Q3 2023 Fulgent Genetics Inc Earnings Call
Hello, and welcome to the poultry genetics Q3, 'twenty 'twenty earnings conference call webcast. If anyone should require operator assistance. Please press star zero on your telephone keypad, a question and answer session will follow the formal presentation.
You may be placed in the question queue at any time by pressing star one on your telephone keypad. As a reminder, this conference is being recorded it's now my pleasure to turn the call over to Melanie Solomon Investor Relations. Please go ahead.
Thanks, Kevin Good morning, and welcome to the Fulgent third quarter 'twenty to 'twenty three financial results conference call on the call today are many Shea Chief Executive Officer, Paul Kim Chief Financial Officer, and Brandon <unk>, Chief Commercial officer.
The company's press release discussing our financial results is available on the Investor Relations section of the company's website www dot children dotcom.
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 events, 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 22022, and subsequently filed reports which are available on the <unk>.
Company's Investor Relations website.
Management's prepared remarks, including discussions of earnings and earnings per share contain financial measures not prepared in accordance with accounting principles generally accepted in the United States or GAAP management has presented these non-GAAP financial measures because 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.
Please see the company's press release discussing its financial results for the third 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 me.
Thank you Melanie good morning, and thank you for joining our call today.
I'll start with some comments on the quarter.
Brendan will review, our co products and the go to market.
Update us from the third quarter.
And Paul will conclude with the financials and the outlook before we take your questions.
We are pleased with our results in the third quarter was $85 million of total revenue due to our successful collection effort, we recognize additional $19 million of revenue from previously build a COVID-19 test.
Our core revenue over $66 million was driven by momentum in precision diagnostics.
As we expected.
The revenue for the anatomic pathology were seasonally lower in the third quarter.
Farmers service, which we had to say it is a lumpy business decreased in the third quarter was as we anticipated.
Given these results we are pleased to affirm our guidance for the full year.
Over $260 million of core revenue.
We continue to make good progress with our work.
Robin.
Well, Jim Farmer, our no novel Nano encapsulation technology instead of over 40 patents and the targeted therapy platform designed to improve the therapeutic windows and a firm quote kinetics profile of both new and existing cancer drugs our lead.
John Kennedy <unk> seven has shown promise results for the treatment of numerous cancers, including head and neck and people are already kind of pancreatic with reduce side effects.
[noise] weekend will present additional data, including Oh uncle <unk> studies of <unk> seven.
Society for immunotherapy of cancer annual meeting on going on now in San Diego.
Well then have a poster available on our website.
From this data we are moving forward with the phase two studies in head and neck cancer.
Have some either our phase two clinical protocol to FDA and expect an initial study in the first quarter of 2024.
We are excited about reaching this next milestones for pharma and the Brean F. I D O seven to more patients in clinical sites.
I'd like to thank our employees and the shareholders for your loyalty during this past quarter. We're looking forward to close out a strong year and perhaps one of the some of the momentum what we see ahead.
I will now turn over the call to over to Brendan.
Offshore to talk about our diagnostic business reads.
Results during the quarter Brendan.
[noise]. Thank you mean, we had yet another solid quarter led by continued momentum in our precision diagnostic division core revenue for the third quarter totaled $66 million down, 2% sequentially and up 17% year over year.
Breaking it down further precision diagnostics came in at $37 $5 million, an increase of 16% sequentially and 45% year over year.
As we have mentioned in previous calls because of the nature of the contracts and awards, our pharma services business will be lumpy and.
And this was the case for the third quarter pharma services came in at $3 $7 million down, 50% sequentially and up 19% year over year.
That said, our pharma services pipeline looks strong with new partnerships coming online. In addition, our capabilities today are broader than ever before giving our clients the opportunity to work with a multidisciplinary team experienced in pathology multi omics oncology space full transcript telmex liquid biopsy single cell sequencing proteomics and <unk>.
Sure.
We are confident that the pharma services will be an integral part of our success going forward.
Our beacon carrier screening portfolio of tests continues to be a significant growth driver for precision diagnostics.
As a reminder, carrier screening assesses risk of passing on certain genetic condition to children. This test is for anyone who is currently pregnant considering pregnancy or planning to become pregnant in the future.
Our Beacon test menu now includes certain preset panels, ranging from six to 787 genes. However, we had the ability to customize panels for our clients, which is something not widely available in the market. This is proving to be an important differentiator.
