Fulgent Genetics Inc (FLGT) 2023 Q1 法說會逐字稿

Hello, and welcome to the Fulgent Genetics Q1 2023 Earnings Conference Call and Webcast. (Operator Instructions) A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Melanie Solomon, Investor Relations. Please go ahead.

Thanks, Kevin. Good morning, and welcome to the Fulgent First Quarter 2023 Financial Results Conference Call. On the call today are Ming Hsieh, Chief Executive Officer; Paul Kim, Chief Financial Officer; and Brandon Perthuis, Chief Commercial Officer. The company's press release discussing the financial results is available on the Investor Relations section of the company's website, www.cosan.com. A replay of this call will be available shortly after the call concludes on the Investor Relations section of the company's website. 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 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-K for the year ended December 31, 2022, and subsequently filed reports, which are 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 they believe it 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 first quarter of 2023 for more information, including the description of how the company calculates non-GAAP income or loss, earnings or loss per share and adjusted EBITDA, and a reconciliation of these financial measures to income or loss and earnings or 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 very much, Melanie. Good morning, and thank you for joining our call today. I will start with some comments on the quarter, then Brandon will review our product and go-to-market updates from the first quarter, and Paul will conclude with the financials and the outlook before we take your call. We are pleased with our results in the first quarter, exceeding the revenue guidance we provided earlier this year on our last call. We also had $3 million in revenue from COVID-19 testing, bringing us to accumulated $2 billion in revenue from Cote testing since 2020. More importantly, revenue from our core business outperformed our expectations. This was driven by strong results from our Pharma Services segment and the Precision Diagnostics segment, including the launch of our expanded Beacon testing, we see continuing momentum for biking testing as well as other rate productive health service.

According to recent reports from Fulgent, it is estimated that global prenatal testing market was over $8 billion in 2021 and is forecast to grow to over $11 billion by 2026, a 7% CAGR. Over the $8 billion in 2021, 3.1% was carrying or $2.5 billion. This is forecast to grow to $3.2 billion by 2026. With the consolidation in the space, we will now find our company as one of the top providers of carrier screening in the U.S. with a significant runway for growth. I want to make comments on Inform Diagnostics. As we have mentioned, the Inform Diagnostics business bolstered our capabilities in anatomic pathology and add significant revenue, though it has put some pressure on margins as we continue to integrate acquisition, our focus on implementing improved process to increase margin and continue to grow the top line with new client acquisitions. This will take some time. Long term, we believe the opportunity we have is the value of thousands of customers we gained and potentially to expand the offering to them. However, we do see significant opportunity for cross-selling in the precision diagnostics market.

During the first quarter results, we are raising our full year guidance to account for the momentum we see with reproductive health services this year and anticipated COVID-19 revenue. We believe we are moving to the right direction in terms of sales momentum. We expect to see this year as we grow our core business across precision diagnostics, farm service and anatomic pathology. Turning to our pharma business. Fulgent Pharma has developed and processed a novel nano-encapsulation technology, which includes over 40 patents and the targeted therapy platform designed to improve therapeutic windows and pharmacokinetics profile for both new and existing cancer drugs. Our lead drug candidate, FID 007 has shown promise results for the treatment of numerous cancers, including head and neck, ancillary and pancreatic with reduced side effects. We will share data from the ongoing Phase Ib study at the upcoming American Society of Clinical Oncology Annual Meeting in Chicago, June 2 to 6.

We look forward to share additional progress and a new initiative on the pharma business as we move throughout the year. I'd like to thank our employees and shareholders for your loyalty during the past quarter. We look forward to the year ahead and the momentum we are creating with our combined business. Now I'll turn the call over to Brandon Perthuis, our Chief Commercial Officer, to talk about our Diagnostics business results during the quarter. Brandon?

Thanks, Ming. We had a solid first quarter. While we're seeing strength across the entire organization, the first quarter outperformance was led again by our offering for pharma services and reproductive health. I will cover these in detail momentarily. At a high level, first quarter sales were $62.7 million, an increase of 150% year-over-year and 14% sequentially. This does not include any COVID-19 testing, while a fraction of what it was a couple of quarters ago, we still do some COVID-19 testing. Revenue for COVID-19 testing totaled $3.4 million in the first quarter -- we forecast COVID-19 testing to continue to decline.

