Fulgent Genetics Inc. Q1 2023 Earnings Call
Hello, and welcome to the Fulgent Genetics, Q1, 2023 earnings conference call and webcast.
And once you acquire operator assistance. Please press star zero on your telephone keypad, a question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.
Now my pleasure to turn the call over to Melanie Solomon Investor Relations. Please go ahead.
Yeah.
Thanks, Kevin Good morning, and welcome to the Fulgent first quarter 2023 financial results conference call on the call today are named Shea Chief Executive Officer, Paul Kim Chief Financial Officer, and Brandon <unk>, Chief Commercial officer.
Company's press release discussing our financial results is available on the Investor Relations section of the company's website Www Dot closing dot 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 managements 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 31st 2022, and subsequently filed reports which are available on the comps.
<unk> 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 it believes 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 2022 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 Nate.
Thank you very much humanity.
Good morning.
And thank you for joining our call today.
I'll start with some comments on the quarter.
And then Brendan will review, our product and go to market.
From the first quarter.
And then Paul will conclude with the financials and the outlook before we take your coat.
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 the revenue from COVID-19 testing.
Bringing us to accumulate to $2 billion the revenue from COVID-19 testing since 2020.
More importantly revenue from our core business outperformed our expectations.
This was driven by strong results from our pharmacy services segment and the precision diagnostics segment.
Including the launch of our expanded the Beacon testing, we see continued momentum for <unk> testing.
As well as other reproductive health service.
According to recent report from Boston.
It is estimated that global prenatal testing market was over $8 billion in 2021 and is forecasted to grow.
$11 billion by 2026.
7% CAGR.
Over the $8 billion in 2021, 1% was a carry Sweden or 2.5.
Billions of dollars.
These are forecast to grow to 3.2.
Billion dollars by 2026.
These are the consolidation in the space. We're now find our company as one of the top providers over carrier screening in the U S with a significant runway for growth.
I want to make comments on informed diagnosis.
As we have mentioned that you from tech analysis business, both sort of our capabilities and our topic pathology and add significant revenue.
Revenue.
Though it has put some pressure on margins.
As we continue to integrate acquisitions.
Our focus on the implementing improved the process to increase margin and to continue to grow the top line with a new client acquisitions.
This will take some time.
Long term, we believe the opportunity we have is a value over thousands of customers we gain.
The potential to expand the offering to them.
However, we do see significant opportunity for cross selling in the precision diagnosis market.
Given the first quarter results, we are raising our full year guidance to.
To account for momentum, we see with a great productive health services this year and and his.
19.
Revenue.
We believe we are moving into the Red a direction in terms of sales momentum.
We expect to see this year as we grew our core business across precision diagnostics pharma services.
Tommy pathology.
Turning to our pharma business.
The farmer has developed and process a novel nano encapsulation technology, which equals over 40 patents and the targeted therapy platform.
Designed to improve therapeutic windows and the pharmacokinetics profile for both new and existing kinds of drugs.
Our lead drug Kennedy F. I D. O seven has shown promising results for the treatment of numerous cancers, including head and neck, and cutlery and pancreatic it which would reduce the side effects.
We will share data from the ongoing phase one b study at the upcoming American Society.
Off of clinical oncology annual meeting in Chicago June 2nd two six we look forward to share additional progress in our new initiatives on the pharma business.
As we move throughout the year.
The legs, thank our employees and shareholders for your loyalty during the past quarter, we look forward.
For the year ahead, and the momentum we are creating with our combined business.
Now I'll turn the call over to Brendan.
<unk>, our chief commercial officer to talk about our diagnostics business results during the quarter isn't.
Isn't it.
Thanks, I mean, we had a solid first quarter, while we are 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 and incur.
Mm, 150% year over year and 14% sequentially. This does not include any COVID-19 testing, while the 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 three categories.
These include precision diagnostics, which is most of our clinical NGF 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 three to four 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 climb.
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're currently returning results within two weeks for one.
90% of our patient samples.
And those that take longer or usually because they require orthogonal confirmation.
So even with triple digit percentage growth or laboratory hasn't missed a beat.
We showed the power of the <unk> platform with COVID-19 testing and we're now showing it again with beacon.
In addition to our organic wins, we've also entered into a long term relationship with one of the largest national laboratories to partner up to expand access to care screening. This lab greatly increases our sales and contracts reach in 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 Acs.