Turnaround time has been stable and is now one of the fastest in the industry with a mean turnaround time of 12 days.
The focus now is to continue to gain market share in the infertility space and began initial planning for our rollout to the Ob market.
During the third quarter, we entered into a new agreement with progeny for Beacon carrier screening progeny is a leading benefits management company specializing in fertility and family building solutions. This new agreement allows us to provide reproductive genetic testing to the project <unk> member network. This is an important.
<unk> for Fulgent since many of our reproductive clients see progeny patients along with our robust managed care contracts. This new agreement puts fulgent in a strong position for coverage and reimbursement.
An area of focus for R&D during the quarter was to update our hereditary cancer panels as the field continues to generate more and more data we need to continually look at what we're offering to make sure our panels are as clinically relevant for patients and providers as possible.
In making these updates our team focused on getting well define options to providers are focused panels are now closely aligned with our latest NCC and guidelines in genes included on these panels are high to moderate risk factors for cancer as noted in the guidelines and associated with direct action ability.
The comprehensive panels are broader and include the focused genes as well as low risk genes and candidate genes that may provide information about the cause of the cancer in the family. It may not be associated with actionable guidelines at this time.
Our comprehensive offerings for hereditary cancer testing, coupled with our test menu for solid tumors and Hematological malignancies makes us an attractive choice for clinicians.
We are often asked about further M&A or strategic investment opportunities. This is an area. We spend a lot of time on consistently evaluating companies and technologies. However, we are being highly selective.
We are seeing the investments we have made in our business pay off with meaningful organic growth and continuing strengthening of our position in the market.
While there are likely opportunities for us to strengthen through M&A, we will continue to be measured in our approach.
I'll now turn the call over to our CFO, Paul Kim to walk through the detailed financials for the third quarter Paul.
Thanks, Brendan revenue in the third quarter totaled $85 million compared to $106 million in the third quarter of 2020 to approximately $19 million came from COVID-19 testing in Q3, which was not part of our guidance revenue from our core business totaled 66 million, which exceeded our guidance.
With $65 million and grew 17% year over year.
Gross margin was 47% the increase in gross margin year over year is primarily related to COVID-19.
Revenues of $19 million.
Recognize on previously billed test due to successful insurance collection on Appeals now turning to operating expenses total GAAP operating expenses were $39 6 million for the third quarter down from $40 4 million in the second quarter of 2023.
non-GAAP operating expenses totaled $29 4 million down from 30.
<unk> 4 million in the second quarter of 2023.
non-GAAP operating margin increased 27 percentage points sequentially to 15, 4%, primarily due to COVID-19 testing revenue recognized in the quarter.
We recognized a tax expense of $20 million in the third quarter as we put up a reserve.
Against our deferred tax assets due to being in a loss position we reserve for these deferred tax assets in fall.
With our performance in gross margin and operating margins in the third quarter had we used the previous statutory rate instead of booking the valuation allowance we would have further exceeded our projections.
<unk> EBITDA for the third quarter was $18 1 million compared to $19 7 million in the third quarter of 2022 on a non-GAAP basis, and excluding equity based compensation expense of intangible asset amortization loss for the quarter was 17.7.
I'm, sorry, $11 7 million.
Or <unk> 39 per share based on 30 million weighted average shares outstanding.
Turning to the balance sheet, we ended the third quarter with approximately 851 million in cash cash equivalents in marketable securities.
Cash cash equivalents and market at all.
Securities.
Increased $4 million from Q2 of which 3 million was an increase in investments.
We're active with our share repurchase program in the third quarter, we repurchased approximately 80000 shares of our common stock at an aggregate cost of $2 2 million.
At an average price of $27 65 under the stock repurchase program announced in March of 2022.
Subsequent to the end of the quarter as of October 31, we have repurchased approximately 533000 shares at an aggregated cost of $13 7 million.
As of October 31, 2023, a total of approximately $159 million remained available for future repurchases of our common stock under the stock repurchase program.
Moving onto our outlook for 2023, we're reiterating core revenue guidance of $260 million. This number does not include additional revenues from COVID-19 testing, excluding the $19 million of COVID-19 revenues.
non-GAAP gross margins improved two percentage points in Q3 to 36% and we estimate Q4 non-GAAP gross margins to remain relatively the same or slightly higher we expect that our ongoing integration efforts with our recent acquisitions will create efficiencies.
Will result in improved gross margins and operating margins in 2024.
