Fulgent Genetics Inc (FLGT) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen. Welcome to the third quarter 2016 Fulgent Genetics earnings conference call.

(Operator Instructions)

As a reminder, this conference is being recorded. I would like to now introduce your host for today's conference, Mr. Bob Jones, Investor Relations, The Blueshirt Group. Sir, you may begin.

Thank you, Amanda. Good afternoon and welcome to the Fulgent Genetics third quarter 2016 conference call. On the call today is Ming Hsieh, Chief Executive Officer; Paul Kim, Chief Financial Officer; and Dr. Harry Gao, Chief Scientific Officer.

The Company's press release discussing its financial results is available in the Investor Relations section of the Company's website, fulgentgenetics.com. 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.

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 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 of the risk factors that may cause results to differ from those described in these forward-looking statements contained in the Company's filings with the Securities and Exchange Commission, including its quarterly report on Form 10-Q for the third quarter of 2016 and the related press release announcing its financial results for that quarter, both of which are available on the Company's website.

Management's prepared remarks, including discussions of earnings and earnings per share, which are 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 2016 for more information, including the description of how the Company calculates non-GAAP earnings and earnings per share and a reconciliation of these financial measures to net loss and net loss per share -- the most directly comparable GAAP financial measures.

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

Thank you, Bob. Good afternoon and welcome to this afternoon's call to discuss Fulgent's third quarter financial results. As you know, this is our first earnings conference call after our initial public offer completed on October 4. It was a pleasure to meeting many of you on the road show and we appreciate your support. I look forward to your discussions in the meetings as we move forward.

Fulgent has strong third quarter financial results, highlighted by 72% of revenue growth, demonstrated how we have been able to disrupt genetic testing market and differentiate Fulgent in the marketplace. Let me first provide the overview of Fulgent, particularly for those who are new to the Company.

In the past several years, we have created high margin genetic testing businesses with a differentiated approach to NGS testing and data analytics. We have been able to combine the Company's scientific expertise in NGS testing with a similar data analytical capabilities from our previous experience at Fulgent; a technology business that we sold six years ago to a cost of $1 billion. We have built Fulgent around a proprietary technology driven by our own gene probes and data algorithms with integrated technology platforms that allow us to quickly develop a test at a lower cost than many of the other companies in our industry, which has a few of the strong revenue growth and the broader NGS testing for our customers.

As our test volumes grow from the relatively low business we have today, we expect we will generally increase our operating efficiency, and that will allow the businesses to further scale and generate the profitability. Today we offer over 18,000 single gene tests and approximately 250 panel tests, which we believe is far more than any of our competitors. And our whole exome genomic sequencing, we are also able to provide a level of customization that we believe have been critical competitive advantage.

From our start to rare disease tests, we have offerings significant expanded now to include cardio, pediatric, prenatal and oncology. We expect to offer [some micro] testing for cancer in the near future. Additionally, recently, we have a launch of the new chromosome tests, the CMV-Plus; that is designed to yield NGS technology to detect copy numbers variance with a similar or improved results as [macro-based] of genomic testing.

Even with a smaller sales force and a leader in marketing today, we have established a strong relationship with the customers based on leading hospitals and other medical institutions worldwide, which we believe is a similar field to the breadth and the flexibility of the test menu that our technology platform allow us to produce.

With that background, let me bring up today some of our third quarter accomplishments that we believe will help us to drive future growth. We recently achieved a milestone by signing a national contract with a national payer organization to become an in-network provider of genetic testing. We have created the test menu and the pricing schedule and are pursuing multiple regional agreements. And this agreement we expect to cover tens of millions of lives by end of 2016.

In addition, we are pursuing agreement with the other payer organization, some of which are anticipated to be completed in the coming months and quarters. We have received a vendor code and established a pricing list with a national clinical laboratory to handle certain of its genetic testing needs associated with the work for certain US government agencies. In addition, we have signed an exclusive agreement with a regional hospital network within the US Army to provide genetic testing for members of the Armed Forces and their families. We have developed a proprietary carrier screening for a leading healthcare service provider for prenatal sector through OEM relationship agreement. We believe this speaks of our unique ability to customize our tests to meet our customer's specific needs.