As a reminder, we're now giving additional color on the business by breaking it out into 3 categories. These include precision diagnostics, which is most of our clinical NGS business, anatomic pathology and pharma services. Starting with our reproductive health business, which would fall into precision diagnostics. We are seeing tremendous growth here. The marquee product for reproductive health is our Beacon expanded carrier screening service. We address the features and benefits of this product in detail on the last call, but as a reminder, Beacon is a suite of products that range from small panels of 3 to 4 genes all the way up to 787 genes, which is one of, if not the largest panels offered today.

The first quarter saw triple-digit percentage growth in Beacon. Clients are choosing Fulgent and Beacon based on our comprehensive and customizable panels, our detection rates, especially for those genes complicated by high sequence homology as well as our turnaround time. In all areas of reproductive health, but especially in the fertility clinics, turnaround time is critical. We are currently returning results within 2 weeks for over 90% of our patient samples, and those that take longer are usually because they require orthogonal confirmation. So even with triple-digit percentage growth, our laboratory hasn't missed a beat. We showed the power of the Fulgent platform with COVID-19 testing, and we're now showing it again with Beacon.

In addition to our organic wins, we have also entered into a long-term relationship with one of the largest national laboratories to partner up to expand access to carrier screening. This lab greatly increases our sales and contracts reach and this relationship is already resulting in a material amount of sales. Also in the first quarter, we joined the access to expanded carrier screening coalition or AECS. AECS is a multi-stakeholder coalition dedicated to ensuring all individuals of childbearing age and their partners have access to expanded carrier screening. As part of the steering committee, initial efforts are to expand patient and client education of carrier screening as well as work with commercial and governmental payers for continued coverage improvement.

While Beacon is certainly an area of focus, our reproductive health services also include single-gene test, prenatal tests, preimplantation genetic testing for aneuploidy, cytogenetics and more. We believe our suite of services, quality and turnaround time make us a good choice for clinicians. Other areas of focus for our Precision Diagnostics division includes a remounted go-to-market strategy for pediatrics, including leveraging our insurance contracts cross-selling our hereditary cancer test to our new Fusion oncology clients and cross-selling neurogenetic next-generation sequencing test to our adult neurology clients, which we acquired through Inform Diagnostics.

Switching over to our Pharma Services division. Pharma Services had a record quarter, growing 36% year-over-year and 149% sequentially to $7.4 million. While this area of our business tends to be a bit lumpy depending on the timing of the contracts, the momentum is clear. Over the last several quarters, we have continually expanded our capabilities to build an impressive multi-omic product offering covering both clinical and translational research. Most recently, we launched 4 new powerful and in-demand technologies for single cell and spatial multi-omics. Notably, we became a certified and qualified service provider for Alcoa's multiples immunofluorescence spatial phenotyping and for the 10x genomic single cell and spatial gene expression platforms. Our portfolio now includes, among other things, whole genome, whole exome, RNA sequencing, proteomics, tumor profiling, epigenomics, liquid biopsy, single-cell sequencing, spatial biology and a wide range of pathology offerings.

Our client list continues to grow, and as importantly, we feel we are driving deeper relationships with our clients, which now includes 6 of the top 10 pharma companies in the United States and 3 of the largest global CROs. We aim to continue to broaden our test menu for Pharma Services and increase our visibility with additional sales headcount and marketing efforts. The Polson oncology launch continues to be a focus for our company. We announced last quarter that our Lumera heme NGS, a state-of-the-art 670 gene profile for hematological malignancies, received MolDx approval with a robust coverage determination and a rate of $2,950. We are excited to announce today that our Lumera NGS solid tumor profile has also received Multi-X approval with a reimbursement rate of $3,288. The Lumera NGS solid tumor profile utilizes next-generation sequencing to cover 523 genes, including RNA sequencing of 55 genes, enabling a highly sensitive review of tumor genomics, fusions and splice variants, all critical to precision care.

