Q1 2024 Fulgent Genetics Inc Earnings Call
Operator: Greetings and welcome to the Fulgent Genetics first quarter 2024 conference call and webcast. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Melanie Solomon, and best wishes for Fulgent Genetics. Thank you. You may begin.
Greetings and welcome to the full didn't genetics first quarter 2024 conference call and webcast. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
I'd now like to turn the conference over to your host Melanie Solomon Investor Relations for full joint genetics. Thank you you may begin.
Melanie Solomon: Good morning, and welcome to the soldier in first quarter 2024 financial results Conference call.
Melanie Solomon: Good morning, and welcome to the Fulgent First Quarter 2024 Financial Results Conference Call. On the call are Ming Hsieh, Chief Executive Officer; Paul Kim, Chief Financial Officer; and Brandon Perthuis, Chief Commercial Officer.
Melanie Solomon: The company's press release discussing the financial results is available on the Investor Relations section of the company's website, www.fulgentgenetics.com. A replay of this call will be available shortly after the call concludes on the Investor Relations section of the company's website. Management's prepared remarks and answers to your questions on today's call will contain forward-looking statements. These forward-looking statements represent management's estimates based on current views and assumptions, which may prove to be incorrect.
Melanie Solomon: On the call are named Shea, Chief Executive Officer, Paul Kim Chief Financial Officer, and Brandon <unk>, Chief Commercial officer.
Melanie Solomon: The company's press release discussing our financial results is available on the Investor Relations section of the company's website Www Dot Fulgent genetics dotcom.
Replay of this call will be available shortly after the call concludes the Investor Relations section of the company's website.
Melanie Solomon: As a result, matters discussed in any forward-looking statement are subject to risks, uncertainties, and changes in circumstances that may cause actual results to differ from those described in the forward-looking statement. 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 from what is described and or implied by these forward-looking statements.
Melanie Solomon: 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.
Melanie Solomon: Forward looking statements.
Melanie Solomon: 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.
Melanie Solomon: These statements.
Melanie Solomon: 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 the forward-looking statements contained in the company's filings with the Securities and Exchange Commission, including the previously filed 10-K for the year ended December 31, 2023, and subsequently filed reports, which are available on the company's Investor Relations website. [inaudible] 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.
Melanie Solomon: Please review the more detailed discussions related to these forward looking statements, including the discussions with some of the risk factors that may cause results to differ from those described in the forward looking statements contained in the company's filings with the Securities and Exchange Commission, including the previously filed 10-K for the year ended December 31 2023.
Melanie Solomon: You can really files reports, which are available on the company's investor Relations website.
Melanie Solomon: Management's prepared remarks.
Melanie Solomon: 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 prepared these non-GAAP financial measures because it believes they may be useful to investors for various reasons.
Melanie Solomon: Management has prepared these non-GAAP financial measures because it believes they may be useful to investors for various reasons, but these measures 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 2024 for more information, including a description of how the company calculates non-GAAP income or loss, earnings or loss per share, non-GAAP operating margin, and adjusted EBITDA, and a reconciliation of these financial measures to income or loss, earnings or loss per share, and operating margin, the most directly comparable GAAP financial measures. With that said, I'd now like to turn the call over to Ming.
Melanie Solomon: These measures should not be viewed as a substitute for or superior to the company's financial results prepared in accordance with GAAP.
Melanie Solomon: Please see the company's press release discussing its financial results for the first quarter 2024 for more information, including the description of how the company calculates non-GAAP income or loss earnings or loss per share non-GAAP operating margin and adjusted EBITDA and a reconciliation of these financial measures to income or loss earnings or loss per share and operating margin.
Melanie Solomon: Directly comparable GAAP financial measures with that I'd now like to turn the call over to Nick.
Nick: Thank you Melanie and good morning, and thank you for joining our call today.
Ming Hsieh: Thank you, Melanie. Good morning, and thank you for joining our call today. I will start with some comments on the first quarter and our therapeutic development business. Then Brandon will review our product go-to-market update for our laboratory service business in the first quarter. Paul will conclude with the financials and outlook before we take your questions.
Nick: I will start with some comments on the first quarter and our therapeutic development business than Brendan.
Nick: We will review our product go to market.
Nick: For our laboratory service business in the first quarter.
Nick: Paul will conclude with the financials and outlook before we take your.
Your question.
Nick: We are pleased with our results in the first quarter with $64 5 million in total revenue, we recognized $1 $3 million over revenue.
Ming Hsieh: We are pleased with our results in the first quarter. With $64.5 million in total revenue, we recognize $1.3 million of revenue on previously billed COVID-19 tests. Excluding COVID-19 revenue, first quarter core revenue of $63.2 million was driven by momentum in precision diagnostics, particularly reproductive health and oncology. All Fulgent revenue at this time originated from our laboratory services business, previously referred to as our clinical diagnosis business. Brandon will discuss this business
Nick: Previously build a COVID-19 test.
Excluding COVID-19 revenue first quarter of core revenue of $63.2 million was driven by momentum in precision diagnostics.
Nick: Particular reproductive health and oncology.
Nick: Oh forging revenue at this time.
Nick: Reaching into from our laboratory services business previously referred to as our clinical diagnosis business.
Nick: Brandon will discuss this business further.
Ming Hsieh: Turning to our therapeutic development business, we continue to make good progress with Fulgent Pharma. Our novel nano-encapsulation technology includes over 30 issued or active patents and active patent applications, and a targeted therapy platform designed to improve the therapeutic windows and pharmacokinetic profile of both new and existing cancer drugs. We are excited about this platform because of its potential to yield several drug candidates. We believe that our lead drug candidate, FID-07, has shown promising results in clinical trials today for the treatment of numerous cancers including head, neck, ampullary, and pancreatic.
Nick: Turning to our therapeutic and people out of the business. We continue to make good progress with the <unk> pharma our normal NIM will encapsulation technology includes the over 30 issued.
Nick: Active patents and patent applications.
