Fulgent Genetics Inc (FLGT) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to our Q3 2017 Fulgent Genetics' Earnings Conference Call. (Operator Instructions) As a reminder, today's conference may be recorded.

I would now like to turn the call over to Ms. Nicole Borsje. Ma'am, you may begin.

Great. Thanks. Good afternoon, and welcome to the Fulgent Genetics' Third Quarter 2017 Financial Results Conference Call. On the call today is Ming Hsieh, Chief Executive Officer; and Paul Kim, Chief Financial 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 and 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 and 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 the previously filed 10-Q for the second quarter of 2017, 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 the accounting principles generally accepted in the United States or GAAP.

Management has presented these non-GAAP financial measurements 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 2017 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 loss and loss per share as the most directly comparable GAAP financial measures.

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

Thank you, Nicole. Good afternoon, and thank you for joining Fulgent Genetics' third quarter conference call. We would like to thank you all for joining us today as we discuss our results. I will discuss some business updates in the quarter and then Paul will go through our financial results in detail.

Let me first provide a brief overview of our financial results in the third quarter. Revenue totaled $4.5 million compared to $5 million in the third quarter last year. Billable tests in the quarter grew 19% year-over-year to 4,072. Our ASP was $1,106, down 8% from $1,198 in the second quarter. GAAP loss was $1.1 million, and non-GAAP loss was $442,000. Non-GAAP loss per share was $0.02 in the third quarter, and the cash flow from operations was positive of $500,000. Our results in the quarter came below our expectations as it has taken longer than we expected for our new sales organization to fully ramp, which has impacted our top line growth. While we are disappointed in these results, we believe we have the proper ingredients to reaccelerate our growth in the future. This includes the following 3 areas: One, technology. We now have the most comprehensive test menu in the industry for various markets, including carrier screening, pediatrics, cardiology, neurology and germline cancer. We continue to invest the wealth of capabilities in RNA, DNA as well as somatic cancer. Second, operations. We continue to expand our lab and invest in equipment. We're also refining our process to include further automation and integration, which increase our quality turnaround time and efficiency. Three, the sales team. We have the right team in place and experienced a meaningful jump in orders since end of the third quarter, which I will discuss in more details in a moment.

With these ingredients in the growing market, we are ready to capitalize on many opportunities, which will accelerate our growth in the future. Non-GAAP gross margins in the third quarter were 53%, down from 61% in the last quarter. Our gross margin in the quarter was impacted by the aggressive investment we made in our lab operations as we increase the higher test volume going forward. This investment increased our overall cost of goods sold, and included hiring more employees, depreciation from expansion in square footage as well as purchasing more equipment. We announced the launch of our comprehensive carrier test in August, which we briefly discussed on our last earnings call. We were pleased to see we're at good initial demand for this test following the launch. While our carrier test didn't have a meaningful impact on our revenue in the third quarter, we have seen strong order volume recently through various agreements that we executed with clinic networks.

We are also in the process of expanding our test offering in the oncology market, including plan to launch our somatic-based test in the first half of 2018. This offer includes combination of germline and the somatic test, which will include detailed analysis and the result from both tumor and normal tissue.

Although it has taken longer than expected for our sales force to fully ramp, the team remains highly focused on executing and making incremental progress on the steps that would lead to much higher test volume in 2018. I'll provide some color on this progress that we're seeing. First, the institutional domestic team has recently converted over 2 dozen new accounts, which should lead to a notable increase in order volume in the month of October. While we didn't see impact of this new account to our third quarter results, it is encouraging sign of our volume in the month ahead. This team is also working on the execution of treatments, which should lead us sustained ongoing business in the key accounts. Second, the reimbursement team is in the process of signing additional third-party payers and working with various group purchasing organizations to drive volume starting 2018. Third, we hired several people in our international team to address the market outside the U.S., including Canada, Australia and the Middle East. Fourth, we are seeing more proposals and opportunities in our sequencing for our service capabilities with several large biopharma organizations. We have recently seen some of these opportunities converted into orders. And although we have -- didn't see meaningful impact of this order in the third quarter, we are excited about these prospects going forward. Finally, our China JV is working hard to drive business through its lab and we are expecting to see meaningful volume growth in 2018.

I would like now to turn over the call to Paul to provide the brief details on our operation and the financial performance in the third quarter. He'll also provide an update of our outlook. Paul?

Thanks, Ming. Third quarter revenues totaled $4.5 million, a decrease of 10% to the third quarter of 2016. As Ming discussed, our results came in below our expectations as our new sales force has taken additional time to fully ramp. We have also been investing in our lab operations and expanding our test menu to best position ourselves for growth in 2018.

