Q3 2021 Fulgent Genetics Inc Earnings Call
Good day and welcome to the Fulton Genetics third quarter 2021 earnings Conference call.
At this time I would like to turn the conference over to Nicole <unk> Investor Relations. Please go ahead ma'am.
Great. Thanks, Good afternoon, and welcome to the Fulgent genetics third quarter 2021 financial results conference call on the call today are <unk>, Chief Executive Officer, Paul Kim Chief Financial Officer, Dr. Larry Weiss, our Chief Medical Officer, and Brandon <unk>, Chief Commercial officer.
Today's press release discussing its financial results is available in the Investor Relations section of the company's website.
<unk> Dot 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 managements estimates based on current views and assumptions, which may prove.
It would 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 expectation.
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.
Risk factors that may cause actual 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, 2020, which is available on the company's Investor Relations website management's prepared remarks, including discussions of earnings and earnings per share.
<unk> 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 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.
The press release discussing its financial results for the third part of 2021 for more information.
Including a description of how the company calculates non-GAAP income and income per share and a reconciliation of these financial measures to income and income per share. The most directly comparable GAAP measures with that I'd now like to turn the call over to Mig.
Thank you imagine you cope.
Good afternoon.
Thank you for joining our call today to discuss our third quarter 2021 results.
We had a very good strong third quarter.
Our core pieces being green.
Well.
Well, Oh researching overcoat Kobe.
Actions with.
With a delta of words.
So a meaningful uptake you our COVID-19 testing warning in the quarter.
I will cover some highlights from the third quarter before.
Turning to coal to our Chief commercial officer, Brendan curfews to discuss with products.
And the go to market update.
In pulp team work discusses our financial results and I'll Alcamo in beauty.
Taking a look at our work.
Quarterly results.
Revenue totaled $228 million.
Mm, 124% compared to the third quarter of 2020 and up 48% sequentially.
We do view were approximately $2 2 million Chris in the call.
Water.
More than doubled.
Volume, our third quarter last year.
Paul will cover the details on.
On the breakout between our core and the core business in the quarter.
For the you know a higher level.
Ooh second for businesses.
Performed the guidance, we set forth last quarter.
Our core business group.
Almost 300% year over year to over $40 million.
The strength across the key areas, including Ksi CSI and.
Our revenue from JV in China.
Yeah.
We also saw a meaningful increase in revenue.
From our contract with the CDC people through the web spread.
We haven't seen in coal.
All right.
We continue to drove strong profitability and a generally the $3 93.
Per share GAAP.
GAAP EPS.
And the $152 million in.
Operating cash flow.
We were pleased to have achieved the results this quarter.
Our expectations are.
Across the board.
Well our business has benefited from.
I'm pretty good at spikes in the bins for Covid testing, we have continued to see the strength our core business as we execute on our strategy to expand the footprint.
For Ngls.
Confirmed by the CSI and our operations in China.
One particular highlights was four in the third quarter is the initial traction we are seeing in the.
The acquisition of CSI.
It was skewed and where are we early in creating synergy across our business. We're pleased that the CSI stuff and the small sales team is fully supporting our continued operations and we are beginning to expand our sales team to support growth over the organizers.
Sure.
We're also working to build.
Our west, but west coast Inlet, which will fuel the E. Hence that she has like oncology testing capabilities.
Particularly in from the trilogy and oncology.
We have also.
Supplement C S venue with our next generation sequencing capabilities as a part of the integration of CSI.
You've seen a meaningful increase in our test volume.
That is being reimbursed by insurance.
We're encouraged by that.
And as we then issue we have with third party payers and look forward to build on this momentum as we continue to scale and expand our test menu.
Well also continue.
On the development and Atlanta awful he build equal with our partners at <unk> health.
Or does some of worry in promising data yesterday and the team will.
B conducting a poster presentation on the performance of Hebei will be we're at the liver meeting 2021, which will be held virtually.
Coming week.
Brendan work discuss in more details above.
We are where we encourage that.
By the programs that we are seeing in that 11, the Hugo Beware and hope to achieve with the commercial bench in the coming months.
On other exciting recent announcement is the our partnership with the Ob Omics, we'll be offering holdings pre omics produce Oh I see.
Through our lens in the U S and China, which will create a more streamlined multi omega solution for our clean coal and the farmer.
Cause customers.
And finally, we're aware we're pleased.
With the activity we.
We've seen through the.
Our operations in China.
Simply fill in our N G S test menu in China well.