Additionally, our Lumera NGS solid tumor profile results tumor mutational burden and microsatellite instability. Both critical components when assessing immunotherapy eligibility in several malignancies. Lumera NGS solid profile is a standout in the field as it relates to turnaround time and QNS ratio, which are crucial to patient care and play a central role in the deciding factors clinicians use to choose a testing laboratory. To put it in perspective, our current turnaround time is less than 2 weeks compared to the industry standard measure of 3 to 6 weeks. And perhaps most important is our current QNS rate, which stands at approximately 2%. This differentiator demonstrates our ability to provide actionable results on very small tissue or neoplastic cell content when compared to the industry standard QNS ratio of approximately 25% on solid tumor tissue.

Our proprietary extraction techniques, coupled with our expertise in the research and development space have led us to commercialize a comprehensive genomic profile that can deliver more actionable results with less tissue availability, thus making the Lumera NGS solid tumor profile, a uniquely competitive option in the busy precision diagnostics space. While we are still early in the stages of launching and commercializing Fulgent oncology, we believe we have taken the right steps to set us up for long-term success.

We ended the fourth quarter call saying that we felt we had the wind in our sales entering the first quarter. I think we demonstrated that with a strong performance across all 3 business lines. As we look ahead, we are enthusiastic about the business opportunities we see, and we are confident that the steps we have taken to build a strong core business will continue to pay off. I'll now turn the call over to our Chief Financial Officer, Paul Kim. Paul?

Thanks, Brandon. Revenue in the first quarter totaled $66 million compared to $320 million in the first quarter of 2022. Roughly $3 million came from COVID-19 testing for Q1, which was not part of our guidance. Revenue from our core business totaled $63 million, which exceeded our guidance of $56 million and grew 150% year-over-year. Gross margin was 28.4%. The decline in gross margin year-over-year is primarily related to the higher cost of anatomic pathology revenues from Inform Dx, which we purchased in Q2 of 2022. However, we are pleased to have achieved a 9 percentage point improvement in our gross margin sequentially over the prior quarter as we see our efforts to create efficiencies across our acquired businesses pay off.

Turning now to operating expenses. Total GAAP operating expenses were $43.6 million in the first quarter, down from $49.5 million in the fourth quarter of 2022. Non-GAAP operating expenses totaled $33.8 million, down from $38.7 million in the fourth quarter of 2022. Non-GAAP operating margin increased 15 percentage points sequentially to a negative 19%, more than offsetting the increase in R&D of $1.2 million, which was primarily related to our pharma business was a decrease in G&A of $7 million as we continue to -- as we continue our integration efforts to achieve efficiencies with our recent acquisitions. Adjusted EBITDA for the first quarter was a negative $7.2 million compared to a positive $213.5 million in the first quarter of 2022. On a non-GAAP basis and excluding equity-based compensation expense and intangible asset amortization loss for the quarter was $6.5 million or $0.22 per share based on 29.5 million weighted average shares outstanding.

Turning over to the balance sheet. We ended the first quarter with approximately $868 million in cash, cash equivalents and marketable securities, excluding investments pending settlements. Now moving on to our outlook for 2023. Given the outperformance in the first quarter and the momentum, we're raising our core guidance -- core revenue guidance to $250 million. This number does not anticipate additional revenue from COVID-19 testing. Looking ahead, we expect our gross margin and operating margins to continue to improve as we implement efficiencies throughout our integration efforts and recent acquisitions. The margin improvement is forecast to be incremental for the remainder of the year as we plan to make further investments and resources to position the company for longer-term growth.

For full year 2023, utilizing a 28% tax rate and a share count of 31 million, we expect non-GAAP loss of approximately $1.25 per share for our shareholders, excluding stock-based compensation and amortization of intangible assets as well as any onetime charges. Last quarter, when we acquired the Pharma business, we said we would report on this business separately. Revenue from this business is not anticipated in our 2023 guidance, and we expect associated cash burn for this business to be approximately $15 million to $17 million this year, which is included in our EPS guidance. Overall, we have strengthened our core business and bolstered our portfolio through strategic acquisitions, and we see very good momentum ahead. Thank you for joining the call today. Operator, you can open it up for questions.