For the full year 2023, utilizing our non-GAAP tax provision and average share count of $30 million, we maintain net non-GAAP loss of 95 per share for our shareholders, excluding stock based compensation and amortization of intangible assets as well as any one time charge.
<unk>.
Given our strong balance sheet.
And cash position and the way we've been balancing our investments we wanted to provide guidance on our expected cash position at the close of the year our investments in our therapeutics business had been lower than anticipated. This year and we continue to be active with our share repurchase program. Our core business is performing well.
<unk>.
And we have some welcome through unexpected COVID-19 testing revenues as such excluding any.
Stock repurchases since Q3 or other expenditures outside the ordinary course, we expect to end the year with approximately $830 million of cash cash equivalents and investments.
Overall, we have strengthened our core business bolstered our portfolio through strategic acquisitions and improved our financial performance in 2023, we're pleased with our trajectory and see good momentum ahead.
You for joining our call today, operator, you may 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 on your telephone keypad one moment, please while we poll for questions.
First question today is coming from David Westenburg from Piper Sandler Your line is now live.
Hi, Thank you for taking the question and congrats on the strong work here.
So can.
Can you talk about any.
On the Covid reimbursement payment.
I think you guys have mostly exited COVID-19 I mean or is there any.
Covid testing remaining or how should we think about that as an option from here out.
Yes, Brendan you want to take that question, yes, certainly thanks, Dave.
Theres very little ongoing COVID-19 testing that that is accurate. However, we continue to.
All claims and continue to collect on a R from when Covid testing was much higher so I think thats, what youre seeing today I think youre seeing there.
The pay off of a robust revenue cycle management team and the payoff of a company that is going to do all we can to collect on the work that we've done. So it was essentially a collections effort and proud of the team they.
They've done a good job to collect on the tests that we ran during the spike of Covid.
David.
Anything of the year at the beginning of the year, we stripped out COVID-19 from our core guidance and from an operational perspective.
And when we did that we commented at the assumptions that we made and not including that we felt was.
Conservative so these kinds of adjustments that youre seeing or.
We're pleased to report that they are on the positive side and I think the other thing that I'd point to is our overall efficiencies in the way that we're conducting our business whether it be appeals or the way that we're running the operations. So.
We're certainly are pleased with the uplift that we're getting from Covid, but we're going to continue to not have that within our guidance.
Yes no.
I appreciate the conservatism on on not having them in the guidance, but I would ask them.
Is there any potential for any one more time payment and I realize like on a go forward basis. I mean, this isn't necessarily how we all are going to value the company, but just for mechanical purposes.
Sure.
Yes, there is our collection efforts are ongoing our appeals efforts are ongoing so is there a chance we have additional collections from COVID-19 in Q4 and beyond yes, something we're counting on no, but yes, I mean, we're continuing to do work on those appeal than on those collections yes.
Alright, Great and then you mentioned.
Pharma revenue being a little bit lumpy.
Just overall and across the industry, we are seeing pharma, taking a little bit more of a conservative approach.
They're spending how confident are you in and as this is his lumps and maybe not just kind of weakening macro overall because there is.
Across the industry you are seeing some of that weakening macro.
Yes, I think we're starting with a little bit smaller number perhaps so I don't think what we're seeing is a macro environment change.
I think we have we don't.
Not yet have a large.
Base for these services is something we're building out so I think what fulgent needs to do is continue to get more clients needs to continue to get more market share and needs to continue to get out to our existing clients to sell the new services. We've launched in that division. So I think for US it's just.
Sort of a timing thing.
The pipeline does look strong.
Our onboarding, new partnerships and new client so.
I don't think we're seeing that macro shift I think for us it's just a timing.
And ultimately to have a more steady trajectory and we need to continue to fill that sales funnel need to continue to onboard new partnerships and continue to get those clients to take advantage of all the new products and services, we've launched David Brandon and I have been commenting on pharma services and the nature of that business being lumpy as.
Brendan mentioned the other thing is the sales cycle.
As longer in terms of duration, but if you kind of take a step back and look at the overall performance of pharma services.
We did approximately $10 million in 2022, and 2023, even with the Lumpiness where anticipated within our guidance to do approximately 21 $22 million. So.
Are anticipated to have over 100% increase in that business we anticipated.
The pharma services revenues to be lower in Q3 and Q4.
Anticipating when the work.
Will be serviced and recognizable in terms of revenues, but as Brendan indicated.
We are really excited about this business and our funnel is full.
Got it great.