Our seafood service is also gaining attraction.
We'd be able to raise a large opportunity.
To ramp up our presence in the local Chinese market. One that we are in the early stage of growth.
I'm very pleased with the ongoing.
Progress, we are making with the expansions to our core business, while our COVID-19 testing solutions continues to drive strong cash generation from our bottom line.
Well, the what activity around the COVID-19 testing could some unpredictability.
Our business near term.
Particularly as the therapeutic treatments may become available in the near future. We remain optimistic about our post COVID-19 the strategy.
The opportunity we have built to drive sustainable growth in the years ahead.
Armed with our capital and the technology private school.
Now ill turn to the code to or who Brendan curfews, our chief commercial officer Brendan.
Thanks Me, we continue to fire on all cylinders as we have made great progress with our core business, our new helio liver liquid biopsy tests integrating the CSI acquisition launching the only collaboration a continual response to the COVID-19 pandemic I will address each of these in detail, but with first.
I'd like to comment on the overall performance of the business we.
We recorded $228 million in revenue in the third quarter, an increase of 124% year over year, while the bulk of this was driven by COVID-19 testing our core business grew to over $40 million, an increase of approximately 300% year over year as we have discussed over the course of the year.
We have continued to diversify the business outside of pediatric rare disease and in this quarter, we were able to continue that trend in a big way with the addition of many new oncology services.
As we mentioned on the last call you had made a strategic investment Helio health and have secured exclusive rights to commercialize lab developed test in the United States and Canada.
The first test we are now is a novel liquid biopsy tests for hip paddle cellular carcinoma, HCC called Helio liver HCC is one of the fastest growing and deadliest cancers in the United States in early detection is critical to successful outcome, especially among high risk populations.
In the United States more than 100 million people have non alcoholic fatty liver disease, which is a major driver of liver cancer.
Helio liver Leverages next generation sequencing technology, which has 28 genes from 77, CPG methylation site in AFP AFP L. Three and DCP for over a decade, there has been little to no improvement in a way HCC is detected today the standard of care in ultrasound.
Which is a relatively ineffective method of detection with some quoting sensitivity in the 40% range ultra.
Ultrasound results are highly variable depending upon the size of the lesion the location of the lesion the body mass index of the patient the equipment used in the experience of the operator <unk>.
Considering the survivability at ATC is dramatically better in early stages, specifically approximately 50% survivability of stage, one and approximately 12 and 3% at stages, three and four respectively. A better test has been needed for some time.
In addition, early stage detection allows for more potentially curative treatment options, such as ablation and transplantation.
Helio liver test has shown much better efficacy with sensitivity of 76% for early stage HCC and 92% for late stage at a specificity of 91%.
These numbers could improve as we gather more data, but already show a major improvement over ultrasound.
Another critical aspect of detecting HCC early is routine screening and surveillance of high risk patients every six months. These include patients with cirrhotic liver hepatitis B hepatitis C.
Unfortunately, many do not follow through with the current ultrasound monitoring for reasons, including difficulty in scheduling traveling to medical centers et cetera.
But the helio liver test, it's a simple blood draw. This can be done at any physician office or phlebotomy service. This should allow for better adherence to the six month monitoring guidelines in summary benefits of a novel Fulgent Helio liver tests include increased patient adherence higher sensitivity more curative treatment options.
He is of use and lower cost of care.
Expanding on that last point cost of care is estimated at $466000 for a patient and late stage treatment versus $132000 in early stage here, you'll never becomes a more cost effective test versus current standard of care, which should prove to be an important as we have discussions with payers.
Helio liver is scheduled to launch this year and we will certainly be keeping the market updated on developments regarding this exciting new tests.
Another notable notable developments from the third quarter was our acquisition of CSI, which closed in August as a reminder, CSI offered over 400 unique test in molecular oncology flow cytometry fish cytogenetic histology, we have completed the integration of CSI with nearly 100% employer.
Tension at 100% client retention, we are now focused on the expansion of the business on a national level and the build out of our cancer lab on the west coast to better serve clients nationally.
A key piece of our growth strategy with the addition of CSI and Helio liver is the expansion of our sales team.
Historically, what has been a very small but very experienced sales team. However, considering the size of the addressable market for the new Helio liver CSI business, we are aggressively expanding our sales organization on the helio liver side, we're onboarding approximately 10, new sales managers, who will be responsible for the product.