We'll now be conducting a question and answer session. (Operator Instructions) Our first question is coming from Dan Leonard from Credit Suisse.

So I had a question on carrier screening. How much of the growth that you're seeing is market growth, same-store sales versus share gain?

This is Brandon. Thanks for the question. It's almost entirely share gain. We've executed well in the going to market with our Beacon carrier screening product. Clients demands are extremely high as it relates to turnaround time, quality, other features and benefits, and we've excelled in all of those areas. So our new client acquisition rate has been tremendous in the first quarter and carrying into the second quarter.

And Brandon, could you give me an update on the billing transition moving some of the contracts from INFORM Dx to the legacy Fulgent offering?

Yes, certainly. In progress going well. I think historically, we've used the terms rolling up the contract, rolling them up to our tax ID, the corporate level, et cetera. While some of that happens, I think we sort of want to look at it from a contract optimization standpoint, as we have now multiple subsidiaries and obviously, many hundreds of contracts. So our goal is to optimize those contracts across our several subsidiaries and labs, and it's going pretty well. The progress we've made has helped us go to market with certain products and services. And as we continue to make additional progress, it's just more opportunity for us to sell in the marketplace. So it is a long process, and we're talking many, many hundreds of contracts to go through. So it's probably taking a bit longer than we anticipated, but all things are going pretty well.

And then my final question, how do you anticipate gross margins are going to trend throughout the year?

Yes. That's a very good question. We see both growth and operating margins gradually improving throughout the course of the year. And that's coming from 2 primary points. One is the continued efficiency and the automation that we see throughout our business. But it's not going to be as fast as we might have anticipated just because we're going to continue to invest in the infrastructure and the operations for continued expansion, continued expansion in our revenues throughout the course of the year. So you will see a gradual improvement in growth in operating margin. But with that improvement, we will still continue to make heavy investments in our operations because we anticipate the momentum that we see, particularly in the reproductive market that Brandon mentioned, to continue.

Your next question is coming from David Westenberg from Piper Sandler.

Congrats to a great start to the year. I want to actually follow up with Dan's question in terms of market share wins in carrier screening. Any sense for if this is maybe share wins or new customers from Semaphore shutting down that business or if it moves from existing players? And I guess, the main reason why we're kind of curious about the Semaphore is that I think a lot of those are the larger panels. And I just wanted to also maybe ask about reimbursement in those larger panels and carrier screening because I think like some of the larger private insurance companies have been a little bit more, what's the word stricter on the payouts with those.

Yes, certainly. No, we certainly benefited from Semaphore exiting the market. So I mentioned on the previous question that a lot of the growth, which has been tremendous, has been from market share and new client acquisition. But we still see a long runway for adoption, right? As we joined the access to carrier screening coalition, I mean it's clear that, that reproductive population is still underserved as it relates to carrier screening. So we see a long runway for continued growth as expanded carrier screening is used more frequently in reproductive settings. And we have the support of the American College of Medical Genetics and Genomics, we have the support of ACOG. We have the support of the genetic counselor. So we see this as an evolving field that still has a long runway for growth. As it relates to reimbursement, from what we're seeing, we're pretty satisfied with what we're seeing. I think most importantly, is controlling the cost structure, right?

So pre-COVID, we're always pretty proud of our cost structure. We also said we had one of the lowest cost structures in the industry. That translates to Beacon, right? So our goal is to automate as much as we can, use informatics as much as we can. We process all of our samples in-house, including the orthogonal confirmation. We don't have to outsource anything. So we think it's incredibly important to control the cost structure. And with our cost structure and what we're seeing right now in terms of reimbursement, it's healthy, and we think it could only improve from here as we work with the payers to continue to expand coverage policies.

All very helpful. I just have one more because unfortunately, my computer just crashed, and I can't see my list of questions right now. So I think you said strength in the pharma services business. Can you talk about some of the high-demand offering that's kind of -- that's powering that? I mean is this your new movement to a lot of different oncology tests that's pushing this -- the strength in Pharma Services? I mean what's going on there that's really driving that?

