Q2 2023 Fulgent Genetics Inc Earnings Call

Speaker 1: Hello, and welcome to the Fulgent Genetics Q2 2023 earnings conference call and webcast. If anyone should require operator assistance, please press star 0 on your telephone keypad. A question and answer session will follow the formal presentation. You may press star 1 at any time to be placed in the question queue. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Melanie Salomon, investor relations for Fulgent. Please go ahead, Melanie.

Hello, and welcome to the Fulgent Genetics Q2, 2023 earnings conference call and webcast. If anyone should require operator assistance. Please press star zero on your telephone keypad.

Question and answer session will follow the formal presentation you May press star one anytime she placed in the question queue.

A reminder, this conference is being recorded its now my.

Pleasure to turn the call over to Melanie Solomon Investor Relations for Fulgent. Please go ahead Melanie.

Speaker 2: Good morning and welcome to the full gen second quarter 2023 financial results conference call. On the call with me today are Ming Shae, chief executive officer, Paul Kim, chief financial officer, and Brandon Perthuse, chief commercial officer.

Thanks, Kevin Good morning, and welcome to the full Gen second quarter 2023 financial results conference call on the call with me today are named Shea Chief Executive Officer, Paul Kim Chief Financial Officer, and Brandon <unk>, Chief Commercial officer.

Speaker 2: The company's press release discussing the financial results is available on the investor relations section of the company's website, www.solgent.com. Retail of this call will be available shortly after the call concludes on the investor relations section of the company's website. The company's press release discussing the financial results is available on the investor

The company's press release discussing our financial results is available on the Investor Relations section of the company's website Www Dot soldier in Dot Com and replay of this call will be available. Shortly after the call concludes on Investor Relations section of the company's website.

Speaker 2: 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, management 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 statement.

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.

Speaker 2: The company assumes no obligation to update any of the four living statements that may make today to reflect actual results or changes in expectations. Scholars should not rely on any four living statements as predictions of future events. And to listen to managers remarks today with the understanding that actual events, including the company's actual future results, may be materially different in what is described and or implied by these four living statements.

Isn't it.

The company assumes no obligation to update any of the forward looking statements. It may make today to reflect actual results or changes in expectations listeners should not rely on any forward looking statements as predictions of future events and should listen to management's remarks today with the understanding that actual events, including the company's actual future results may be materially different in what is described in or implied by.

These forward looking statements.

Speaker 2: 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 10K for the year ended December 31, 2022, and subsequently filed reports which are available in the company's investor relations website.

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 company's investor.

Since last night.

Speaker 2: Management's prepared remarks, including discussions of earnings and earnings per share, contained financial measures not prepared in accordance with accounting principles generally accepted in the United States, or GAAP. Management has presented to these non-GAAP financial measures because it believes that may be useful to investors for various reasons, but they should not be useded as a substitute for or seperior to the company's financial results prepared in accordance with GAAP.

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 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.

Speaker 2: Please see the company's press release discussing as financial results for the second quarter, like 2023 for more information, including the description of how the company calculates non-GAP 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.

Please see the company's press release discussing its financial results for the second 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 Nate.

Speaker 3: Thank you, Melanie. Good morning, and thank you for joining our call today.

Thank you Manny good morning, and thank you for joining our call today.

Speaker 3: I will start with some comments on the quarter, then Brandon will review our product and go to market updates for the second quarter. And Paul will conclude with the financials and outlook before we take over your questions. We are pleased with the...

I'll start with some comments on the partner and Brendan will review, our product and go to market updates for the second quarter.

And Paul will conclude.

With the financials.

And I'll be smoked before.

They go to your questions.

We are pleased with our results in the second quarter.

Speaker 3: with another record core revenue reaching $67 million and less than $1 million of COVID revenue for total of just under $68 million of revenue.

It was another record core revenue, reaching $67 million and less than $1 million of coal revenue for a total of just under $68 million for Remy.

Speaker 3: Our core revenue was driven by strong results that caused all three areas of our diagnosed business.

Our record revenue was driven by strong results across all three areas of our diagnostics business.

Speaker 3: precision diagnosis, and atomic pathology and pharma services.

Precision diagnostics anatomic pathology and farmer services.

Speaker 3: Including our expanded beacon carry testing for reproving house

Including our expanded beacon carry testing for Reprising Health service.

Speaker 3: We are encouraged by the art performance in the first half of the year and seeing

We are encouraged by the outperformance in the first half of the year and see.

Speaker 3: Good cells momentance as we move into the second half of the year.

Good sales momentum as we move into the second half of the year.

Speaker 3: We continue to make good progress with our therapeutic business.

We continued to make good progress with our therapeutic business.

Speaker 3: Virgin Pharma, our novel nanoencubicization technology, including our 40 patents and the target therapy platform designed to improve therapeutic windows and the pharmacodynamic profile of both new and existing cancer drugs.

Cogent farmer.

No no no compensation technology, including over 40 patents.

And the target therapy platform.

Signed to improve therapeutic windows and the Pharmacodynamic profile of both new and existing cancer drugs.

Speaker 3: Our leap drug-canidied FID-07 has shown promised the results for treatment of numerous cancers, including catenac, antivary, and apancryide, with reduced society effects.