<unk> 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 test pre implantation 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 diagnostic division includes a revamped go to market strategy for pediatrics, including leveraging our insurance contracts cross selling our hereditary cancer test to our new folding oncology clients and cross selling neuro genetic next generation sequencing test to our adult neurologists neurology clients, which we acquired.
Through informed diagnostics.
Switching over to our pharma services Division.
Pharma services had a record quarter growing 306% year over year, and 149% sequentially to $7 $4 million. While this area of our business tends to be a bit lumpy, depending upon the timing of the contracts the momentum is clear.
Over the last several quarters, we've continually expanded our capabilities to build an impressive multi omics product offering covering both clinical and translational research.
Recently, we launched four new powerful and in demand technologies for single cell and spatial multi multi omics, notably we became a certified and qualified service provider.
For the acquired multiplex immuno fluorescence spatial phenotyping and for the Chinext genomics single cell and spatial gene expression platforms our.
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 are.
Our client list continues to grow and as importantly, we feel we are driving deeper relationships with our clients, which now includes six of the top 10 pharma companies in the United States and three of the largest global kroes.
We aim to continue to broaden our test menu for pharma services and increase our visibility with additional sales head count and marketing efforts.
Supposedly oncology launch continues to be a focus for our company, we announced last quarter that our leu mirror Haim NGF a state of the art 670 gene profile for Hematological malignancies.
Received <unk> approval with a robust coverage determination and a rate of $2950. We are excited to announce today that our leu Meera NGL solid tumor profile has also received <unk> approval with a reimbursement rate of $3288 <unk>.
<unk> solid tumor profile utilizing next generation sequencing to cover 523 genes, including RNA sequencing 55 genes, enabling a highly sensitive review of tumor genomics fusions and splice variance all critical to precision care. Additionally.
Additionally, our loomer Ngls solid tumor profile results tumor mutational burden and microsatellite instability, both critical components, when assessing immunotherapy eligibility and several malignancies.
<unk> solid profile is a standout in the field as it relates to turnaround time, and queuing asset ratio, which are crucial to patient care and play a central role in the deciding factors conditions used to choose a testing laboratory.
To put it in perspective, our current turnaround time is less than two weeks compared to the industry standard measure of three to six weeks.
And perhaps most important is our current qos rate, which stands at approximately 2%. This differentiator demonstrates our ability to provide actionable results on very small tissue or neoplastic sell content when compared to the industry standard Q&A ratio of approximately 25% on solid tumor tissue.
Our proprietary extraction techniques, coupled with 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 <unk> NGL solid tumor profile, a uniquely competitive option.
The busy precision diagnostic space.
While we are still early in the stages of launching and commercializing folds in 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 sails entering the first quarter.
We demonstrated that with a strong performance across all three 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. We 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 2020 to roughly $3 million came from COVID-19 testing for Q1, which was not part of our guidance revenue from our card 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 informed Dx, which we purchased in Q2 of 2022.
However, we are pleased to have achieved a nine 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 the decrease in G&A of $7 million as we continue to do.
We continue our integration efforts to achieve efficiencies with our recent acquisition.
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 22 cents per share.
Sure.
On a 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 settlement.
Now moving onto 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.
Roof, as we implement efficiencies throughout our integration efforts and recent acquisitions the.
The margin improvement is forecast to be incremental for the remainder of the year as we plan to make further investments in resources to position the company for longer term growth.
For a full year of 2023, utilizing up 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 one time charges.
Last quarter, when we acquired the final 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.
Head.
You for joining our call today, operator, you can open it up for questions.
Certainly, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one at this time one moment, please while we poll for questions.
First question is coming from Dan Leonard from Credit Suisse. Your line is now live.
Thank you so I had a question on carrier screening.
How much of the growth that Youre seeing is market growth same store sales versus share gain.
Hey, this is Brandon thanks for the question, it's almost entirely share gain.
We've executed well, they're going to market with our beacon carrier screening product.
Clients' demands are extremely high and 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.
Thank you and Brian could you give me an update on the billing transition moving some of the contracts from inform Dx to the legacy full Gen offering, yes, certainly in progress going well I think historically, we've used the terms are rolling up the contract and are rolling them out to our tax at 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.
Our goal is to optimize those contracts across our several subsidiaries in labs and its gone 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 to many many hundreds of contracts to go through so it's probably taken a bit longer than we anticipated but.
All things are going pretty well.
Thank you and then my final question, how do you anticipate gross margins are going to trend throughout the year.