Brandon: And the target the therapy platform designed to improve therapeutic windows and the Pharmacodynamic kinetics profile of both.
Brandon: New and existing cancer drugs, we are excited.
Brandon: Bob this platform because of its potential to yield several drug candidates.
Brandon: We believe with our lead drug can be Oh, seven has shown promising results in clinical trials today for treatment of numerous Kansas.
Brandon: Kansas include head and neck ambulatory and pancreatic.
Ming Hsieh: An abstract of preliminary HNSCC clinical results from our Phase 1.1b study has been accepted for presentation at the 2024 ESCO Annual Meeting, which will be held from May 31st through June 4th in Chicago. Our phase two clinical protocol for second-line treatment of HNSCC was accepted by the FDA, and we expect to enroll the first patient this quarter. We look to bring FID-07 to more patients in a clinical trial setting and keep you updated on the progress of the trial.
Brandon: Abstract of a preliminary.
Brandon: So you see clinical results from our phase one <unk> study has shown.
Brandon: Excited with.
Brandon: For a presentation at a 2020 for ESCO annual meeting, which will be held.
Brandon: May 31 through June four in Chicago.
Brandon: Our phase III clinical protocol for a second line treatment.
Brandon: In SCC was accepted by the FDA and then we expect to enroll first patient this quarter.
We'll look to bring <unk> to more patients in the clinical trial setting and keeping you updated on the progress of the trial.
Brandon: We are advancing a second drug can be.
Ming Hsieh: We are advancing our second drug candidate, FIDO2, a nano-encapsulated SN38, tarot, and IND, or investigational new drug application by end of this year. We believe our nano-drug delivery platform has the potential to address the challenges of currently available treatment for the colon, bile duct, and other cancers using SN38 instead, building up our nano particle technology. We are also developing next generation antibody drug conjugate ADC technology platform that could potentially provide even broader killing toward heterogeneous cancer cells than those ADCs with a bystander killing effect. Our ADC platform is not target-driven and may be potentially applied to more targeted ADCs, particularly new targets with low antigen expression, where existing ADC platforms have failed to show any effect.
Brandon: <unk> nano encapsulates the Sn 38 Corrado.
Brandon: Our investigational new drug application by the end of this year, we believe our nano drug delivery platform has the potential to address the challenges of currently available treatments for the colon.
Brandon: In other cancers, using Sn 38, instead of a pro drug of Sn 38.
Brandon: Building off of our nano.
Brandon: Article Technology. We are also developing next generation antibody drug conjugate.
Brandon: ADC technology platform that could potentially provide the even broader kidding toward heterogeneous cancer cells than those adcs with.
Brandon: Bystander, killing effect.
Brandon: Our ADC platform is now targeting driven and maybe potentially being applied to more targeted the adcs particular, new targets with low inflation.
Brandon: <unk>.
Brandon: Existing ADC platform have failed to show the effects.
Ming Hsieh: Overall, we have a strong strategy with both the laboratory service business and the therapeutic development business. We continue to maintain a strong balance sheet, which will enable us to execute this strategy. I'd like to thank our employees, partners, and stakeholders for your hard work and loyalty. We'll look forward to continued progress in 2024. I will now turn the call over to Brandon Perthuis, our Chief Commercial Officer, to talk about our laboratory service business results during the first quarter. Brandon?
Overall, we have a strong strategies with both laboratory service business and the therapeutic development business. We continue maintain a strong balance sheet with which we will execute this strategy.
Speaker Change: I'd like to thank our employees partners.
Speaker Change: Holders for your hard work and loyalty will look forward to continued progress in 2024.
Speaker Change: I'll now turn it over to coal tool brand and <unk>, our chief commercial officer to talk about our laboratory service business results during the first quarter Brendan.
Brandon Perthuis: Our laboratory services business includes precision diagnostics, anatomic pathology, and biopharma services. These three represent our core revenue streams and do not include COVID-19 testing revenue. First quarter core revenue was up approximately $500,000 year over year, however down about $3.3 million sequentially.
Brendan: Thank you mean.
Brandon Perthuis: The sequential decline was attributed to timing of biopharma service contracts and a decline in our anatomic pathology revenue. However, looking at our precision diagnostics revenue stream, precision diagnostics was up $9.5 million or 34% year over year and increased $2 million or 6% sequentially. Growth and precision diagnostics were led by Reproductive Health and Oncology. We saw volumes continue to trend up late in the first quarter, and we exited the quarter with great momentum. We believe this momentum will carry into the second quarter.
Brendan: Our laboratory services business includes precision diagnostics anatomic pathology in Biopharma services.
Brendan: These three represent our core revenue streams and do not include COVID-19 testing revenue.
Brendan: First quarter core revenue was up approximately $500000 year over year, however, down about $3 $3 million sequentially. The sequential decline was attributed to timing of Biopharma service contracts and a decline in our anatomic pathology revenue however, looking at our precision diagnostics.
Brendan: Canoe stream precision diagnostics was up $9 $5 million or 34% year over year and increased $2 million or 6% sequentially.
Brendan: The growth in precision diagnostics was led by reproductive health and oncology.
Brendan: We saw volumes continue to trend up late in the first quarter and we exited the quarter with great momentum. We believe this momentum will carry into the second quarter. Thus, we expect approximately 10% sequential core revenue growth for the second quarter.
Brandon Perthuis: Thus, we expect approximately 10% sequential core revenue growth for the second quarter. In terms of reproductive health, outperformance was driven by our Beacon Expanded Carrier Screening product. We continue to execute on the operational front, delivering excellent turnaround time, clinical support, and comprehensive gene content, leading to increased detection rates. We also continue to execute on the commercial front, winning new accounts and working with our B2B partners to win new accounts. We have a robust pipeline for beacon opportunities, and thus, we are predicting continued growth in this area.
Brendan: In terms of reproductive health the outperformance was driven by our <unk> expanded carrier screening product, we continue to execute on the operational front delivering excellent turnaround time clinical support and comprehensive gene content, leading to increased detection rates.