Well, when we first launched Pharma Services as sort of a division and a focus for fall can, it was mostly NGS, right, whether it was single gene panel of genes, maybe exomes or genomes, but it was just NGS. Today, it's a full multi-omic product offering. Probably one of the most comprehensive product offerings out there as it relates to providing services for pharma and biopharma. So whether it's spatial biology, proteomics, RNA sequencing, I don't even know honestly how many total tests we're providing to pharma services at this point, it's grown tremendously. So all of those platforms allow us to both sort of bid on new contracts as well as drive deeper relationships with existing customers.

Next question today is coming from Andrew Cooper from Raymond James.

Maybe just first, I want to check one on the guide. I know the 240 prior didn't include any to but I just want to make sure the $250 million, I think you said no incremental to it. As part of that raised a couple of millions of COVID in 1Q? Or is that $250 million number purely core? And anything in COVID is above and beyond?

Yes. Thank you for that question. So the $250 million is pure Core.

Okay.

$250 is pure core for the year and to give a little bit of color on the breakdown of the areas. When we initially laid out the guidance about 8 or 9 weeks ago, we said that the core revenues would be approximately $240 million. We said that Pharma Services would be approximately 13% and precision diagnostics and anatomic pathology would be evenly split at about $113.5 million each, adding up to the $240 million. we see momentum across all of our businesses, but virtually all of it is coming from the strength in precision diagnostics as well as strength in pharma services. We like that very much because we think in both those 2 areas are at the core of what the company was founded upon. And we're translating those kinds of capabilities over into anatomic pathology. But in short, we see momentum within the last 8 or 9 weeks from the time that we initially gave our guidance across all 3 of our businesses.

Okay. Great. Maybe just one last quick one on guidance before I transition a little bit. The 2Q number is down just very slightly on core at about 62%. I'm assuming that AP and precision diagnostics are growing, but pharma can be a little bit lumpy. Is that the right way to think about why there is not a little bit more sequential progress from 1Q.

I think you might be reading a little bit too much into it. I mean, if you take a step back, it's only been 2 months since we provided our fiscal year guidance, and now we're raising it. The rise and the particular strength in the reproductive health and what Brandon has talked about, has only happened in the past couple of weeks. And we'd like to see how that plays out before potentially raising. This is only the first quarter, and we have plenty of opportunities to communicate where we think the business is going and where we think that we're going to be ending the year. And that's also associated with the question that I got on the growth of the operating margins. We are seeing a lot of those efficiencies. But then again, on the flip side, we are anticipating this momentum to continue throughout the course of the year. So we continue to make incremental investments in infrastructure and operations for that momentum because we anticipate that to actually strengthen as we get into the later quarters.

Okay. Helpful. And then maybe shifting gears a little bit, just sticking with expanded carrier screening, like you mentioned kind of a newer business for you, at least at the scale that you are in the U.S. You've got this big cash balance. I think a lot of the other players out there; we see selling carrier screening have additional offerings there. Is there anything, whether from an inorganic perspective, potentially you feel like you need to add to be a little bit more interesting or at least that you could capitalize on to bundle with carrier screening to go to more than just necessarily IVF clinics but out into the OB/GYN field? Or how do we think about where there's potential opportunity or need to expand now that you've found some real footing in that business?

That's a great question. You hit on an area that we talk about quite a bit. So you are correct that a lot of our expanded carrier screening business is coming from the IVF clinic. So a couple is trying to get pregnant. We have everything it takes, the product, the turnaround time, the contracts to penetrate the OB/GYN market, but we are missing a piece there, right? So often expanded carrier screening is ordered in tandem with noninvasive prenatal screening in IPS or NIPT as it was once called. We don't have that today. It's something we've talked about for a while. We could maybe do a strategic partnership; we can maybe launch it organically. But that's the one sort of piece of the reproductive puzzle that we don't have right now. We do have a pre-implantation genetic testing for antipode, which is important in the reproductive setting. But we're exploring all options and I wouldn't rule any additional product launches out in the future.

We reached the end of our question-and-answer session. I'd like to turn the floor back over for any further or closing comments.

Yes. Thank you very much for everyone joining our call today, and we are looking forward to provide you the update in the coming quarters. Thank you.

Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.