Our lead drug candidate <unk> Oh seven.

Show promising results for treatment of numerous cancers, including head and neck and people really in the pancreas.

The reduced society effects.

Speaker 3: In June , we presented safety and the data from the ongoing phase 1B study at the American Society of Clinical Oncology annual meeting in Chicago.

In June we presented safety and the efficacy data from the ongoing phase one B study at the American Society of clinical.

<unk> annual meeting in Chicago.

Speaker 3: In summary of 40 cavity treated patients of worst cancer types, with a rich, low level from 50 milligram per spectrometer to 160 milligram per spectrometer.

In summary over 40.

<unk> treated patients of wears cancer types with a weekly dose level from 15 milligram per square meter 260 milligram prescribing to <unk>.

Speaker 3: 18% had a partial response, and 35% had a stable disease.

18% of had apart show response, and a 35% had stable disease.

Speaker 3: three out of four squamous cell carcinoma of head and neck cancer patients.

Three out of four of screening.

<unk> carcinoma head and neck cancer patients.

Speaker 3: with the partial response, had previously been treated with taxi. No high-grade mirror.

Partial response had previously been treated with taxi.

No I agree to Europe to the northeast.

Speaker 3: FID-07 demonstrates the preliminary evidence of anti-pumor activity. It has been pre-treated that patients across the wears tumor type.

Everybody over seven demonstrated preliminary evidence of anti tumor activity.

Heavily pre treated.

Patients across whereas tumor types.

Speaker 3: based on the over low total build date bomb, code,fl tennic and F

Based on the overall Tolerability pharmacokinetics.

And the efficacy.

Speaker 3: 125 mg per square meter has tuition as recommended to stay to those.

<unk> hundred 25 milligram per square meter is tuition as the recommended phase two dose.

Speaker 3: we received the positive response for the data from medical community and

We'd really see with the positive response for that.

The medical community and.

Speaker 3: continue to optimize our manufacture process as well as prepare the initial phase two studies. We look forward to share additional updates over the start of that trial by end of the year. We also have a deep pipeline in preclinical development focusing on targeted therapies for additional kinds of disease.

Continue to optimize our manufacturing processes.

As well as preparing the initial phase two studies.

Before to share additional updates over the start of that trial by end of the year.

Also I would.

Deep pipeline in preclinical development focusing on targeted therapies for additional cancers.

Speaker 3: I'd like to thank our employees and shareholders for your loyalty during the quarter. We look forward to the second half of the year and the momentum we are creating with our combined business.

I'd like to thanks, our employees and the shareholders.

Are you largely during the quarter.

We look forward to the second half of the year and the momentum we are creating with our combined business.

Speaker 3: I will now turn over to Brandon Perthius, our Chief Commercial Officer, to talk about our diagnosis, dismissive, resources during the quarter. Bennett.

I will now turn the call over to Brendan <unk>, our chief commercial officer.

A bunch of our diagnostic business resolved during the quarter Bennett.

Speaker 4: Thank you, Ming. We had a record quarter for our core business, driven by strong growth in our Precision Diagnostic Division.

Thank you mean.

Had a record quarter for our core business driven by strong growth in our precision diagnostics division.

Speaker 4: decision diagnostics was up 40% year over year and 12% sequentially. We are seeing strong demand for our reproductive services, specifically our Beacon expanded carriage training products, as we have now cemented ourselves as one of the market leaders.

Vision diagnostic was up 40% year over year and 12% sequentially we.

We are seeing strong demand for our reproductive services, specifically, our beacon expanded carrier screening product as we have now cemented ourselves as one of the market leaders.

Speaker 4: During the quarter, we saw our other division's meet expectations with farm and services having another strong quarter. However, as we previously mentioned, we expect farm and services to be a bit lumpy depending on the timing of the service contract.

During the quarter, we saw our other divisions meet expectations with pharma services, having another strong quarter. However, as we previously mentioned, we expect pharma services to be a bit lumpy, depending upon the timing of the service contracts looking forward, our pharma services pipeline and backlog remains strong as we continue to leverage our expanded capabilities.

Speaker 4: Looking forward, our pharma services pipeline and backlog remains strong as we continue to leverage our expanded capabilities in multiomics and spatial biology.

And multi omics and spatial biology.

Speaker 4: Not since COVID-19 have we stress tested our technology platform like we did this quarter. Overall, next generation sequencing lab volume was up 112% year over year. We were able to take on this volume with minimal incremental investments and were able to perform the services with only minimal temporary increase in turnaround.

Not just COVID-19 have we stress tested our technology platform like we did this quarter.

Overall next generation sequencing lab volume was up 112% year over year.

We're able to take on this volume with minimal incremental investment and we're able to perform the services with only minimal temporary increase in turnaround time.

Speaker 4: We feel time and time again we are showing real-world evidence of the power of the FOLSI technology platform and overall lab operations and capabilities.

We feel time and time again, we are showing real world evidence of the power of the <unk> technology platform and overall lab operations and capabilities we have.