Brendan: We also continue to execute on the commercial front, winning new accounts and working with our <unk> partners to win new accounts.
Brendan: We have a robust pipeline for beacon opportunities. Thus, we are predicting continued growth in this area.
Brendan: Our beacon volume has mostly been limited to IVF clinics due to carrier screening often being coupled with noninvasive prenatal testing or in ICT at the obgyn level. However for the first time, we are launching a new <unk> test this will allow us to shift gears and focus more on the obgyn market.
Brandon Perthuis: Our beacon volume has mostly been limited to IVF clinics due to carrier screening often being coupled with non-invasive prenatal testing, or NIPT, at the OBGYN level. However, for the first time, we are launching a new NIPT test. This will allow us to shift gears and focus more on the OBGYN market. This will include hiring a new sales team with OBGYN experience currently in progress. Our new NIPT test, which we marketed as NOVA, spelled K-N-O-V-A, is a unique, first-of-its-kind approach.
Brendan: This will include hiring a new sales team with obgyn experience currently in progress, our new <unk> test, which we marketed as Nova spelled K N O. VA is a unique first of its kind approach Novo will include any 40 screening deletion duplication screening and <unk>.
Brandon Perthuis: NOVA will include aneuploidy screening, deletion-duplication screening, and de novo point mutations, all on one maternal blood sample. While there are tests on the market today that include aneuploidy screening and deletion duplication analysis, and other tests that look for de novo point mutations, there has not been one lab to offer both, and more importantly, not one test to combine all three into one. This will streamline the process for physicians, allowing them to use one lab for their NIPT needs. We expect NOVA volume to start slowly as we onboard early adopters and our key opinion leaders.
Brendan: Novo point mutations all on one maternal blood sample.
While there are test on the market today that include Aneuploidy screening and deletion duplication analysis and other tests that look for de Novo point mutations there has not been one lab to offer both and more importantly, not one test to combine all three into one.
Brendan: This will streamline the process for physicians, allowing them to use one lab for their <unk> needs.
Brendan: <unk>, we expect novo volume to start slowly as we onboard early adopters and our key opinion leaders.
Brendan: Moving to our oncology services as you May recall, we had two oncology laboratories, one based in Alpharetta, Georgia and one based in Phoenix, Arizona, Both laboratory offer comprehensive heme and solid tumor testing laboratory in Alpharetta caters to a clientele, while the Phoenix laboratory caters to an oncologist clientele.
Brandon Perthuis: Moving to our oncology services. As you may recall, we have two oncology laboratories, one based in Alpharetta, Georgia, and one based in Phoenix, Arizona. Both laboratories offer comprehensive heme and solid tumor testing. The laboratory in Alpharetta caters to a pathologist clientele, while the Phoenix laboratory caters to an oncologist clientele, enabling us to specifically tailor our reports to the relevant client base. Both provide full-service expert hematopathology diagnosis, cytogenetics, flow cytometry, immunohistochemistry, fish, and molecular biology.
Brandon Perthuis: The Alpharetta Lab, in particular, provides solid tumor consultation services to pathologists along with prognostic immunohistochemical and FISH testing, including tech-only services, while the Phoenix Solid Tumor Service concentrates on providing prognostic immunohistochemical and FISH testing to oncologists. NGS is available to both pathologists and oncologists and is performed centrally in our El Monte laboratory. This includes separate state-of-the-art NGS assays for solid tumors, including liquid biopsy and hematological neoplasms, as well as offering germline testing.
Brendan: <unk>, enabling us to specifically tailor our reports to the relevant client base.
Brendan: Both provide full service expert medical apology diagnosis, cytogenetics and flow cytometry, immunohistochemistry fish and molecular.
Brendan: The Alfa Reta lab in particular, it provides solid tumor consultation services to pathologists, along with prognostic immunohistochemistry fish testing, including Tech only services, while the Phoenix operation.
Brendan: The Phoenix solid tumor service concentrate on providing prognostic immunohistochemistry.
He is the chemical and fish testing to oncologists.
Brendan: NCS has available to both pathology and oncologist and has performed centrally and our El Monte Laboratory.
Brendan: This includes separate state of the art Mgs assay for solid tumor, including liquid biopsy and Hematological neoplasms, as well as offering germline testing.
Brandon Perthuis: We believe that our heme assay is extremely comprehensive and is exclusively devoted to hematologic neoplasms, unlike other providers which usually offer a heme assay either combined with solid tumor or something else like soft tissue. Clients choose Fulgent based on two main points: turnaround time and rate of insufficient specimens. We not only promise a turnaround time of less than 10 business days for our somatic cancer assays, but we actually deliver on that in 96% of cases.
Brendan: We believe that our heme assay is extremely comprehensive and is exclusively devoted to hematologic neoplasms. Unlike other providers, which usually offer a heme assay either combined with solid tumor or something else like soft tissue.
Brendan: Clients use 48 based on two main points turnaround time and range of insufficient specimens, we not only promised a turnaround time of less than 10 business days for our somatic cancer assays, we actually deliver on that 96% of cases.
Brandon Perthuis: And due to our expertise in nucleic acid extraction, our insufficient rates have been lower than what is generally seen in the industry with an overall QNS rate of 8.5% and a 4.5% QNS rate specifically for lungs. For Heme, our Q&S rate sits at.6%.
Brendan: And due to our expertise and nucleic acid extraction are insufficient rates have been lower than what is generally seen in the industry with an overall <unk> rate of eight 5% and four 5% Q&A right specifically for lung for heme, our Q&A rate sits at <unk>, 6%.
Brendan: Our Alfa reta locations growing nicely transitioning from an excellent regional lab. It was before forging acquired it and growing into a more national footprint with an expanded sales force and the oncology lab, which started as a regional laboratory with a focus in southern California has now expanded into multiple regions in the country as we have grown in sales team.
