for genetic testing, since it will drive demand for their therapies. Fulgent has also established FF Gene Biotech, a joint venture focused on oncology in China, which is expected to be a $45 billion market. Stay tuned to these critical long-term developments.
3. Mergers and acquisitions
Fulgent's large cash position and strong operating leverage could make acquisitions a way to rapidly generate revenue that is accretive to the bottom line. In last year's Q4 conference call, CEO Ming Hsieh called out his interest in acquisitions to expand the core diagnostic business in Asia and Europe. It's a big world, and billions of people will need the genetic tests Fulgent is developing.
A great beginning, not the end
The market doesn't like uncertainty, which has helped push Fulgent shares down 56% from their 52-week high. The share price may go even lower as investors struggle to understand the profit picture in the next few quarters.
For patient long-term buy-and-hold investors with a tolerance for some uncertainty, Fulgent Genetics may actually be the best value biotech stock out there and could be a great addition for your portfolio.