Speaker 4: We stated before that we are a laboratory founded, designed, and built by engineers. Our mission was to create a differentiated lab operation using automation, AI, and informatics to be able to scale genomic testing without the high cost of continually layering on professional hire.

Stated before that we are laboratory founded designed and built by engineer. Our mission was to create a differentiated lab operation using automation AI and informatics to be able to scale genomic testing without the high cost of continually layering on professional hires.

Speaker 4: During the quarter, we also installed additional sequencers, the most recent and highest throughput to date, allowing us to additionally expand our capacity and lower the cost of exome and genome sequence.

During the quarter, we also installed additional sequencers and most recent and highest throughput to date, allowing us to additionally, expand our capacity and lower the cost of exome and genome sequencing.

Speaker 4: We've also recently begun consolidating our two West Coast Lab operations into one. Historically, we occupy two buildings a few miles apart, bringing them together should lead to new operational and cost efficiency. We aim for the move to be completed by the

We've also recently begun consolidating our two west coast lab operations into one historically, we occupy two buildings a few miles apart, bringing them together should lead to new operational and cost efficiency. We aim for the move to be completed by the end of the third quarter.

Speaker 4: Beacon Expanded Care Screening continues to be a key growth driver for our company. Solgent stands out in this space as one of the few labs that controls the end-to-end product offerings, allowing us to have a better handle on cost and turnaround time.

Beacon expanded carrier screening continues to be a key growth driver for our company holds it stands out in this space as one of the few labs that controls the end to end product offering, allowing us to have a better handle on costs and turnaround time.

Speaker 4: As we ramp volume, we are focused on process improvements to continue to lower cost and improve turnaround.

As we ramp volume we are focused on process improvement to continue to lower costs and improved turnaround time.

Speaker 4: We've done a good job capturing meaningful market share in the infertility space, and we'll look to penetrate the OB market in the future.

We've done a good job capturing meaningful market share in the infertility space and we will look to penetrate the OE market in the future.

Speaker 4: A most clinician today are using a panel of around 400 genes that standard of care, we've already built the next version, which includes 787 genes, and we are seeing more and more adoption of this larger panel. Our thought process is that clinicians will continue to look for broader coverage, which is what we've seen over the last few years, going from approximately 100 genes to approximately 400.

Our most conditions today youre using a panel of around 400 genes that standard of care. We've already built the neck version, which includes 787 genes and we're seeing more and more adoption of this larger panel. Our thought process is that clinicians will continue to look for broader coverage, which is what we've seen over the last few years going from approximately 100 genes to approximately 400 genes.

Speaker 4: Before too long, the most efficient test could be an exome, at which time we'll be ready to address with our proprietary sequence alignment tools, bioinformatics, and capture probes along with our robust sequencing capacity.

Before too long the most efficient test could be an external at which time, we'll be ready to address with our proprietary sequence alignment tools bioinformatics and capture probes along with that robust sequencing capacity.

Speaker 4: Our anatomic pathology division continues to perform well, with a lot of our focus on continuing to improve operation.

Our anatomic pathology division continues to perform well with a lot of our focus on continuing to improve operations. These improvements include standardization of system revenue cycle management logistics and managed care among others.

Speaker 4: These improvements include standardization of systems, revenue cycle management, logistics, and managed care among others.

Speaker 4: In addition, we have been investing heavily in digital pathology. Digital pathology is revolutionizing the space, leading to better turnaround time, cost, and quality. For example, shipping prepared glass slides to our lab and to our clients had the burden of at least one day shipping and associated costs, plus the physical storage. Now we can scan, digitize, and share electronically immediately. In addition, we have built one of the only end-to-end solutions to allow our clients to view the digital images or even sign out their own cases.

In addition, we have been investing heavily in digital pathology digital pathology is revolutionizing the states leading to better turnaround time cost and quality for example, shipping prepared glass lite to our lab and our client had the burden of at least one day shipping and associated costs plus the physical storage now we can scan digitize and share.

<unk> immediately in addition, we have built one of the only end to end solution to allow our clients to view the digital image it or even sign out their own cases.

Turning to flows in oncology.

Speaker 4: Now with both our Lumera Solid Tumor profile and our Lumera Heam NGS approved and priced by Moldiac at $3,288 in $2,950 respectively, we turn our attention to expanding beyond our soft launch on the West Coast.

Now with both our leu meera solid tumor profile and our leu Meera heme NGL approved in price by multi yet at $3288 in $2950 respectfully, we turned our attention to expanding beyond our soft launch on the West coast. We have placed a small number of rep in strategic territories across the nation.

Speaker 4: We have placed a small number of reps in strategic territories across the nation and expect the teams to continue to grow. Armed with a multi-disciplinary portfolio, folded oncology is a near one stop shot for specialty oncology tests.

This team to continue to grow.

Armed with a multidisciplinary portfolio folio oncology is a near one stop shop for specialty oncology testing.

Speaker 4: We feel very strongly that we will be able to continue to penetrate the community oncology segment beyond the West Coast and establish ourselves as a national contender in precision cancer diagnosis.

We feel very strongly that we will be able to continue to penetrate the community oncology segment beyond the west coast and establish ourselves as a national contender in precision cancer diagnostics.