We are actively pursuing in a similar arrangement with cardio and oncology area as well. Fulgent and Xi Long USA, a large stakeholder of the Company, are working towards the formation of a joint venture. Under the terms of the agreement, Fulgent is expected to be a minority partner in the joint venture, which will address opportunities in the genetic testing market in China. We view this potential joint venture as a long-term growth opportunity.

Finally, we hire senior individuals to lead our sales organization. These individuals bring decades of experiences in each of their relative field for infusion to managed care to genetic consulting. We believe we have scratched the surface of our growth opportunities. Even in the hospital market, our core market today, we have a relatively low penetration and we believe a tremendous upside as we diligently build a sales force. Hospitals are high volume users in genetic tests with an attractive payer profile. We intended to grow our businesses with hospitals and other medical institutions to generate cash while investing heavily into the adjacent market to pursue growth opportunities.

To summarize, we believe we are a fast-growing genetic testing company with a rising [expense] product portfolio. We have achieved the business with our highly differentiated business model and proprietary technology, which we believe will allow us to continue to invest our growth while generating strong cash flow.

Paul will walk you through our third quarter financial results and I will come back and summarize our long-term growth strategies. Paul?

Thank you, Ming. Welcome to our first earnings conference call at Fulgent Genetics. The third quarter was certainly a busy and exciting period for Fulgent, tapped off with the successful completion of our IPO.

As Ming said, we appreciate the support of our stockholders and look forward to seeing many of you at our upcoming conferences and investor events. We believe our third quarter financial results demonstrate that our operating and financial model is driven by our superior technology platform and uniqueness in the genetic testing space. Revenues grew 72% to $5 million in the quarter compared to last year's third quarter, and increased 26% sequentially. Our revenue growth was driven by new customer additions and further penetration of existing customers, primarily in the hospital market. I'd like to point out that virtually none of the new business that Ming described in his remarks covering third quarter accomplishments contributed to our revenue performance during the quarter.

We generated 62% of our revenue in the US and Canada, and 38% outside of North America. Test volumes during the quarter rose to 3,423 billable tests from 2,781 billable tests in the prior quarter. Pricing was slightly above our expectation at an average sales price of $14.60 per test during the quarter, which we believe was largely due to our ability to offer more complex and customized tests than many of our competitors.

Although our model calls for slight pricing decreases over time, we have not been experiencing pricing degradation recently. Gross margin for the quarter was $2.9 million, excluding share-based compensation of $542,000 in that category, gross margin was $3.454 million, or 69%, which is a record level for the Company in its short history.

On the flipside, costs per test continue to decrease during the quarter. Excluding aforementioned share-based compensation of $542,000, cost was $1.557 million, or $455 per test; a record low for the Company. We believe we will continue to meaningfully reduce the fixed cost per test as we execute our growth strategies and build volume.

On the operating side, given the approximate $4 billion NGS testing market, we plan to make substantial investments in our business while still focusing on generating positive cash flow. These investments are focused in the commercial and sales and marketing part of the business as we seek to promote Fulgent's name in the genetic testing market. We're taking a very diligent approach to expanding our sale force with the goal of more than doubling our sales organization in the next 12 months.

Third quarter operating margin came in at 36%. We intend to invest prudently in the near term to add global customers in the hospital market and adjacent markets while increasing the number of tests we offer.

Our continued focus is to build the business for the long term by increasing revenues and strong cash flow and achieves profitability. Additionally, we have substantial unused capacity to handle increased test volumes as we execute our growth strategy to expand our business. We believe our business model makes us unique in the industry as we're generating fast growth while also driving towards GAAP profitability. To note, in this regard, adjusted EBITDA during the quarter was $2.1 million based on $5 million of revenues.

On a non-GAAP basis, excluding share-based compensation in the effect of an estimated corporate tax rate, earnings for the quarter were $1.1 million. On the tax side, we have estimated a corporate tax rate of 38%. To note, because our IPO did not close until early October, our per share calculation for the third quarter are based on approximately 13 million shares. And following the IPO, we have approximately 18 million shares outstanding and subject to outstanding equity awards. In looking at our balance sheet, we have strong liquidity and are well capitalized to support our expansion plans and growth strategies. The net proceeds from the IPO added $36.3 million of net proceeds to our balance sheet in October.