Brandon Perthuis: Our Alpharetta location is growing nicely, transitioning from the excellent regional lab it was before Fulgent acquired it and growing into a more national footprint with an expanded sales footprint. And the Oncology Lab, which started as a regional lab with a focus in Southern California, has now expanded into multiple regions in the country as we have grown its sales team. Turning to anatomic pathology, while this revenue stream has seen some headwinds, we are beginning to see the new sales team and structure pay off.
Brendan: Turning to anatomic pathology, while this revenue stream has seen some headwinds we are beginning to see the new sales team structure payoff. We are continuing to gradually layer on additional sales team members and expect to see this business stabilize in 2024.
Brandon Perthuis: We are continuing to gradually layer on additional sales team members and expect to see this business stabilize in 2024. In addition, we have been diligently working on improving operational efficiency. We recently purchased a new building just outside of Irving, Texas, where we will be able to consolidate our existing Texas operation and our New York operation.
Brendan: In addition, we have been diligently working on improving operational efficiency. We have recently purchased a new buildings just outside of Irving, Texas, where we where we will be able to consolidate our existing Texas operation and our New York Operation. In addition, we continue to invest in digital technology for slide imaging and AI. So we.
Brandon Perthuis: In addition, we continue to invest in digital technology for slide imaging and AI to improve both the efficiency and the quality of our operations. Finally, in terms of our biopharma services revenue stream, we are tracking on plan for 2024, and we continue to believe this revenue stream will perform well over time. With our expanded product offering, the focus is to build a deeper opportunity funnel to help smooth out the lumpiness in this business.
Brendan: Improve both efficiency and quality of our operation.
Brendan: Finally in terms of our Biopharma services revenue stream, we are tracking on plan for 2024, and we continue to believe this revenue stream will perform well over time with our expanded product offerings. The focus is to build a deeper opportunity funnel to help smooth out the lumpiness in this business to that end, we're continuing to look at expanding.
Brandon Perthuis: To that end, we are continuing to look at expanding on existing biopharma relationships and forging new ones. We have recently expanded the biopharma sales team to a small degree, and we continue to build on a robust product offering that we believe biopharma clients value, allowing us to address a large market for these types of studies. We are encouraged by the momentum in the business, and we look forward to updating our investors on our progress throughout 2024. I'll now turn the call over to Paul Kim, our CFO. Paul.
Brendan: On existing biopharma relationships and forging new ones.
Brendan: We have recently expanded the biopharma sales team to a small degree and we continue to build on a robust product offering that we believe biopharma clients value, allowing us to address a large market for these types of studies.
Brendan: We are encouraged by the momentum in the business and we look forward to updating our investors on our progress throughout 2024, I will now turn the call over to Paul Kim Our CFO Paul.
Paul Kim: Revenue in the first quarter of 2024 totaled $64.5 million, compared to $66.2 million in the first quarter of 2023. $1.3 million came from COVID-19 testing in Q1, which was not part of our guidance. Revenue from our core business totaled $63.2 million. Gross margin was 34.3%. The increase in gross margin year over year is primarily related to a decrease in overall compensation expense as we optimize our cost structure.
Paul Kim: Revenue in the first quarter of 2024 totaled $64 5 million compared to $66 2 million in the first quarter of 2020 313 million came from COVID-19 testing in Q1, which was not part of our guidance.
Paul Kim: Revenue from our core business totaled $63 2 million gross margin was 34, 3% the increase in gross margin year over year is primarily related to a decrease in overall compensation expense as we optimize our cost structure total.
Paul Kim: Total GAAP operating expenses were $43.9 million for the first quarter, decreased from $176.4 million in the fourth quarter of 2023, primarily related to the one-time non-cash goodwill impairment charge incurred in the fourth quarter. Non-GAAP operating expenses totaled $32.4 million, decreased from $45.1 million in the fourth quarter of 2023. Non-GAAP operating margin increased approximately 12 percentage points sequentially to minus 12.9 percent, primarily due to lower bad debt reserve and legal fees.
Paul Kim: Total GAAP operating expenses were $43 9 million for the first quarter to decrease from 176 4 million in the fourth quarter of 2023, primarily related to the onetime noncash goodwill impairment charge incurred in the fourth quarter non-GAAP operating expenses totaled $32.
Paul Kim: 4 million decreased from $45 1 million in the fourth quarter of 2023 non-GAAP.
Paul Kim: Operating margin increased approximately 12 percentage points sequentially to a minus 12, 9%, primarily due to lower bad debt reserve and legal fees.
Paul Kim: Adjusted EBITDA loss for the first quarter was $3.2 million, compared to a loss of $7.2 million in the first quarter of 2023. On a non-GAAP basis and excluding equity-based compensation expense and intangible asset amortization, the loss for the quarter was $269,000, or one cent per share, based on 30 million weighted average shares outstanding.
Paul Kim: Adjusted EBITDA loss for the first quarter was $3 2 million compared to a loss of $7 2 million in the first quarter of 2023 on a non-GAAP basis, and excluding equity based compensation expense and intangible asset amortization loss for the quarter was $269000 or <unk> <unk> per share.
Paul Kim: Based on 30 million weighted average shares outstanding turning to the balance sheet. We ended the first quarter with approximately $846 $2 million in cash cash equivalents in marketable securities.
Paul Kim: Turning to the balance sheet, we ended the first quarter with approximately $846.2 million in cash, cash equivalent to marketable securities. We are reiterating our outlook for 2024 provided in February. With minimal revenue from COVID-19 testing expected, we're guiding to core revenue, which is total laboratory services revenue for the company without COVID-19 testing revenue. We continue to expect total core revenues to be approximately $280 million in 2024, representing core growth of 7% year over year.
We are reiterating our outlook for 2024 provided in February with minimal revenue from COVID-19 testing expected, we're guiding to core revenue, which is total laboratory services revenue for the company without COVID-19 testing revenue. We continue to expect total core revenues to be approximately 200.
Paul Kim: $80 million for 2024, representing core growth of 7% year over year, There's no revenues from our therapeutics development business anticipated in our 2020 for guidance.