I would also remind you that our revenue from Asia continues to decline as these samples are now going through our JV, and our Asia revenues represented 12% of our total revenue in the third quarter. This compares to 23% in the third quarter of 2016 and 11% last quarter. Excluding revenue from Asia, our business in the U.S. and Europe remains stable.

Billable tests were 4,072 in the third quarter, an increase of 19% over Q3 of last year and an increase of 5% from Q2. Our ASP was $1,106, down from $1,198 in the second quarter. Our ASPs have ticked down due to the growing portion of our revenues we're receiving from sequencing service agreements with biopharma organizations, which are sold under contract at a lower price per test and carry lower gross margins. Cost per test for the quarter was $557 on a GAAP basis and $524 excluding equity-based compensation of $133,000. Cost per test increased slightly in the quarter due to investments we made in our lab operations, which Ming discussed. As a result of the increased COGS, our non-GAAP gross margin came down more than we were expecting to 53% in the quarter. Our gross margin will continue to fluctuate as our test mix varies and our volumes scale. Longer term, we still continue to expect to see a lower average cost per test as we ramp our volumes and continue to improve productivity and automation in the lab. We believe that our differentiated technology and operating efficiencies will give us an advantage with margins long term despite pricing declines we may see in our business or in the industry overall.

Now looking at operating expenses. We remain focused on balancing our investments for growth, while managing expenses. On the sales and marketing side, our expenses were $1.4 million in the quarter, up from $851,000 last quarter. This increase was due to spending on various initiatives, including hiring overseas and domestically, and partnering in program launch expenses related to our new tests for targeted markets including oncology. Also, we beefed up our reimbursement team to handle the recent tick up in orders. We believe these marketing investments will bring us incremental business in the future.

On research and development, we continue to invest in our technology platform and expanding our test menu, which led to R&D expenses of $1.1 million, up from $920,000 last quarter. Lastly, our G&A expenses were $1.2 million. Non-GAAP operating expenses totaled $3.3 million for the quarter. Adjusted EBITDA for the third quarter was a loss of $458,000 compared to earnings of $685,000 in the second quarter and $2.1 million in Q3 last year. On a non-GAAP basis and excluding equity-based compensation expense, non-GAAP loss for the quarter was $442,000 or $0.02 per share based on 17.8 million common shares outstanding. The GAAP and non-GAAP tax rate at the end of the year -- at the end of the third quarter was 36%. Although we reported non-GAAP loss this quarter, we expect to return to a profit in the coming quarters as the recent investments we made in the business begin to pay off.

Turning to the balance sheet. We remain well capitalized to support our growth, and we're comfortable with our cash position. We ended third quarter with $43.9 million in cash, cash equivalents and marketable securities with no debt. This equates to $2.47 per cash and a book value per share of $3.11 and enterprise value of approximately $25 million for the business.

Moving on to our outlook. While we're disappointed in the progress we saw in the quarter, we remain focused on leveraging our investments and expanded test offering to drive growth in the quarters ahead. As Ming indicated, we have seen some promising indications that our business should reaccelerate in the coming years. We saw a meaningful increase in billable test volume in the month of October, as our sales team recently signed a number of new clients and secured multiple sequencing for service orders. Specifically, our overall billable orders jumped more than 35% in the month of October compared to the average monthly orders that we saw in July, August as well as September. This momentum continued in the first week of November through today. The increase came from various key accounts we won in recent months for existing test as well as newly launched carrier tests. Although we expect orders will increase significantly in the fourth quarter, we expect that fourth quarter revenues will be approximately $5 million, which implies a full year revenue guidance of approximately $20 million.

We're projecting a relatively small sequential revenue growth rate of approximately 10% for the following reasons: First, a meaningful portion of our volume growth is related to our new carrier test, for which we have not been able to recognize the revenue until we collect cash from insurers; second, although we're very excited about our big leg up in October as well as early November orders, we have tempered our revenue expectations in the fourth quarter as we have not yet seen orders for the rest of November as well as December; third, we expect our revenue contribution from Asia will continue to decline, and this will a represent a very small portion of our overall revenue in Q4. We are closely monitoring the recent order momentum we have seen, and we believe the revenue impact of our new sales organization will be felt in full force in 2018. On the bottom line, despite recognizing a GAAP loss in the quarter, we expect to see a non-GAAP profit and positive cash flow for operations for the full year. Although we were disappointed with our results for this quarter, we remain focused on continuing to invest in our technology and streamlining operations through automation and integration. With our technology and capabilities in the laboratory, we believe we can capitalize on many opportunities that will drive growth going forward.

Thank you again for joining us on our call today. Operator, now open it up for questions.

(Operator Instructions) And our first question comes from the line of Bill Quirk from Piper Jaffray.