Following the close of IPO on October 4, 2016, and including the net proceeds from the over-allotment exercise, the Company had approximately $46 million in cash in its balance sheet at the end of October 2016. That included the cash generated from operations during the third quarter. Given our excess capacity and modest capital requirements, we expect to generate strong cash flow going forward, adding to the $3.2 million we generated in the first nine months of 2016.

Now turning to financial guidance for the fourth quarter. We anticipate revenues to be between $5.8 million and $6.2 million for the quarter; representing 107% increase at the midpoint of last year's fourth quarter. We also anticipate continued generation of cash and attractive growth in operating margins. Actual gross margins will be impacted by mix of revenues, continued investments in our operating infrastructure -- not only in our lab, but also in staffing support and systems to handle the anticipated volume and reimbursement, offset by efficiencies of scale as we grow volume.

Actual operating margins will be impacted by the timing of new hires across sales and marketing in addition to spending related to creating greater awareness of our rich product portfolio.

As I mentioned, we anticipate our estimated tax rate to be approximately 38% and share count to be approximately 18 million during the fourth quarter. With all that said, we anticipate continued high EBITDA in relation to revenues. Also, stock-based compensation should be approximately $500,000 per quarter going forward or less. As mentioned in the prospectus, there were several non-cash stock-based charges in the third quarter immediately prior to the IPO related to the exercisability of previously granted options and conversion of the LLC units into common stock. These amounts stood at $2.4 million during this quarter.

Ming mentioned that in the most recent months we have contracted with the national payer organization. We're pursuing many other regional and national payers. We completed a new prenatal OEM service agreement and we established a relationship to serve the US Army. Our fourth quarter guidance only anticipates nominal contributions from any of these arrangements. However, we expect all these deals to contribute to our growth in 2017.

High growth in operating margins of our business, even with the relative low volume are, we believe, the results of our technology differentiation, which includes proprietary gene probes and the use of proprietary software and data algorithms. As volumes grow, we expect to increase operating efficiencies as we focus on growing revenues and volumes.

Before turning it back to Ming to wrap up before taking your questions, I want to take the opportunity to review our multi-pronged approach to growing our business across a range of markets and opportunities in the near term; to grow the hospital customer-base and increase test volumes. Second, continue to broaden our test menu. Third, develop and strengthen relationship with payers through a diligent and planned process to establish the features that will allow us to bill and receive payments for the tests we deliver. Fourth, expand our presence internationally, particularly in Europe and Asia, where we believe the market opportunity is potentially greater than the US down the road and capitalize on opportunities with reference to labs, OEMs, pharma and academic institutions as they arise.

That is the set portion of our conference call script. And, Operator, now we'll take questions.

(Operator Instructions) Erin Wilson from Credit Suisse.

Can you speak first to your progress with the third-party payer contracts? How are the relationships progressing specifically with the [Blue's] plans, and are you happy on sort of the contracted pricing terms? And are you still in discussion with other larger payers out there?

We are progressing our insurance payer's negotiations now. We do believe the pricing we received from besides this are largely national payer were already signed.

The other national payer organizations provided for us a very, very attractive contract pricing schedule, especially for the panels. So we are working actively for all the national payers organizations as well as some of the subsidiaries. So we're happy to see our position. I think I highlighted before the dealing with the payers.

The NGS market, it is growing. NGS is attractive to the insurance payers because it's related to patient care. And that they do like the depth of Fulgent, we could bring to the table for the test menu that we have, and that's why we're attractive to this organization for -- get us on their contracts.

And, Paul, maybe I missed this but did you give what your guidance and price in terms of pricing and volume for the fourth quarter?

No, we didn't give any guidance on the pricing and volume. We're only one month into the fourth quarter, but based on the one month, we don't see any drastic changes in the pricing environment based on the orders that we received.

And then speaking about -- I noticed a comment about the Xi Long JV in the press release. When do you think that will start to sort of materialize? Can you kind of speak to the broader opportunity there as you kind of enter the China market?