Paul Kim: There are no revenues from our therapeutics development business anticipated in our 2024 guidance. Turning to expected margins for 2024, excluding COVID-19 revenue and stock-based compensation, we expect non-gap gross margins to continue to improve as the efficiencies of our integration efforts take effect, increasing from the mid-30 percent range we saw in Q1 to our target of 40 percent or slightly above 40 percent by end of year. We expect to see slightly lower non-gap operating margins in the quarters ahead as we further invest resources to grow our business, with operating margins approximately minus 18 percent for the year.
Turning to expected margins for 2024, excluding COVID-19 revenue and stock based compensation, we expect non-GAAP gross margins to continue to improve as the efficiencies of our integration efforts take effect.
Paul Kim: <unk> from the mid 30% range, we saw in Q1 to our target of 40% or slightly above 40% by end of year, we expect to see slightly lower non-GAAP operating margins in the quarters ahead as we further invest resources to grow our business with operating.
Paul Kim: <unk> approximately at minus 18% for the year, we remain focused on managing our spend and continue to believe that our foundational technology platform supports a strong <unk>.
Paul Kim: We remain focused on managing our spend and continue to believe that our foundational technology platform supports a strong Margin Profile. Longer term, we expect associated cash burn for our therapeutics development business of approximately $15-17 million this year, which is contemplated in our EPS and cash guidance. Utilizing a non-GAAP tax provision, an average share count of 31 million, we reiterate our full... Full year 2024, a net non-GAAP loss of approximately $1.05 per share for shareholders, excluding stock-based compensation and amortization of intangible assets, as well as any one-time charges, the position will remain strong, excluding any stock repurchases or other expenditures outside of ordinary course.
Margin profile longer term.
Paul Kim: We expect the associated cash burn for our therapeutics development business of approximately $15 million to $17 million. This year, which is contemplated in our EPS and cash guidance utilizing our non-GAAP tax provision and average share count of $31 million, we reiterate our fall.
Paul Kim: Full year 2024, net non-GAAP loss of approximately $1 <unk> five per share for our shareholders, excluding stock based compensation and amortization of intangible assets as well as any one time charges.
Paul Kim: Moving onto cash cash.
Paul Kim: Possession remains strong excluding any stock repurchases or other expenditures outside of ordinary course, we would anticipate ending 2020 for cash with approximately $800 million.
Paul Kim: We would anticipate ending 2024 with approximately $800 million in cash, cash equivalents, and investments, and marketable securities. Overall, we see strength in our core business, which has grown organically through our strategic acquisitions, and we see good momentum ahead. Thank you for joining the call today, Operator. Now you may open it up for questions.
Paul Kim: Cash cash equivalents and investments and marketable securities overall, we see strength in our core business, which has grown organically through our strategic acquisitions and see good momentum ahead.
Speaker Change: Thank you for joining the call today, operator, you may open it up for questions.
Operator: Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Dan Leonard with UBS. Please proceed with your question.
Speaker Change: Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue you.
Speaker Change: You May press star two if you'd like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Speaker Change: Our first question comes from the line of Dan Leonard with UBS. Please proceed with your question.
Daniel Louis Leonard: Great. Good morning, and thanks for the time. My first question, perhaps for you, Brandon, is, you know, what gives you comfort on the revenue ramp required to hit that $280 million sales target for the year? And I think you gave a second quarter target of 10% sequential growth, but it wasn't clear to me if that was just precision diagnostics or if that was the entire lab services business.
Daniel Louis Leonard: Great Good morning, and thanks for the time.
Daniel Louis Leonard: My first question, perhaps for you Brandon.
Daniel Louis Leonard: What gives you comfort on the revenue ramp required to hit that $280 million sales target for the year and I think you gave second quarter target that 10% sequential growth, but it wasn't clear to me if that was just precision diagnostics or if that was the entire lab services business.
Brandon Perthuis: Thanks for the question, Dan. That would be for the entire lab services business. So what's giving us confidence in the guide, in the momentum? It's what we're seeing come through the front door, right?
Speaker Change: Thanks for the question, Dan that would be for the entire lab services business.
Speaker Change: What's giving us the confidence in the guide and the momentum.
Brandon Perthuis: We're winning new opportunities. We're gaining market share in reproductive health. We're gaining market share in oncology, and our anatomic pathology business is beginning to stabilize. We had contracts in place for biopharma services that were not delivered in Q1. I mentioned that timing issue. Those contracts are in place, and they will roll into Q2. So really across those revenue streams, we see that momentum, and that gives us, like I said, confidence in the annual guide, but also the double-digit growth we expect in Q2.
Daniel Louis Leonard: What we're seeing come through the front door right, we're winning we're winning new opportunities we're gaining.
Brandon Perthuis: Appreciate that. And then my follow-up question, I was hoping you could touch on the implications of those finalized lab-developed test regulations that were issued earlier in the week, the implications for Fulgent.
Daniel Louis Leonard: Market share in reproductive health, we are gaining market share in oncology, our anatomic pathology business is beginning to stabilize.
Daniel Louis Leonard: We had contracts.
Daniel Louis Leonard: In place for Biopharma services that were not delivered in Q1, I mentioned that timing issue those contracts are in place they will roll into Q2, so really across the.
Daniel Louis Leonard: And those revenue streams, we see that momentum and that.
Daniel Louis Leonard: Gives us like I said the confidence in the annual guide, but also the double digit growth we expect in Q2.
Speaker Change: I appreciate that and then my follow up question I was hoping you could touch on the implications of those finalized lab developed test regulations that were issued earlier in the week the implications for Fulgent.
Speaker Change: Yes, certainly I mean, obviously, a big development of new development, we are still digesting some of that information, but our initial read on that Dan we believe it bodes well for Fulgent.
Brandon Perthuis: Yeah, certainly. I mean, obviously, a big development, a new development. We're still digesting, you know, some of that information. But our initial read on that, Dan, we believe it bodes well for Fulgent. There appear to be some exceptions that are made for products that are already marketed that may not have to go through a full PMA process. I mean, obviously, Fulgent has a large test menu already on the market, so that seems to bode well for Fulgent.