Speaker 4: As Ming mentioned, we are pleased with the performance during the second quarter, and we remain encouraged by the business prospects we see moving forward.

As Ming mentioned, we are pleased with the performance during the second quarter and we remain encouraged by the business prospect, we see moving forward.

Speaker 4: I'll now turn the call over to our CFO , Paul Kim, to walk through the detailed financials. Paul?

I'll now turn the call over to our CFO , Paul Kim to walk through the detailed financials Paul.

Speaker 4: Thanks, Brandon. Revenue in the second quarter total 58 million. I'm here to 125 million in the second quarter of 2022. Less than one million came from COVID-19 testing in Q2, which was not part of our guidance.

Thanks, Brendan revenue in the second quarter totaled $68 million compared to $125 million in the second quarter of 2020 to less than 1 million came from COVID-19 testing in Q2, which was not part of our guidance revenue from our acquired business totaled $67 million, which exceed.

Speaker 4: Revenue from our Cord Business total 67 million, which exceeded our guidance of 62 million and grew 48% year over year.

Our guidance of $62 million and grew 48% year over year.

Speaker 4: Gross margin was 30.3%. 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.

<unk> margin was 33% the decline in gross margin year over year is primarily related to the higher cost of anatomic pathology revenues from <unk>, which we purchased in Q2 of 2022.

Speaker 4: Non-gap gross margin was 33.8%. We are pleased to have achieved a two-point improvement in our gross margin sequentially over the prior quarter as we see efforts to create efficiencies across our acquired businesses pay off. Now turning over to operating expenses. Total gap operating expenses are $40.4 million for the second quarter down from 43.8%.

non-GAAP gross margin was 33, 8%.

We are pleased to have achieved a two point improvement in our gross margin sequentially over the prior quarter as we see efforts to create efficiencies across our acquired businesses pay off now turning over to operating expenses total GAAP operating expenses by $40 4 million for the second quarter down from 42.

Three point.

Speaker 4: 6 million in the first quarter of 2023, a non-GAP operating expenses total 30.4 million down from 33.8 million in the first quarter of 2023. Non-GAP operating margin increased 8 percentage points, but, quantally, so a negative 11.1 percent, which is primarily due to adjustment and bad debt expenses and to other items combined with continuing operating officials.

$6 million in the first quarter of 2023, and non-GAAP operating expenses totaled $30 4 million down from $33 8 million in the first quarter of 2023, non-GAAP operating margin increased eight percentage points sequentially to a negative 11, 1% which is primarily.

Due to adjustments and bad debt expenses and few other items combined with continuing operating efficiencies.

Speaker 4: Adjusted EBITDA for the second quarter was a negative $2.7 million compared to a positive $37.7 million in the second quarter of 2022. On a non-GAAP basis and excluding equity-based compensation expense and intangible asset amortization, the loss for the quarter was $2.4 million or $0.08 per share based on 29.8 million weighted average shares outstanding.

That EBITDA for the second quarter was a negative $2 7 million.

Prior to a positive $37 7 million in the second quarter of 2022 on a non-GAAP basis, and excluding equity based compensation expense and intangible asset amortization loss for the quarter was $2 4 million or eight cents per share based on $29 8 million weighted average.

Shares outstanding.

Speaker 4: Turning over to the balance sheet, we ended the second quarter with approximately $847 million in cash, cash equivalents and marketable securities. The decrease from the first quarter is primarily due to cash used approximately 25 million to pay off our margin loan, in full, and to purchase real estate. From operations, cash provided by operating activities for the second quarter was a positive $9.7 million.

Turning over to the balance sheet, we ended the second quarter with approximately $847 million in cash cash equivalents in marketable securities.

Decrease from the first quarter is primarily due to cash used approximately 25 million used to pay off our margin loan.

And Paul and to purchase real estate from operations.

Cash provided by operating activities for the second quarter was a positive $9 7 million.

Speaker 4: Moving on to our outlook for 2023, given the outperformance in the second quarter, we're raising our core revenue guidance to 260 million. The numbers does not anticipate additional revenue from COVID-19 tests.

Moving onto our outlook for 2023, given the outperformance in the second quarter, we're raising our core revenue guidance to $260 million number does not anticipate additional revenue from COVID-19 testing looking ahead, we expect gross margin and operating margin to continue to improve as we implement it.

Speaker 4: Looking ahead, we expect growth margin and operating margin to continue to improve as we implement efficiencies to our integration efforts with our recent acquisitions. The margin improvement is forecasted 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.

Session fees through our integration effort with our recent acquisitions.

Margin improvement is forecasted 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.

Speaker 4: For the fall year 2023 utilizing an estimated 28% tax rate in a share count of 30 million, we now expect their non-gap losses to narrow to 95 cents per share from the previous expectation of a dollar 25 per shareholder's ex-witting stock-based compensation amortization of intends to last steps.

For the full year 2023, utilizing an estimated 28% tax rate and a share count of $30 million. We now expect our non-GAAP losses to narrow to 95 per share from the previous expectation of $1 25 for our shareholders' equity stock based compensation amortization of intangibles.