From a go to market perspective key markets include New York, California, Illinois, Texas, and Florida, all of who have high incidents of HCC. However, this will be a national rollout as we gain sales experience. During the early launch we anticipate the number of salespeople to expand rapidly as there are over 7000 hepatology.
<unk> providers in the United States or immediate call points and over 15000 Gastroenterologists are secondary call points.
We have invested in data resources to assist in our account targeting and planning, allowing us to focus on those high volume physicians with high spin on ultrasound and MRI.
On the CSI side historically their team has also been small with only three to four salespeople. This number doubled this quarter and we aim to double it again in the fourth quarter. We believe we have superior turnaround time service and quality for cancer diagnostics and look forward to leveraging an expanded sales team to take the service.
As national.
On the partnership front. We were also excited to announce the addition of <unk> proteomics capabilities to the platform.
This partnership we will enable customers to leverage only high throughput protein biomarker discovery technology through our lab, which create an end to end platform for biomarker research discovery and clinical trials, we are creating a one stop shop for pharma and clinical research customers by offering our extensive next generation sequencing.
Menu oncology testing solutions, and now always proteomics assay across a single sample at our labs.
This partnership will make it faster easier and more efficient for researchers to carry out their projects as it enables them to send their samples to one location and accurate all of the results from one portal Fulgent is one of a handful of lab offering Oh links capability in the United States and we look forward to providing this enhanced service to our research customers.
And finally as Nick mentioned, we saw a big rebound in COVID-19 testing in the third quarter driven by the highly contagious Delta variant, we completed approximately $2 2 million COVID-19 tests in the quarter, which marks our third highest quarter for COVID-19 testing behind the first quarter of 2021.
In the fourth quarter of 2020.
These tests continue to come from a variety of sources, including counties driving site hospital clinic et cetera.
We also saw schools go back in session, which restarted the flow of back to school samples.
At this time, we are serving over 1000 schools.
We are also supporting the back to work mandate and verification programs with our newly launched online platform. This new system allows employees to upload their vaccine records or their weekly testing result, it provides dashboards and quick access to employers to track compliance.
While symptomatic testing ebbs and flows with the positivity rate these back to work and back to school programs are more predictable long term contracts.
During the quarter. We also saw a record in terms of our COVID-19 next generation sequencing tests due to the elevated number of cases and increased positivity rate.
We believe genomic study to the vote, Chris will continue to play a pivotal role in fighting an understanding of COVID-19.
We are pleased with our third quarter results and excited about the future prospects of our business. We continue to have a pipeline of assets. We are evaluating and expect to see continued activity on the M&A and strategic investment front I'll now turn the call over to Paul Kim Our CFO Paul.
Thanks, Brandon revenue in the third quarter totaled 228 million, an increase of 124% compared to the third quarter of 2020, while exceeding our guidance of $125 million to $150 million available costs in the quarter totaled almost $2 2 million more than twice the volume of Q3 last year.
Breaking down the revenue a bit further roughly a 188 million came from covered PCR testing, which exceeded our guidance by approximately 100 million and grew 105% year over year, while roughly $40 million came from our core business, which exceeded our guidance of 32 million and grew approximately 300%.
Year over year.
As a reminder, our core revenue include our Ngls business contribution from our Chinese JV and now contribution from CSI that also include contribution from our CDC covered Ngls testing agreement, which we saw a meaningful uptick in activity this quarter due to increasing COVID-19 positivity rates that met the delta variants.
<unk>.
And we recognize that covered MTS testing volume from the CDC can vary dramatically depending on Covid positivity rates.
If we exclude the impact we saw from the CDC in the quarter. Our Q3 core revenue still grew by more than 160% year over year compared to Q3 of 2020.
While demand for Covid testing remains extremely volatile we remain well positioned to capture this demand F. N. One at fluctuate tire, which we signed a third quarter a reversal relative to the slowdown we saw in the second quarter. We have continued to take a conservative stance on any expected revenue from kind of a testing given the inherent challenge.
And predicting covered spikes or the emergence of other variance.
We remain focused on executing on our post COVID-19 growth opportunities, which include expanding the reach of Csi's capabilities working with helio on our joint commercialization opportunities growing on the footprint on our China operations and launching new initiatives such as the only partnership Brendan discussed our Asp's in third quarter.
With $105 slightly higher than the $99. We saw in the second quarter. Our ASP remained relatively stable over the last few quarters trending modestly higher.
As our test mix shift more to Ngls testing.
Cost per ton in the quarter was $20 slightly lower than the second quarter due to the efficiencies inherent in our platform is our testing volume scale gross margin increased to 89% up more than six percentage points year over year and up four percentage points sequentially driven or.