Speaker Change: There are appears to be some exceptions that are made for products that are already marketed that may not have to go through a full PMA process. I mean, obviously <unk> has a large test menu already on the market. So.
Speaker Change: That seems to bode well for Fulgent and addition, there seems to be some exceptions for New York State approved test, which we have several of.
Brandon Perthuis: In addition, there seems to be some exceptions for, you know, New York State-approved tests, which we have several of. So our take on it is we're in a good place with what we've learned so far. Obviously, we will still be under those regulations, just perhaps there will not be a big need for PMAs. And we believe we have the quality systems, expertise, and, you know, ability to adhere to these guidelines. So, you know, it's likely to perhaps even strengthen our position in this marketplace, perhaps increasing the bar and barrier for entry for new laboratories. So we'll obviously be monitoring this very closely, and we look forward to working with the FDA closely on these new regulations.
Our read on it is we're in a good place.
Speaker Change: With what we've learned so far.
Speaker Change: Obviously, we will still be under those regulations, just perhaps not a big need for PMA.
Speaker Change: We believe we have the quality systems expertise and ability to adhere to these guidelines so.
Speaker Change: It's likely to perhaps even strengthen our position in this market place.
Speaker Change: Perhaps increasing the bar and barrier for entry for New laboratories. So, we'll obviously be monitoring this very closely and we look forward to working with the FDA closely on these new regulations.
Speaker Change: I appreciate the thoughts thanks Brandon.
Brandon Perthuis: I appreciate the thoughts. Thanks, Brandon.
Speaker Change: Thank you.
Operator: Thank you. Our next question comes from the line of David Westenberg with Piper Sandler. Please proceed with your question.
Speaker Change: Thank you. Our next question comes from the line of David question Berg with Piper Sandler. Please proceed with your question.
David Michael Westenberg: Hi, thank you. My questions are actually going to be kind of a continuation of some of Dan's questions.
Hi, Thank you.
David Michael Westenberg: I'm actually my question is actually going to be kind of a continuation of of some of Dan's question I did love the 10% growth sequentially can you maybe run us through some of the.
Brandon Perthuis: I did love the 10% growth sequentially. Can you maybe run us through some of the things that you saw in March that give you confidence? Do you think maybe January and February might have been maybe more weather-impacted, or was there a big customer win? Just kind of run us through why March might have been so much better than January and February. Thanks.
David Michael Westenberg: Things that you saw in March that give me confidence do you think maybe January and February might've been maybe more weather impacted or was there a big customer win just kind of run us through why March might've been so much better than January and February.
David Michael Westenberg: Yes.
Brandon Perthuis: Yeah, I think it's safe to say there was a big customer win, but not just one big customer win. There were multiple customer wins that happened late in the quarter. In addition, as I mentioned, there was some biopharma business that we were able to close in the quarter contractually but not deliver in the quarter. But I would say that most of our confidence is coming from that precision diagnostics momentum, which was Fulgent gaining market share late in the quarter that we believe is going to continue throughout the rest of the year.
David Michael Westenberg: I think it's safe to say there was a big customer win but not just one big customer win.
Brandon Perthuis: Gotcha. Okay.
David Michael Westenberg: Multiple customer wins that happened late in the quarter.
David Michael Westenberg: In addition, as I mentioned there were some biopharma.
David Michael Westenberg: Business that we were able to close in the quarter contractually, but not deliver in the quarter, but I would say that most of our confidence is coming from that precision diagnostics momentum.
David Michael Westenberg: Which was <unk> gaining market share late in the quarter that we believe is going to continue throughout the rest of the year.
Speaker Change: Gotcha, Okay, no and I wanted to also hit on the FDA changes do you think any of those for example, the new <unk> offering is going to go have to have to go to the FDA for a 500 10-K's and.
Brandon Perthuis: Now, and I wanted to also hit on the FDA changes. Do you think any of those, you know, for example, the new NIPT offering is going to have to go to the FDA for 510Ks? And, I mean, you do have a very big... Rare Disease Portfolio. Any thoughts on costs on getting it into compliance as we look ahead? I know maybe you're not ready to, or it still requires a look given the fact that this was all just this week ago.
Speaker Change: You do have a very big.
Speaker Change: Sure.
Speaker Change: Rare disease portfolio.
Speaker Change: Any thoughts to cost on getting into compliance as we look at the year as I know, maybe maybe youre not ready to.
Speaker Change: Or it's still requires look given the fact that this was all just this week.
Speaker Change: Yeah. Thanks for the question and Youre right. It is hot off the press, we certainly haven't been able to model what the costs could look like but again.
Brandon Perthuis: Yeah, thanks for the question. You're right. It's hot off the press.
Brandon Perthuis: We certainly haven't been able to model, you know, what the cost could look like. But again, our read on it is that tests that are currently on the market would be exempted from a PMA process, not exempted from regulation. We would still have to adhere to FDA quality standards, quality guidelines, and reporting, and we believe we have those systems in place, and we've been working on something similar for the IVDR stuff in Europe.
Our read on it is.
Speaker Change: Tests that are currently on the market would be exempted from a PMA process not exempted from regulation, we will still have to adhere to FDA quality standards and quality guidelines and reporting.
We believe we have those systems in place and we've been working on something similar for the IBD or stuff in Europe. So I think we're in a good place to adhere to those guidelines and.
Brandon Perthuis: So I think we're in a good place to adhere to those guidelines, and certainly there's no disruption to our product offering. We can continue to offer these products. So we'll see how that PMA exemption continues to play out for products that are already on the market, but, you know, again, we think that's a big part of this that bodes well for Fulgent, considering the amount of products we currently offer.
Speaker Change: Certainly there is no disruption to our product offering we can continue to offer these products. So we will see how that PMA exemption continues to play out for products that are already on the market but.