We are processing some more paperwork. We expect this joint venture, the paperworks will be finalized by this quarter towards maybe end of November or middle December. So this JV will be finalized.

Besides this Xi Long JV joint venture, we see very, very attractive opportunities in China for the preventive care market. We do have a separate relationship with the Chinese major [peripheral] medicine company. They are looking forward the relationship with us to build a genetic testing to profile some of their patients or their customers. So in general, the China market is very, very attractive for us and we're very aggressive in chasing the market.

Bill Quirk from Piper Jaffray.

A couple of questions from me. First off, Ming, you mentioned in your prepared comments that you saw both some new account growth as well as volume growth with an existing account.

Is there any way to just get a sense about that same-store sales volume growth; how much of that is kind of ongoing kind of market volume growth versus incrementally winning business at some of these accounts and from other labs, for example?

Our business in terms of quarter-over-quarter, we do have some variations from hospital to hospital. But in general trends, we do see the hospital business, the volume in general, is growing and we might see a certain hospital grow fast than others, but that's maybe related to seasonal issue. But in general, as we see our test volumes grow up in general.

Maybe a different way of asking the question, Ming; no doubt you're watching metrics in each of your accounts in terms of the type of tests that they're ordering. I mean, are you seeing any broadening of menus and such from some of these existing accounts?

Yes. Bill, we see a lot of [actions]. We see the cardio, we do see attraction on the cancers and all those [volumes] are growing as the test [then we'll come see].

And then secondly, and I think this is a question to Paul. I know that for the commentary, you didn't see much impact from the deals that you guys signed in the third quarter numbers. Are you expecting much impact from those in 4Q, or is that something that we should really be thinking about potentially accelerating in 2017?

We're not anticipating a whole lot in the fourth quarter. If we do get it in the fourth quarter, then we think that there's potential upside to the fourth quarter numbers. But a lot of these drivers -- whether it'd be progress that we're making in the payer side, whether it be progress that we're making on the international side, or progress that we're making on the OEM side or even the government, we really see those as being volume drivers in 2017 rather than 2016.

Andrew Cooper from Raymond James.

First, you talked about kind of more OEM opportunities in oncology or cardio. I just want to kind of get your thoughts on why kind of target that sort of opportunity relative to developing another panel yourself, or what your thoughts would be as to who you're going to partner with and how you're thinking about that opportunity in general.

I think I might have created some kind of confusion. When I mentioned about the OEM relationship, this is related to the prenatal testing. And that's the one we signed a major contract with the leader in that market. Related to the cardio, our regular genetic tests, clinical-related tests, we are still working by ourselves. We have built a sales force to penetrate this market. We're also working with some of our sales forces now outside of US such as Middle East. Those relationships we have be the distributor relationship, so we are handling all those clinical-related tests by our own sales force. But when we penetrate into the different markets, such as prenatal, and that's a market that we are not exposed to before. We [stopped] OEM relationships.

As we think about the JV with Xi Long, if you could talk about kind of, one, a little bit more of the timing into 2017. I know you said sign it by kind of the end of the year, but anything on timing there in terms of when you would be up and running and what sort of investment would be required out of you before you're able to start seeing some of the benefits there?

We will see the level to be up and running in the earlier of 2017. As I mentioned, regardless for the lab we also have another relationship with a major Chinese [herbal] medicine company and to build the genetic testing for their customers. So that will be through this joint venture -- part of the deal was to go through this joint venture.

And at this time, I'm showing no further questions. I would like to turn the call back over to Mr. Hsieh for closing remarks.

All right. So I would like to thank you for all of your participation to Fulgent's first earnings call as a public company. We're very proud of the Company we have built in such a short period of time. We believe there's a tremendous opportunity to reach our ambitious goals and now we are a public company.

The NGS market is large and growing. We have many opportunities for us to grow our business globally. As we seek expansion, our customer-base beyond the hospital market, we believe our proprietary technology platform provides a sustainable and competitive advantage. I would like to thank our customers for their confidence in us, and our stockholders in their support. Thank you, and have a good day.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, you may now disconnect.