Speaker 4: as well as any one-time charges. Overall, we have further strengthened our core business and bolstered our portfolio through strategic acquisitions and are already seeing improved financial performance in the first two quarters of 2023 and see good momentum ahead. Thank you for joining the call today. Operator, you may now open it up for questions.

With that as.

As well as any one time charges.

Overall, we have further strengthened our core business bolstered our portfolio through strategic acquisitions and are already seeing improved financial performance in the first two quarters of 2023 and see good moment momentum I had thank you for joining the call today operator, you may now open it up for questions.

Speaker 1: Thank you. And I'll be conducting your question and answer session. If you'd like to be placed in the question queue, please press star 1 at this time.

I will 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.

Speaker 1: You may press star two if you'd like to move your question from the queue. One moment please, what we pulled for questions. Our first question is coming from Dan Metter from Credit Suisse, your line is now live.

You May press star two if you'd like to move your question from a Q1 moment. Please while we poll for questions. Our first question is coming from Dan <unk> from Credit Suisse. Your line is now live.

Thank you and good morning.

Speaker 5: Good morning, Paul, your your revenue guidance implies a decline in your sales run rate from Q2 levels. Why would that be? Do you think the revenue runs Do you think the revenue runs

Good morning, Paul Your your revenue guidance implies a decline in your sales run rate from Q2 levels why would that be.

Excuse me the revenue run rate for.

Can you repeat the question.

Speaker 5: Yeah, you're guiding for $260 million in revenue for the full year. You did $67 million in Q2. You're guiding for $65 million in Q3, which is a decline. And it looks like $65 million in Q4 as well. So I'm wondering why sales wouldn't grow from the $67 million, why they would decline.

Yeah.

You're guiding for $260 million in revenue for the full year.

You did $67 million in Q2, you're guiding for 65 in Q3, which is a decline in and it looks like 65 in Q4 as well. So I'm wondering why sales wouldn't grow from the $67 million.

They would decline.

Speaker 4: Okay, yeah, great question. So we had outperformance in Q1 and Q2, we're still digesting the heavy increase in volume and we feel very good about our moment.

Okay, Yeah, great question so.

We had outperformance in Q1 and Q2, we're still digesting the heavy increase in volume.

And we feel very good about our momentum.

Speaker 4: There definitely is potential based on what we have posted in Q1 and Q2 to outperform again. And we certainly reserve the right to post higher numbers.

There definitely is potential based on what we have posted in Q1 and Q2 to outperform again.

And you know, we certainly reserve the right to post higher numbers.

Understood.

Speaker 5: And then a follow up, Paul, I know at one point you were hoping to get gross margin to 40% by the end of the year. What is the new target and what are the steps that get you there?

And then a follow up Paul I know at one point you were hoping to get gross margin to 40% by the end of the year.

What is the new target and what are the steps that get you there.

Yeah. So the gross margin target for 40% of yours at all our hope we certainly are pleased with the gross margin jump, which had a low point of I believe and the $20 to 25% in Q4, we had a significant jump from that to what we posted.

Speaker 4: So the gross margin target for 40% a year, that's still our hope.

Speaker 4: We certainly are pleased with the gross margin jump, which had a low point of I believe in the 20 to 25% in Q4.

Speaker 4: We had a significant jump from that to what we posted in the first.

In the first quarter.

Speaker 4: In the first quarter, the gross margin on a non-gap basis was 32%.

In the first quarter the gross margin on a non-GAAP basis was 32%. We see we saw a two point improvement from Q1 to Q2, which takes us up to 34, we certainly anticipate the gross margin numbers to grind higher into Q3, and Q4, but where we end up at the end of the year.

Speaker 3: We saw a two point improvement from Q1 to Q2 which takes us up to 34.

Speaker 4: We certainly anticipate the growth margin numbers to grind higher into Q3 and Q4. Where we end up at the end of the year, it could certainly be at 40%.

It certainly would be at 40%, but as long as the trajectory is correct as well as the rate of that change we think that that indicates.

Speaker 4: But as long as the trajectory is correct, as well as the rate of the chain.

Speaker 3: we think that that indicates further strengthening of our overall business model. I think the other thing, right, that we're also taking a look at aside from just a percentage is the absolute contribution from gross margins. And we're very, very pleased to raise our revenues twice this year, you know, given the fact that it's only the middle of the year.

Further strengthening of our overall business model.

I think the other thing right that we're also taking a look at aside from just a percentage as the absolute contribution from gross margins and we're very very pleased to raise our revenues twice this year.

Given the fact that it's only the middle of the year.

Great. Thank you.

Speaker 1: Thank you. Next question today is coming from David Westenberg from Piper Sandler. Your line is now live.

Thank you next question today is coming from David Western Burn from Piper Sandler Your line is now live.

Speaker 6: All right, thanks for taking the question and congrats on a very strong performance this quarter.

Hi, Thanks for taking the question and congrats on a very strong performance this quarter.

Speaker 6: Can you remind us how much of the GNA is still dedicated to COVID testing and if there's an opportunity now to get more cost savings by just exiting that business or any plans there with COVID just generally speaking? Yeah, that's what I'm saying.

Can you remind us how much of the G&A is still dedicated to COVID-19 testing and.