I'll, just ask one more and let Andrew.
Some more questions.
So just.
I know youre going to begin phase two I think early next year. So I know, you're not giving 2020 for guidance, but I would be I would love to hear about maybe anticipated spend on on you know maybe some of these some of that or that project specifically if there is a major increase in.
In R&D spend associated with that as a step up thank you.
Yes, David.
A war.
The budget.
Projection still solid we are still around the $15 million.
And you annually burn rate.
So for the Phase III study is going to be the phase two study at the second line of therapy for the head and neck cancer.
Patient. So it is a company combining combination therapy wishes, we see suggests the by the experts in the field.
We'll feel the word good about our position and the market potential potential by the in terms of R&D spending the $50 million of we allocated so not only are only for the clinical trials, but all the new drugs.
Combined together, so we still expect about a $50 million annual burn rate.
Thank you so much.
Thank you. Your next question today is coming from Andrew Cooper from Raymond James Your line is now live.
Sorry, I had myself muted.
Thank you for the questions.
I guess just.
Yeah.
Wanted to maybe first ask a little bit about the.
The guidance just the sequential revenue.
The core being sort of flattish maybe down a touch on sort of what youre pointing to so maybe just a sense for how much of that might be seasonality in your minds versus.
Maybe something that that is moving a little bit more materially from quarter to quarter.
Hey, Thanks for the question Andrew No is certainly is some seasonality in it.
Especially as it relates to our anatomic pathology division.
Something we are planning on in addition, it still goes back to some of our pharma services and <unk>.
Needing to get those projects through the door get them signed out. So we can book those revenues. So that's another thing we're planning on in Q4, just seeing some additional lumpiness in the in the.
The pharma services business, but the precision diagnostics still has tremendous momentum beacon volumes are doing incredibly well our oncology business is doing well.
So we expect to see that continued momentum into the fourth quarter.
But again taken a bit of a conservative approach as it relates to some of the seasonality around AP and some of the pharma services.
Okay helpful and a couple of those are areas I wanted to hit on as well, so maybe starting with with AP.
If I have my numbers right for precision diagnostics and.
Pharma services for this quarter I think <unk> was a little bit lower than we were looking for and I think lower than you were sort of looking for at least at the start of the year. When you originally guided for that segment, so sort of what's going on there can you give us a little bit of an update.
And how we should be thinking about that business given it is a pretty pretty hefty chunk of the overall, but not been one that we've talked about much today.
Yes, certainly no it is and we're still continuing to sort of hold it by that acquisition and doing the work there to implement our technologies our procedures and the focus has been improving the operation.
And improving those margins I think we're making some good process theyre a good progress there, but perhaps taking a little bit longer than we anticipated to work through that acquisition, but things are generally trending in the right direction.
There is a pretty stable business youre right.
So the there are a little bit of a downturn that we saw it could be a little bit of seasonality into the back half of the year.
We are monitoring our accounts for profitability so.
Two a very small degree we've exited some areas, where maybe we didn't have favorable reimbursement or for whatever reason the mix wasn't on a profitable account for us. So we are looking into some account level profitability.
That may have played a small role in it but long term, we're continuing to invest in that business.
We've made some changes into the go to market strategy and sales structure. We are onboarding. Some additional salespeople in the back half of this year and early next year.
We believe we have.
An incredible product offering an AP are subspecialty trained pathologists are some of the best in the United States turnaround times are fantastic. So we do believe it's in an area we can grow.
And hopefully some of the investments we've made recently and are continuing to invest will pay off into next year.
Okay great.
That's helpful.
And then just oncology oncology I know last quarter, we talked about adding some incremental hedge starting to to build that rollout beyond the west coast, where you. Initially started so would love just an update on sort of how that's going what the reception has been maybe where you are in some of those hiring processes that I know don't don't happen overnight.
Yes, Thank you and I, certainly don't happen overnight and as you've seen we are quite selective with who we onboard into the sales team.
We have brought on two new head count.
They are not on the west coast and in different other territories. So that geographical expansion, we talked about is happening.
There is a obviously a ramp period for these new reps they don't step in selling on day, one even though they would love to.
But we brought onboard are industry veterans, they're industry expert so they do bring with them that client level expertise and market expertise. So we are enthusiastic about their potential long term to drive new sales roles in oncology and we're continuing to look for additional sales talent, so, but again, it's sort of a more of an opportunist.
Thing when we find the right people in the right territories, we don't have a ton of code open positions right now that we're just trying to fill.