Higher overall volumes and.
Continued operational efficiency.
The efficiency of our technology platform now turning to operating expenses total GAAP operating expenses were $25 1 million in the third quarter up from $18 9 million in the second quarter non-GAAP operating expenses totaled $21 7 million up from 16 million last quarter our opera.
<unk> expenses increased primarily due to ongoing investments in strategic headcount across our organization as well as fees and services associated with our heightened M&A activity.
Non-GAAP operating margin increased over five percentage points from the second quarter to 71, 8%.
Our expense structure.
Very lean, enabling us to drive significant profitability from our revenue outperformance.
Adjusted EBITDA for the third quarter was $167 3 million compared to $67 4 million in the third quarter of 2020.
On a non-GAAP basis, and excluding equity based compensation expense and intangible asset amortization income for the quarter was $126 3 million or $4 and five.
Per diluted share based on $31 2 million weighted average diluted shares outstanding.
It takes into account.
Tax effect for stock based compensation and intangible asset amortization in the quarter.
Turning to the balance sheet, we ended the third quarter with $877 million in cash cash equivalence and marketable securities. We also generated $152 million from cash from operations during the quarter fueling our cash balance despite the cash investments we have made this year, including the cash investment.
A $43 4 million for CSI, which closed in the third quarter $20 million for helio and $19 million for controlling interests and the China JV. We are on our track to reach our goal of reaching $1 billion in cash cash equivalents in marketable securities on our balance sheet before the end of the year ex.
Any additional M&A announcements, which is certainly a possibility.
Now moving onto our outlook.
What covered revenue as we discussed cover revenue continues to be volatile due to many factors outside our control as cases trend higher we tend to see a positive correlation in test volumes at the same time government agencies and schools have put regular testing protocols in place to both supplement vaccination.
Grants and monitoring potential breakthrough cases.
With that we expect cover revenues for the year it will be at least $815 million up from our previous guidance of 690 million. This increase of 125 million accounts for the outperformance in Q3.
As a reminder covered revenue.
Guidance includes only revenue from RT, PCR COVID-19 testing, including picture at home colored chip.
Moving onto our core revenue guidance, which includes revenue from our core NGF testing covered NGF testing and the impact from CSI, We expect our core NGF business will continue to see strong growth as we further capitalize on our investments we expect core Ngls revenues will total approximately.
And 95 million.
With our previous guidance for Cobot Ngls revenue from the CDC for raising our guidance to $20 million from $15 million given the strength. We saw in this program in Q3 due to higher positivity rates altogether, we expect our total core revenues will be $115 million for the year.
With the $815 million in code revenues and with a $115 million and core revenue. We expect total revenues will be approximately $930 million for the year up from our previous guidance of 800 million. We acknowledged at the vast majority of this increase will be coming from Covid related testing.
But remain confident in our core business and believe we're at the very early stage of ramping on numerous opportunities that we're focused on our core business.
From a profitability standpoint, we continue to expect to show ongoing leverage in our business, which drops to the bottom line and drives cash flow generation, our foundational technology platform that underpins our business operations continued to drive extremely growth extremely high gross and operating margins.
That being said, we could see some fluctuations in the near term as we continue to check investments in head count and M&A.
For the full year 2021, utilizing an estimated 27% tax rate and a share count of $31 million. We expect non-GAAP income of approximately 502 million or $16 per share for our shareholders. Excluding stock based compensation our updated guidance is posted on.
Slides on our Investor Relations website, which shows that the California.
Uh huh.
We feel very good about the positioning.
Headed into the fourth quarter as we have set ourselves up to benefit from a number of long term strategic initiatives. We are excited about the potential to drive sustainable growth in our core business in the quarters ahead armed with a large cash balance and capital structure. We're also continuously evaluating more and more M&A.
Strange and and getting expanded reimbursement is it you know being able to.
Disclose specific coverage or in network decisions with national payers as it lives covered as a percentage of revenue just kind of what's the best way to measure improvement on that metric.
[noise] yeah. Thank you kind of an I think like in general our insurance in terms of like courage, we have about 160 million lives covered under our insurance contract.
But the in terms of the revenue.
Most of the or call. It the revenue is this through the reimbursement so.
We also have the the 90 insurance contract that we should be the our relationship it with the farmer.
Farmer companies so.
So Paul could you can take a a <unk>, but at the summit cover for what Kevin.
<unk>.