If there is an opportunity now to get more cost savings by just executing that business or any plans there with with Covid just generally speaking.

Yeah excellent question David So.

Speaker 3: From an overall perspective, the majority of the activity has been flushed out related to COVID testing. During the second quarter specifically, we had approximately a $2 million dollar increase in COVID-19 cases.

From an overall perspective, the majority of the activity has been flushed out related to Covid testing.

The second quarter, specifically, we had approximately a $2 million.

Speaker 4: adjustment. It was actually a credit, you know, related to the AR reserve for COVID testing.

Adjustment it was actually a credit.

Weighted to the AAR reserve for Covid testing, that's part of the reason on why you started growth I mean, not the growth, but the G&A expenses being out like we had few other items that are in there as we look ahead into Q3 and Q4, we anticipate G&A expenses to bounce back after something that we had in Q1.

Speaker 4: That's part of the reason why you saw the growth, I mean not the growth but the GNA expenses being light. We had few other you know items that are in there.

Speaker 4: As we look ahead into Q3 and Q4, we anticipate the GNA expenses to bounce back to something that we had in Q1 or maybe higher levels.

Or maybe higher level.

Speaker 4: But kind of back to your question of, is COVID relatively flushed out the short answer? Yes. I think the reason why I comment on the expense structure is even what the bump up in GNA for Q3 and Q4, from an overall perspective, we see very good efficiencies throughout the operating expense categories and up the organization.

But kind.

Back to your question of as Covid relatively flushed out the short answer is yes, I think the reason why I comment on the expense structure as you know even with the bump up in G&A for Q3, and Q4 from an overall perspective, we see.

Very good efficiencies throughout the operating expense categories.

Organization.

Speaker 3: And that's being further being added if we take a look at the overall business model, with the overall strength that we're seeing with the top line as well as the gross margin improving.

And thats being further being.

Being.

And if we take a look at the overall business model what.

But the overall strength that we're seeing but the top line as well as the gross margin improvement.

Speaker 6: Very helpful detail there Paul. Thank you very much. And then can you just remind us about any the closed date last year of inform? Just trying to think about the organic revenue growth as we look in the back half of the year. I believe the only acquisition you made in the back half of the year would have been the Folsom Pharma if I'm correct. I know this is probably a short, disclaryty question here.

Okay.

Very helpful detail there Paul Thank you very much.

And then can you just remind us about any.

Closed date last year of in form I'm, just trying to think about the organic revenue growth as we look in the back half of the year I believe the only acquisition you made in the back half of the year would have been the folds in pharma, if I'm correct and I know this is probably a short just clarity question here.

Speaker 3: Yeah, so inform DX closed.

Yeah.

And for them.

At close.

Speaker 3: During Q2 of 2022, it was about halfway through the second quarter, when we take a look at the contributions of revenue from the three categories that we have.

During Q2.

Of 2022, it was about you know halfway through the second quarter and when we take a look at the contribution of revenue from the three categories that we have anatomic pathology pharma services and precision diagnostics, we see absolute growth in.

Speaker 3: anatomic pathology, pharma services, and precision diagnostics.

Speaker 4: We see absolute growth in all three of those areas when we compare it against the numbers from last year. But what really excites us is where the acceleration of the business is coming from. So we first started off the year at $240 million of revenues and we had.

All three of those areas when we compare it against the numbers from last year.

But what really excites us is where the acceleration of the business is coming from so we first started off the year at $240 million of revenue and we had the contributions from anatomic pathology, which has informed our dx.

Speaker 3: the contributions from anatomic pathology, you know, which is Inform DX.

Speaker 3: And then precision diagnostics evenly split with about $13 million from pharma services, which added to the $240 million.

And then precision diagnostic evenly split with about $13 million from pharma services, which added to the 240, but you know as we take a look at the updated guidance now at $260 million.

Speaker 3: But as we take a look at the updated guidance now at 260 million.

Speaker 3: All of that is coming from either precision diagnostics or pharma services, which are very, very lucrative and attractive markets. And it's the area that we perform very, very well in, where you have sequencing and large amount of interpretation. So we really like the way that the business is headed as we look at at the end of this year and in the 2024.

You know all of that is coming from either a precision diagnostics our pharma services.

<unk> are a very very lucrative and attractive market and its the area that we performed very very well and where you have sequencing and a large amount of interpretation. So we really like.

The way that the business is headed.

As we look out at the end of this year and into 2024.

Speaker 6: Got it. Now thank you very much. And just one last question on the gross margin. Can you talk about the different levers? I know you just said implementing a new CE. You're buying a new sequence there. In terms of carrier screening for example, which I know you're outperforming in, there's a lot of prep work. So can you just run us through all the different levers that you're thinking about in the next year to really drive those gross margins higher? And that's my last question. Thank you.

Got it no.

Thank you very much and just one last question on the on the gross margin can you talk about the different levers I know you. Just you said implementing a new CEO , you're buying a new sequence there.

In terms of carrier screening for example, which I know you're outperforming in there's a lot of prep work. So can you just run us through all the different levers that youre thinking about the next year to really drive those gross margins higher.