Speaker Change: Again, we think that's a big part of this that bodes well for Fulgent and considering the amount of products. We currently offer.
Brandon Perthuis: Okay, great. And then I'll ask an actual original question here. So just in terms of the go-to-market strategy with the OBGYN community, what's the investment going to look like? Are you going to target maybe submarkets first, then expand like you would with anything when you talk about things like Fulgent Oncology, or are you just going to go maybe high-level system wins? I'm just trying to think about the pacing of SG&A over the course of the next couple years as you add that call point on. So that's really what I'm targeting there. Thank you. Yeah, thanks for the question. I think what we're currently doing.
Okay, Great and then I'll ask an actual original question here I haven't said it just didnt meet in terms of the go to market strategy with the <unk>.
Speaker Change: With the OBJ Obgyn community.
How is that I mean, what's the investment going to look like are you going to target maybe submarkets first and then expand like you would with anything when you talked about like full Gen oncology or are you just going to go maybe maybe high level system wins I'm, just trying to think about the pacing of of SG&A over the course of the next couple of years as you add that.
Speaker Change: Call point on so that's really what I'm targeting there. Thank you.
Brandon Perthuis: Yeah, thanks for the question. I think what we're currently planning right now is ramping up to a net new sales headcount of around 20 people by the end of 2024. Again, this is a novel NIPT product. It's not lost on us that we're late to this market and late to this game. But we've talked about this for a while, that we were interested in this market, but we did not want to launch another similar product that was already on the market.
Speaker Change: Yes. Thanks for the question I think what we're currently planning right now is ramping to a new net new sales head count of around 20 people by the end of 2024.
Again this is a novel and IPC products is not lost on us that we're late to this market in late to this game, but.
Speaker Change: We've talked about this for a while that we were interested in this market, but we did not want to launch a another similar product that was on the market. So I think we were able to develop this product via differentiated product, we do expect volume to start slowly.
Brandon Perthuis: So I think we were able to develop this product and make it a differentiated product. We do expect volume to start slowly. We will be offering this novel product, so there will be some education involved in why this product is different and how this product leads to additional diagnostic yields. And we'll be able to detect a significant number of conditions that are currently being missed by products on the market. So my long answer to your question is that we will build this sales team gradually throughout the year.
Speaker Change: We will be offering this novel products. So there will be some some education involved and why.
Why this product is different in and how this product leads to additional diagnostic yields and we'll be able to detect a significant number of conditions that are currently being mis byproducts on the market.
Long answer to your question of.
Speaker Change: We will build the sales team gradually throughout the year.
Brandon Perthuis: In terms of a regional approach, we believe, you know, there's no particular reason to focus on certain regions other than, you know, just based on population density and, you know, where pregnancies are happening. But other than population density, I don't see any reason that we have to focus on certain regions or states. So, I would consider this a national rollout, but again, starting slowly throughout the year.
In terms of the Regionalisation approach.
Operator: Thank you. Our final question comes from the line of Andrew Cooper with Raymond James. Please proceed with your question.
Speaker Change: We believe there is no no particular reason to focus.
Speaker Change: In certain regions other than just based on population density and where we're pregnancies are happening rather than population density.
Speaker Change: I don't see any reason that we have to focus on certain regions or states. So I would consider this a national rollout, but again starting slowly throughout the year.
Speaker Change: Thank you guys.
Thank you.
Thank you.
Speaker Change: Final question comes from the line of Andrew Cooper with Raymond James. Please proceed with your question.
Andrew Harris Cooper: Hey guys, thanks for the time. Maybe just first, kind of following up on the OB-GYN launch, just to make sure we understand the guide, you know, nice beat on the bottom line in one cue, but some step down in the margins from here. Is part of that in terms of reiterating the guidance, layering in incremental costs from this NOVA, you know, ramp and build out, or is that already contemplated in the prior guide? Yeah.
Andrew Harris Cooper: Hey, guys. Thanks for the time, maybe just first.
Andrew Harris Cooper: Following up on the Obgyn launch.
Andrew Harris Cooper: Just to make sure we understand the guide nice beat on the bottom line in <unk>.
But some step down in margins from here.
Andrew Harris Cooper: As part of that in terms of reiterating the guidance layers.
Andrew Harris Cooper: <unk> incremental costs from this nova ramp and build out or was that already contemplated in the prior guide.
Paul Kim: Thank you for that question. The operating expense structure that we have experienced, including the first quarter, we've had benefits from, particularly collection and lower fees from an operating expense perspective. If you take a look at our operating expenses in Q2, Q3, and Q4, those should be more normalized, which is consistent with the original guide that we had. So, excluding stock-based compensation, we anticipate operating expenses to be approximately $43 million in each one of the quarters of Q2, Q3, and Q4. But I think the real highlight of what we wanted to point out was, one, the elevated revenues and the expansion of the business that Brandon indicated.
Andrew Harris Cooper: Yeah.
Speaker Change: You for that question.
Speaker Change: B.
Speaker Change: The operating expense structure that we have experienced including the first quarter we've had benefits.
Speaker Change: From particularly like collection.
Speaker Change: Lower.
Speaker Change: Fees from an operating expense perspective, if you take a look at our operating expenses in Q2, Q3, and Q4 that should be more normalized.
Speaker Change: Which is consistent with the original guide that we had so excluding stock based compensation, we anticipate the operating expenses to be approximately $43 million and each one of our quarters are Q2, Q3, and Q4, but I think the real highlight of what we wanted to point out was one.
But the elevated revenues and the expansion of the business that Brandon indicated so what we're indicating for the second quarter as core revenues to be approximately or in excess of about $70 million that already puts us at 200 $280 million annual core revenue.
Paul Kim: So what we're indicating for the second quarter is core revenues of approximately or in excess of about $70 million. That already puts us at a $280 million annual core revenue rate, which we're very, very pleased with. The other thing that I wanted to point out is our gross margins. We've been talking about increasing our gross margins for some period of time. And with the acquisitions that we made a year or two ago, if you take a look at our gross margins excluding stock-based compensation and if you strip out the COVID-19 revenues, in 2023, in the first quarter, we had our gross margins at approximately 28%, and then that increased to about 33%.