So we'll continue to do that the product offering is going well I think we've done a good job with that rollout. So it's something that's a long term vision for the company and we will continue to layer on our capabilities and salespeople as we move forward.
Okay. That's helpful. And then maybe just one on <unk> as well.
Pretty big immediate step up early in the year in terms of the volumes and the share gains. There. So just would love any any commentary on sort of whether that stabilized are you continuing to take share in that IVF setting.
And then what are some of the guideposts, we should really be looking for as we think about that build out in that initial effort to to make the transition into the obgyn setting as well.
Well as we've discussed before I mean, there was massive disruption in that space right. So clients.
Were left without a provider on short notice so those clients had to find a new lab relatively quickly so.
It was certainly hectic there for a while for the clients as well as for folding in other laboratories, but most of that business had to find a new home and it did and like as you said fulgent benefited tremendously from that I think what we're seeing now is some of those clients were a bit rushed in their decision making process.
And perhaps not entirely pleased with some of the laboratories, they've chosen for a variety of reasons, whether its panel content turnaround time.
Customer service and so now what we're seeing is.
Clients have had time to digest everything.
<unk> now seen unfolds. It may have been a better choice. So while the like you said a mad dash kind of happened now it's more of a grind to find the clients.
We're full as it can be a better service provider than than what they're currently getting in terms of the Ob space. It's something we have it's a bright spot in our radar. It's a huge tam, it's a big opportunity for us.
We've commented historically that often in IPD and carrier screening a couple together.
That is true, but I think what we're seeing right now with the dynamics in carrier screening I do believe that there is a subset of that market that would be willing to separate the two I think with our turnaround time, which is again right now around 12 days were signing some of these out as fast as nine days I think the Ob and the infertility.
Clinics appreciate that turnaround time, our ability to customize these panels from anywhere between a handful of genes all the way up to almost 800. So I think we've done a phenomenal job going to market with beacon.
And even in lieu within <unk> I think we can get the attention of some of these ob doctors with beacon.
And Andrew the numbers, if I back that out meaning that earlier, Brandon talked about some of our assumptions and anatomic pathology and that being relatively muted, but if you take a look at.
The performance that we had in precision diagnostics, which is the most lucrative part of the market.
And that's the area that we believe that we shine in terms of our capabilities and services in Q1, the revenues for precision diagnostics. It was a little under $29 million in Q2, it was between 32% and $33 million and in this quarter, it's between 37% and 38.
So.
In terms of the growth rate and the acceleration and the performance that we've been having in this particular sector within a very short timeframe, it's been really impactful on the company.
No that's helpful and certainly appreciate that.
Gross profile there maybe just one more for me kind of higher level.
When we think about the FDA LDC regulations, I think we'll see whether they go in and how theyre written or not but.
How do you think about that and what that means to you. Some of the pacing that you make obviously the turnaround time piece isn't affected but that ability to customize under sort of a tweak.
Or really overhauled LDC regime, how do we think about what that might mean and sort of what's the plan to the degree that this does go in as written.
Because those customization, presumably become at least more difficult. So just would love kind of your thoughts on what the regulation in general and into how that specifically plays in for Fulgent and the strategy you guys take especially with Beacon.
I mean, it's a good question and we're monitoring it as closely as every other lab out there right I mean, there's no.
<unk> been exercising jurisdictional discretion for for many years.
Have leaned on LTE, Ts with cap and CLIA validation so.
Something like 22000 genetic tests on the Fulgent test menu, we're not sure how the FDA will approach regulating 'twenty 2000 test per lab for example.
We think they are going to target some of the higher risk genetic testing some of the higher volume genetic testing, but it's hard to say it's hard to predict.
However, it shakes out we'll be prepared right. We have the subject matter expertise we have the operational expertise. So it's something we're watching and waiting I think it is a.
Quite a difficult task.
To step in and try to do this after all these years and all of these genetic testing.
But again it's.
What we will watch it we will monitor it and we will respond accordingly with the expertise we have here in that area.
Larry.
Some additional feedback on the FDA, yes, our quality systems are in place and.
A very.
Professional so whatever the FDA throws at US we feel that we can respond in a timely fashion.
I agreed.
Andrew It sounds like you have some connectivity issues.
I, just said I would I would stop there hopefully you can hear me okay. I apologize, yes, we can thank you Andrew.
Thank you we've reached end of our question and answer session and ladies and gentlemen 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.