Last question. Thank you.

Speaker 3: Yeah, so there's a lot of blocking and tackling that we're doing, you know, in terms of

Yeah. So there's a lot of blocking and tackling that we're doing in terms of.

Speaker 3: in terms of improving policies and attracting higher talent. But the fundamental reason on why we have the growth margin improvement is through automation and the utilization of our technology platform. And I'll turn it over to Ming, who reiterate the differentiation that we have in the utilization of our technology compared to other companies.

In terms of improving policies.

Tracking.

Attracting higher talent, but the fundamental reason on why.

We have the gross margin improvement is through automation and the utilization of our technology platform and I'll turn it over to a man who can.

To reiterate.

The differentiation that we have in the utilization of our technology compared to other companies.

Speaker 7: Thanks, Paul. The bottom line is how could we use the technology to handle more blue folks. That's the reason for areas where we put a lot of focus.

Yes, Thanks Paul.

Bottom line is the Hulk, whether we use the technology to handle more fruitful.

The areas, where we've put a lot of focus.

Speaker 7: We continue to apply the technology, which we call the AI. Does the area that we started in the 1990s?

<unk>, who applied the technology, which we call the AI.

It doesn't the areas that we started since the 19 nineties.

Speaker 7: But since the past 30 years, over 30 years, definitely AI has made a tremendous impact in our life. We have been riding with this technology, with my experience, for the past 30 years.

But it seems that the positive 30 years over 30 years that Devon has.

Make a tremendous impact in the <unk>.

We have been writing with this technology.

With my experience with for 30 years.

Speaker 7: We continue seeing the technology to be applied to the in the diagnosis business and then we continue to invest and you pull out the technology.

<unk> seen the dart technology to be applied to the in the technology business and then we're continuing to invest in product and technology.

Got it thank you very much.

Right.

Speaker 1: Like, next question is from Andrew Cooper from Raymond James, who line is now live.

Thank you next question is coming from Andrew Cooper from Raymond James Your line is now live.

Speaker 8: Hey, everybody, thanks for the question. Maybe first kind of tagging on to the back end of that, you know, you talked about the automation and the improvements there. I think you did mention in the prepared remarks, a little bit of turnaround time increase as volumes ramped as much as they did. Can you just give us a little bit more color on sort of how much that was, you know, whether it's it's worked lower, and how we should think about the the turnaround times as you continue hopefully to grow to grow the volumes on the Maybe I should just give you a little bit of a Clarence analysis more about the improvement we had at the time that was approaching on this.

Hey, everybody. Thanks for the question.

First kind of tagging onto the back end of that you talked about the automation and the improvements there. Thank you did mentioned in the prepared remarks, a little bit of turnaround time increase as volumes ramped as much as they did can you just give us a little bit more color on sort of how much that was whether its work to lower.

How we should think about the turnaround times as you continue hopefully to grow to grow the volumes on the inbound side.

Speaker 9: Yeah, thanks Andrew. Good question. The turn one time did increase, but it was a short window, right? See, we did a much better job capturing market shares than perhaps we were anticipated. And that's great execution by the sales team in our company, but the increase in volume was tremendous. So, and I'm proud of the lab and how they were able to digest this. I mean, the turnaround time maybe had a 25 to 50% increase a couple to a few weeks.

Yeah. Thanks, Andrew Good question.

The term of time did increase but it was it was a short window right now.

We did have a much better job capturing market share than perhaps we were anticipated and that's that's great execution by the sales team and our company but.

But the increase in volume was tremendous so and I'm proud of the laden how they were able to digest. It I mean, the turnaround time, maybe had a 25% to 50% increase for a couple to a few weeks.

Speaker 9: As Ming mentioned, during that time, we began to improve additional processes and procedures and streamline. And at this point, turnaround time is back on track. I mean, I think we're around 14 or 15 days for carrier screening and ex-SOMs are back down. So it was a temporary increase and really allowed us to go into the systems and make those improvements and get it back on track. And turnaround time is something we've monitored and to be very, very closely. It's incredibly important for our clinicians.

It's been mentioned during that time.

We began to improve additional processes and procedures and streamlining.

At this point in turnaround time it is back on track I mean, I think we're around.

Around 14, or 15 days for carrier screening exome or back down. So it was a temporary increase and really allowed us to go into the systems and it make those improvements and get it back on track and turnaround time is something we monitor very very closely it's incredibly important for our clinicians.

Speaker 9: while we talk about it, while we, you know, we've mentioned it in our in our script, and, you know, going forward.

While we talk about it but we you know we mentioned it in our in our script.

And going forward.

Speaker 9: We intend to meet our turnaround time, which depending upon the product could be anywhere between two and six weeks, but especially in the reproductive space, that sort of two weeks, three weeks turnaround time is critical, and we're sort of back on track, and don't see any disruption to that in the future.

We intend to meet our turnaround time, which depending upon the product to be anywhere between two and six weeks, but especially in the reproductive space, that's where two week to three week turnaround time is critical and we're sort of back on track and don't see any disruption to that in the future.

Yeah.

Very helpful.

Speaker 7: Remember Brandt in

Yes.

And then remember Brendan mentioned.

