At the start of the pandemic, diagnostic tests for the coronavirus were in extreme demand. Making a test for a new virus isn't exactly difficult, and the sheer scale of the world's need provided an opportunity for a handful of enterprising companies to jump into the new market. And now that the peak of the testing gold rush is over, some of those competitors are still making money at full steam.
Today, I'll be discussing two diagnostic companies that are transforming themselves into sustainable engines of growth using the income they made from producing coronavirus diagnostics. Both of these businesses are strongly profitable, with net margins well above 45%, and their futures look bright. While there's no avoiding the fact that their coronavirus testing revenue is falling, they're taking it in stride, and they just might be a good fit for your portfolio as they enter their next acts.
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1. Fulgent Genetics
Fulgent Genetics (FLGT 4.18%) is one of the coronavirus testing market's biggest winners, and its momentum is still holding strong more than a year after its debut. Compared to its wild second quarter of 2020, in Q2 of this year, its revenue exploded by just shy of 790% year over year.
Though coronavirus diagnostic testing has been the primary driver of the company's revenue since the start of the pandemic, its main line of business is in genomic testing for a variety of purposes, and that's what is already starting to carry its ongoing growth. For example, when people are interested in learning whether they're a carrier of a hereditary condition, Fulgent makes tests for that. In clinical settings, hospitals also rely on its tumor profiling tests to help inform the appropriate course of treatment for certain cancers.
And with its coronavirus diagnostic revenue in hand -- which is expected to total $690 million this year -- Fulgent has unprecedented leeway to expand deeper into these other testing verticals. Not to mention chasing even more revenue from new coronavirus products, like its at-home SARS-CoV2 antibody test that launched on Oct. 27. In August, it acquired CSI Laboratories, a private cancer testing company. Although investors won't know how much the acquisition is worth in terms of immediate new revenue until Fulgent reports earnings for the first time since the purchase on Nov. 9, CSI will be crucial to the company's growing cancer testing segment. The acquisition will also add new capacity to its other genetic testing services. In this vein, Fulgent also recently invested $20 million in Helio Health to commercialize its early cancer detection tests.
Moving forward, Fulgent is planning to focus on China as its primary international market. Even with sales of coronavirus diagnostics slowing down, expanding there will drive significant growth. If things go according to plan with its Chinese joint venture and its new income from CSI Labs, management is expecting $800 million in sales for 2021, which would be an increase of 90% year over year.
Given that the stock has increased more than 162% in the last 12 months, even more outperformance is likely in the near future. Furthermore, Fulgent might be sharply undervalued; its trailing price to earnings ratio is 4.62, which is far lower than the market's average of around 29. If that's not tempting to investors, not much else will be.
2. Co-Diagnostics
For most of 2020 and 2021, Co-Diagnostics (CODX -3.33%) was close to being a pure-play stock for coronavirus testing. Between its international reach and constant development of new types of hotly demanded combination tests, the company's quarterly revenue grew by a shocking 252,700% in the last three years. That's because as recently as 2019, it only brought in $214,974 in revenue, which is barely notable compared to its trailing revenue of $96.3 million. And that sum is only continuing to go up over time. Global sales of its coronavirus tests earned it $27.4 million in the second quarter, marking a 13.8% increase compared to Q2 of 2020.
When it comes to laying the foundation for future growth, Co-Diagnostics is taking a different direction than Fulgent Genetics. Rather than expanding its selection of test offerings or increasing its capacity by buying smaller testing businesses, Co-Diagnostics is developing its own point-of-care diagnostics device for polymerase chain reaction (PCR) testing. PCR testing is a common biomedical technique that quantifies the amount of genetic material in a sample, which makes it useful for everything from clinical diagnostics to basic research. While details are scarce, CEO Dwight Egan has touted that the new PCR machine will be able to quickly and cheaply process saliva samples and that its ease of use will make it a good fit for "nearly every setting."
In short, it seems like the new device is trying to appeal to small clinics and consumers. If it lives up to management's description, Co-Diagnostics might just make the first PCR machine that's a home appliance. That could be beyond huge, especially if it would be compatible with new non-coronavirus tests made by the company.
But, for now, investors should look to the company's joint venture in India for growth in the short term. On Oct. 6, it locked up a go-ahead from regulators there to sell one of its new diagnostics, which tests for both dengue fever and Chikungunya virus. While that might not be as lucrative as coronavirus diagnostics, it'll still help revenue to grow while putting the final touches on the new PCR device.
In terms of its stock performance, shares of Co-Diagnostics are up more than 267% in the last three years, but the last 12 months have seen its price fall by nearly 37%. Much like Fulgent Genetics, Co-Diagnostics' PE ratio near 5 suggests that it could be quite undervalued, so a catalyst could potentially send its stock soaring. Stay tuned to see whether the new device is going to be a game-changer for shareholders in the same way that its coronavirus tests were in 2020.