Aiming a brand new policy.
And just by what I'm, referring to non non Thomas.
Right. So the synergies between a full J C. S. I in terms of loving the contracts really hasn't begun to be realized meaning we've been focused on integrating C. S I and not cross selling.
<unk> <unk> test uhm with CSI Salesforce and contracts. So long story short those efficiencies have not been recognized yet so the insurance billing, we would see to date would be the traditional CSI business flow I see fish cytogenetics, those products and services in terms of.
On a on a go forward basis, we continue to put effort into becoming more in network Uhm I think we're really happy to be able to sit here and say today that we have 160 million covered lives, but it's a never ending feet. We continue to go after these sort of smaller regional contracts some of the Blue Cross Blue Shield contracts, we don't have yet so we do have resources.
Working on that on a daily basis to continue to improve and increase the number of covered lives we have.
And with regard to the Salesforce expansion for C. S. I N and the ontology franchise I think your comments suggest somewhere around 15 reps.
By the end of the year at least with the the current portfolio. How do you think about you know.
Appropriate sizing for.
Clinical oncology Salesforce Uhm go over say in 18 to 24 month horizon.
Much bigger than that right you know what we're doing Kevin from go to market perspective is looking at those states were were particularly strong with managed care and we think that's a good place to start in terms of increasing our head count as we mentioned historically CSI has been a wonderful business. They run that business very well for a long time, but it's been a bit focused in southeast.
<unk>. Our first objective is to take that laboratory national expand outside the southeast region. We believe we had the managed care contracts to do that and we believe in certain states were particularly strong in managed care. So that we're replacing our head count I think over time that number must be bigger it is a massive market with a ton of call.
<unk>.
We are differentiating a little bit as it relates to oncologists versus pathologist and we may have some sub specialty salespeople for oncology, but I think it's a it's a number that's going to continue to grow, especially as we land additional managed care contracts in those days. So I think we'll be reporting likely each quarter sort of.
How this head count expands, but I could see in 2020 that number being significantly more than 15 and that I'm, specifically talking about the CSI salesforce not.
<unk> not the helio, salesforce, which would be a different call point.
Understood.
And.
And then just when we got one more and then I'll get back into cute with regard to balance shares all with your guidance. So close to $1 billion on the balance sheet by January that's equivalent to <unk>.
<unk> Faso.
So current market cap.
Uhm, Yeah, how do you think about buybacks are just.
Balance sheet management here, just kind of given the current balance sheet profile relative to the current stock price.
Yeah. Thank you for that question, Kevin buyback and other options are certainly things that we can consider but our primary focus is investing in this business and executing on our post covered in our M&A strategy. If you take a look at our core revenues.
The amount of core revenues that we threw up in 2019 was $32 million the amount of core revenues that we had in 2021 36 million.
The amount of core revenues that we had in a single quarter now with $40 million, even if you strip out the ngf's from the CDC, because it's hard to predict which way covenant is gonna go.
We still had.
Accelerated core revenues in a massive way and this was possible because of our expanded operational capabilities are quality or reputation quality of the people and they're more senior people that are gravitating towards uhm folger as well as progress in a reimbursement.
If you take a look at our strategy, particularly for M&A, what we're doing is we're using.
Using the capital of being very conscious about which assets.
And which companies to evaluate.
And we're doing both.
So for example, CSI it bolstered and strengthened.
Traditional ah capabilities for us in the cancer market.
Being able to provide and doing solution and then offer helio and investments such as.
That area was an evolving newer markets, where liquid biopsy. We also made an investment in China now taking over a controlling interest which will expand our footprint on an international basis. So if you take a look at the approach that we're taking where I'm using the massive amount of capital that we continue.
To write generate additional cash with and we're deploying that from it M&A perspective, and we're bolstering the traditional markets as well as looking forward all utilizing our technology and our operational platform. So the long and short of it is buybacks are certainly an option, but it's our intention to deploy.
Capital externally as well as investing aggressively within our internal structure.
Thanks for taking our questions.
And there are no further questions at this time I will now turn the call back to main shitty for closing remarks.
Okay. Thank you very much you for each window, but Comcast we are where we were thank you for the help he shouldn't be we're facing in the definitely we have do we feel the capital and technology and whoopee. The major pillar in case were exciting.
To diagnose the market. So thank you very much for joining the coke and looking forward to upgrade to you in the next quarters.
Thank you.
And thank you for joining US. This concludes today's call you may now disconnect.
[music].
Uh-huh.
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