Yeah. 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.
Two 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 of 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 and operating margin.
But what that improvement we will still continue to make heavy investments in our operations because we anticipate the momentum that we see particularly in our reproductive market that Brandon mentioned to continue.
Okay. Thank you.
Okay.
Thank you next question is coming from David Westenburg from Piper Sandler Your line is now live.
Hi, Thank you for taking the question congrats to a great start to the year.
I wanted to actually follow up with with Dan's question in terms of market share wins in.
In carrier screening any sense for if this is maybe share wins or new customers from from semaphore shutting down that business or if it moves from the existing players and I guess the main reason why im 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 in carrier screening because.
Some of the larger private insurance companies have been.
Little bit more.
What's the word.
Stricter.
On the payouts with dose.
Yes, certainly.
No we.
We certainly benefited.
From <unk> before 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 Asics barrier expanded carrier screening is used more frequently in reproductive study.
And then we have the support of the American College of medical genetics and genomics, we hadn't supported because we have the support of the genetic counselors. So we see this as an evolving field thats still has a long runway for growth.
As it relates to reimbursement from what we're seeing.
We're pretty we're pretty satisfied with what we're seeing.
Most importantly is controlling the cost structure right. So.
Pre COVID-19, we were always pretty proud of our cost structure and 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 confirmations, 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.
<unk> healthy and we think it can only improve from here as we work with the payers to continue to expand coverage policies.
All very helpful. Thank you I just have one more because unfortunately make computer just crashed and I can't see my list of questions right now.
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 move into a lot of different oncology tests, that's pushing this.
This strength in pharma services I mean.
What what's going on there.
That's really driving that.
Well when we first launched our pharma services that sort of a division and our focus for Fulgent. It was mostly Ngls right. Whether it was you know single gene panel of genes may be Exxon their genomes, but it was just ngls today, it's a full multi ohmic product offering probably one of the most comprehensive product offerings out there as it relates.
Two providing services for pharma and Biopharma, so whether it's special.
Spatial biology, proteomics RNA sequencing.
I don't even know honestly, how many total tests were providing to pharma services at this point its 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.
Thank you.
Thank you.
Thank you. Your next question today is coming from Andrew Cooper from Raymond James Your line is now live.
Yes.
Hey, everybody. Thanks for the question maybe.
Maybe just first want to check one on the guide.
I know the $2 40. Prior didn't include any color, but I just want to make sure that <unk> I think you said no incremental to have it as part of that raised a couple of million dollars of Covid in a.
In <unk> or is that $2 50 number a purely core than anything and COVID-19 is above and beyond.
Thank you for that question, so the $2 50, a share core.
<unk> for the year and to give a little bit of color.
On the breakout of the areas when we initially laid out the guidance about.
Eight eight or nine weeks ago, we said that the core revenues would be approximately $240 million, we said that pharma services will be approximately 13.
And precision diagnostics and anatomic.
<unk> would be evenly split at about $113 5 million, each adding up to the $2 40.
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 very much because we think in both those two areas are at the core of what the company was founded upon and we're translating those kinds of capabilities over.
<unk> anatomic pathology, but in short we see momentum within the last eight or nine weeks from the time that we initially gave our guidance across all three of our businesses.
Okay, Great maybe just one last quick one on guidance before I transition a little bit.
The <unk> number is down just very slightly on core at about 62, I'm assuming that.
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 Q to Q.
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 two 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.
Past couple of weeks and.
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 why we think that business is going and where we think we're going to be ending the year and thats 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 up 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 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.
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 onto bundle with carrier screening to go to more than just necessarily IVF clinics put out into the obgyn appeal or how do we think about where theres potential.
Entity or need to expand now that you 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 clinics. So a couple of trying to get pregnant.
We have everything it takes the product the turnaround time, the contracts to penetrate the obgyn market.
But we are missing a piece there right. So often expanded carrier screening is ordered in tandem with noninvasive prenatal screening and Ips or <unk> 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 and now we can may be launched it organically.
But that's the one sort of piece of the reproductive puzzle that we don't have right now we do have pre implantation genetic testing for <unk>, 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.
Okay, Great I'll stop there thanks, everybody.
Thank you we reached end of our question and answer session I like to turn the floor back over for any further or closing comments.
Yes, thank you very much.
For everyone joined.
Drilling a recall.
Today, and we're looking forward to profile the update in the coming quarters.
Thank you.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.
Yeah.