Paul, I appreciate the order color around the fourth quarter. Can you go in to a little bit more detail there? Is this the biopharm partnership? Is this kind of the core genetics business? Is this carrier screening? Is it all 3? Just trying to get a handle on, I guess, how broad that order improvement is. And then secondly, I guess, why? Why did things slow down so much in the summer? And now we're starting to see them accelerate nicely. I'm just curious if you could tell us some more details there.

So Bill, I'll probably cover some of those first, and then Paul can add on to some of my comments. I think -- yes, first of all, I think we offer a pretty diversified test offering. We do see a significant attention from various research institutions sending their sequencing service to us. So we are working with them -- some of them, working to tuning of their tests, build up their [pharmas] and have them conduct their scientific research. So that's one of the areas we've seen traction. And also we are invest heavily into the testing with several pharmaceutical companies, which convert it to their genetic service to the third-party labs. We are still in the areas of competing in that area. We haven't lost any of those opportunities yet, and we're seeing more and more coming, but these companies who doesn't take a long time to (inaudible) the lab and go through their processes, we're seeing more of those opportunities also working now. And we do expect to convert some of them in 2018. So in terms of all the institutions, we continue to see the institutions adding their service orders to us, and those areas we've seen positive signs. Paul, you probably can add to that.

Yes, so I agree with Ming. It's been broad, both in terms of what they've been ordering as well as the customers. As I indicated, the new sales organization, they converted over 2 dozen accounts already. And the increase in orders, it's coming from those accounts as well as existing accounts as they continue to develop relationships, contacts and let them know about our full service offerings. In the orders, they comprise of sequencing for service from biopharma organizations, but also comprises a big slug of our newly launched carrier tests as well as all of our other available tests. And we could have been more bullish in terms of our forecast for the fourth quarter, but we've missed quite a few quarters in a row, so we're just tempering expectations altogether. And then lastly, because we are billing out a carrier test through our insurance, we had to incorporate conservatism because the tests through insurance, we're not able to recognize revenue until we get cash collection.

And our next question comes from the line of Erin Wright from Crédit Suisse.

This is actually Hong on for Erin. Just 2 quick questions from us. Sort of given some of the contracts that you've talked about in October, how do we think about sort of average sales price going forward given some of the sequencing contracts that you just mentioned? And then, our second question, can you discuss sort of any ongoing -- like, can you discuss any implications of sort of some of the ongoing [panel] proposals and just any shift in the regulatory environment in general?

So as far as the ASPs for the recent uptick in the orders, because a nice chunk of it was related to the carrier-based test, we believe the ASPs will be nominally lower than what we've reported on average for all of our tests. And then, as far as sequencing for service, those carry slightly lower ASPs as well. But the composition of the remaining items are from the institutional side of the business, and that's pretty reflective of the ASPs that we had before. And then, as far as the regulatory environment and the proposals that are looming out there, we don't think that that'll greatly impact our business.

And our next question comes from Andrew Cooper from Raymond James.

First one, we've heard about a couple of different payers, including United, talk about requiring more prior authorization for some of the bigger gene panel tests. Just wanted to get your perspective on if that changed anything about trying to go to the commercial payer market or any color you could provide there.

Yes, Andrew, that's a pretty good question. We do work with the insurance companies now discussing -- discussion about the bigger panel reimbursement. Actually, we're encouraged to see the signs. We do get reimbursement from the United technology insurance now.

We have. We have. So our experience with the various carriers is -- has been pretty good. We're not in-network with all the carriers; we're out-of-network. But the way we have streamlined our billing procedures, when everything is said and done, the way we actually bill out the amount that we're allowed to bill out, we don't think that, that will significantly impact our business just based on the efficiencies that we have in the operations.

Great. And just one more from me. As we look at kind of the gross margin or the average cost per test and think about how much of the increase you saw sequentially was kind of volume driven as opposed to the incremental expenses that you're layering in, in terms of building out some of the automation and the hiring and things like that, just kind of what the underlying go-forward might look like. Any color there would be great, please.

So almost all the increase that we had in our cost structure was intentional. Meaning that we continue to make investments in terms of equipment. We expanded our laboratory. We actually have a separate location for bioinformatics team down the street, which is about 0.5 mile from our lab. So the old headquarters is going to be solely dedicated for the anticipated volume going forward. The other thing that we did was, we beefed up the number of hires that we had internally for the operations. So it's equipment, facilities and headcount. And we're very excited about the readiness that we have for the operations. And going forward, as volumes, they pick up, we should be able to see in the numbers, the uplift that we have in the gross margins based on our investments.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program, and you may all disconnect. Everyone, have a great day.

Thank you.