Speaker 7: We also made the lab consolidation during the quarter. So we are not only trying to hundle increase the volume, but they will also try to make the lab operation more efficient by consolidating two locations. So those also caused a bit of the transition, but we do see the good trend for the long term to continue to handle the higher volume and improve the turnaround time.

We also made that the lab consolidation during the quarter. So we are not not only try to eat to handle increased volume, but they will also try to make the lab operation more efficient by consolidated in two locations.

Also caused a.

A bit of a.

Transition, although we do see that as a good trend for the long term to continue to handle the higher volume and the improved the turnaround time.

Okay, Great Super helpful and then.

Speaker 8: Maybe just one more on sort of the portfolio. I think, you know, there was, they mentioned in the call as well of looking to penetrate the, the OB space in terms of carrier screening.

Maybe just one more on sort of the portfolio I think there was mentioned in the call as well looking to penetrate the Ob space in terms of carrier screening.

Speaker 8: You know, a lot of times I feel like we hear people talk about that being bundled with NIPT, so just the latest and greatest thinking there and then...

A lot of times I feel like we hear people talk about that being bundled with <unk>. So just the latest and greatest thinking there and then kind of related I think on the forging oncology side. You mentioned that are near a one stop shop. So just remind us what do you feel like still needs to be added into the portfolio. How do we think about.

Speaker 8: Kind of related, I think on the Fluidrant Oncology side, you mentioned a near one-stop shop. So just remind us, what do you feel like still needs to be added to the portfolio? How do we think about addressing some of those factors and what the timelines might be?

Addressing some of those some of those factors and what the timelines might be.

Speaker 9: Yeah, certainly. Thanks again for the question. We actually have Dr. Larry Weitz with us today, so I'll let him address the Folgene oncology question here in a moment. But in terms of our care screening market penetration, it's mostly been in the infertility space. We've landed some fantastic long-term clients that are mostly infertility clinics or REIs. And you're correct in that to penetrate the obese space, it is much, much easier to do so if you can bundle it with NIPT.

Yes, certainly and thanks again for the for the question Oh, we actually have Larry Dr. Larry Weiss with US today, So I'll, let him address the Fulgent oncology question here in a moment, but in terms of our carrier screening market penetration, it's mostly been in the fertility space.

We've landed some some fantastic long term clients.

Clients that are mostly and fertility clinics are are your eyes, and you're correct in that to penetrate the ob space. It is much much easier to do so if you can bundle it within ITT as.

Speaker 9: As you're aware, we currently don't have an NIPT test.

As you are aware, we currently don't have in an ITT tests.

Speaker 9: That doesn't prevent us from selling to the OBs. Again, it's just easier to do when you can bundle it. We will...

That doesn't prevent us from selling to the L. B.

And it's just easier to do when you can bundle it.

We will be.

Speaker 9: be able to target the OBs, especially the OBs that are referring into some of these new clients we have and be able to leverage the continuity there. But NIPC is something we've been looking at for a long time. We continue to evaluate the space. We continue to evaluate how we can deploy our technology in that space. So full-gen......

Be able to target <unk>, especially the <unk> that are you know referring into some of these new clients, we have and be able to leverage the continuity there but in ITT is something we've been looking at for a long time, you know we continue to evaluate the space. We continue continue to evaluate how we can deploy our technology in that space. So.

No.

Speaker 9: It has ongoing R&D across a lot of areas, and ICT being one of them. So, but again, I think with what we've done with carrier screening, with our turnaround time, our ability to interface and integrate, some of the clinical advantages we've built with Deacon in terms of copy number and dealing with pseudogenes and proprietary algorithms. I think there's still a great story to tell to the OB market, even in lieu of having an NIP, NIP T-test at this time. So Larry, he asked the question about his sort of what's missing to be sort of the four, one-stop shop that policy takes out.

It has ongoing R&D across a lot of areas and ICT being one of them. So, but again I think with what we've done with carrier screening with our turnaround time, our ability to interface and integrate some of the clinical advantages.

Built with peak in terms of copy number and in dealing with pseudo genes that proprietary algorithms I think there's still a great story to tell to the Ob market, even in lieu of having an in IP.

P. T tests at this time, so Larry you mentioned he asked the question about sort of what's missing to be sort of a full one stop shop, but I'll, let you take that well I'll tell you. We recently launched liquid biopsy for solid tumor and we hope to have an HRD test before the end of the year and maybe some additional offerings.

Speaker 9: Well, I'll tell you, we recently launched liquid biopsy for solid tumor, and we hope to have an HRD test before the end of the year.

Speaker 9: and maybe some additional offerings in 2024.

In 2024.

Great I'll stop there thanks.

Thanks, Andrew.

Speaker 1: Thank you. We reach the end of our question and answer session. I'd like to turn the floor back over to management for any further closing comments.

That you Werent sure of our question and answer session.

The floor back over to management for any further or closing comments.

Speaker 7: Thank you very much for your time, and we are looking forward to the update you about our business performance.

Thank you Ron Chu for for Ya joined the call today and now we are looking forward to update you about our business performance. During the next few quarters. Thank you very much.

Speaker 1: Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation.

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