Speaker Change: Which we're very very pleased with the other thing that I want to point out is our gross margin now we've been talking about increasing our gross margins for some period of time and what the acquisitions that we made.
Speaker Change: A year or two ago.
Speaker Change: If you take a look at our gross margins, excluding stock based compensation and if you strip out the.
Speaker Change: COVID-19 revenues.
In 2023 in the first quarter, we had a gross margins at approximately 28% and then increase to about 33% and then in Q3 and Q4 of 2023 it was approximately 35%.
Paul Kim: And then in Q3 and Q4 of 2023, it was approximately 35%. This quarter, that gross margin rate was approximately 36 percent. But starting in the second quarter of 2024, we anticipate our gross margins, excluding stock-based compensation, to be approximately 40 percent or higher. We think that that will go even higher than that in Q3 and Q4, to approximately 42 percent. So what we see is, one, our core revenues being intact because we raised our guidance from 260 to 280, but we see the gross margins continue to grind higher for the business, which we're very proud of.
Speaker Change: This quarter that gross margin rate was approximately 36 <unk>.
Speaker Change: But starting in the second quarter of 2024, we anticipate our gross margins excluding stock based compensation to be approximately 40% or higher we think that that will grind.
Speaker Change: Even higher than that in Q3, and Q4 to approximately 42%. So what we see is one our core revenues being intact, because we've raised our guidance from $2 6 billion or $2 80, but we see the gross margins continued to grind higher for the business, which we're very proud of.
Speaker Change: Okay that is helpful.
Paul Kim: That is very helpful. Maybe next, just on... AP, you know, I know precision diagnostics, you spend a lot of time on doing very well. Do you want to dive in a little bit just on anything that you've seen on the anatomic pathology side in terms of the competitive landscape or any share shift and maybe what you attribute that to and how you can get that business back to a little bit healthier growth there?
Speaker Change: Maybe next just on.
Speaker Change: AEP I know precision diagnostics, you spend a lot of time on doing very well you want to dive in a little bit just on anything that you've seen on the anatomic pathology side in terms of competitive landscape or or any share shift and maybe what you attribute that to you and how you can get that business back to a little bit healthier growth there.
Brandon Perthuis: Yeah, certainly. Thanks for the question.
Speaker Change: Yes, certainly thanks for the question I think one of the things. We've done there is a revamp of the sort of go to market strategy and the sales organization I don't want to get into the details specifically, but sort of the focus of the sales team their roles and responsibilities it wasn't overly calibrated to hunting and Fi.
Brandon Perthuis: I think one of the things we've done there is a revamp of the sort of go-to-market strategy and the sales organization. I don't want to get into the details specifically, but the focus of the sales team, their roles, and responsibilities, wasn't overly calibrated to hunting and finding new business. So, this year, in January of this year, we revamped that and changed that go-to-market strategy. In addition, we've layered on some additional sales leadership and additional sales headcount for that area. So, you know, we expect that team to perform better this year.
Speaker Change: <unk>, new new business. So we.
Speaker Change: This year in January of this year, we've revamped that and change that go to market strategy. In addition, we've layered on some additional sales leadership and additional sales head count for that area.
Speaker Change: So we expect that team.
Speaker Change: Two performed better this year.
Brandon Perthuis: I wouldn't say there's been any macro changes in the competitive landscape or market share. We continue to see consolidation with physician groups, and sometimes that leads to the creation of these supergroups and physician-owned laboratories, so they continue to be a competitor. Our goal there is to block and tackle and get back to growing that business. We have the quality turnaround time, the subspecialty trained pathologist, and the product menu to be successful in that space.
Speaker Change: I Wouldnt say theres been any macro changes in the competitive landscape or market share.
Speaker Change: We continue to see <unk>.
Speaker Change: <unk> with physician groups and sometimes that would lead to creation of these super groups and physician owned laboratories.
So they continue to be a competitor.
Speaker Change: But our goal there is to blocking and tackling and getting back to growing that business.
Speaker Change: We have the quality turnaround time, the subspecialty trained pathologists the product menu.
Speaker Change: To be successful in that space for some time, we've talked about synergies with the precision diagnostics division and the.
Brandon Perthuis: For some time, we've talked about synergies with the Precision Diagnostics Division and the ability to cross-sell. I would say over the last year or so, we've been sort of more focused on fixing and growing the AP business, but as we're beginning to see that business stabilize, I think we're getting to the point now where we can spend more time and energy on these opportunities to cross-sell. For example, perhaps cross-selling germline hereditary oncology to many of our AP clients, which include GI, GU, and DERM. We continue to invest in that business, again, focusing on operations there, improving operational efficiencies, but obviously, importantly, we do want to see that business return to top-line growth.
Brandon Perthuis: Super helpful. I'll stop there. Thank you.
Speaker Change: Ability to cross sell.
Speaker Change: I would say the last year or so we've been sort of more focused on fixing and growing the AP business, but as we are beginning to see that business stabilize.
Speaker Change: Think we're getting to the point now where we can spend more time and energy on these opportunities to cross sell.
Speaker Change: For example.
Speaker Change: Perhaps cross selling the germline hereditary oncology to many of our AP clients, which include <unk> and derm. So we continue to invest in our business again, focusing on operations, they're improving operational efficiencies.
Speaker Change: But obviously importantly, we do want to see that business returned to topline growth.
Speaker Change: Super helpful. I'll stop there. Thank you.
Speaker Change: Yeah.
Speaker Change: Thank you, ladies and gentlemen that concludes our Q&A session and thus concludes our call today.
Operator: Thank you. Ladies and gentlemen, that concludes our Q&A session and thus concludes our call today. We thank you for your interest and participation. You may now disconnect your lines.
Speaker Change: Thank you for your interest and participation you may now disconnect your lines.