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spk02: Good day and welcome to the Fulgent Genetics Third Quarter 2021 Earnings Conference Call. At this time, I would like to turn the conference over to Nicole Borgia, Investor Relations. Please go ahead, ma'am.
spk01: Great, thanks. Good afternoon and welcome to the Fulgent Genetics Third Quarter 2021 Financial Results Conference Call. On the call today are Ming Hsieh, Chief Executive Officer, Paul Kim, Chief Financial Officer, Dr. Larry Weiss, Chief Medical Officer, and Brandon Perthews, Chief Commercial Officer. The company's press release discussing its financial results is available in the investor relations section of the company's website, FulgentGenetics.com. An audio replay of this call will be available shortly after the call concludes. Please visit the investor relations section of the company's website to access the audio replay. Management's prepared remarks and answers to your questions on today's call will contain forward-looking statements. These forward-looking statements represent management's estimates based on current views and assumptions, which may prove to be incorrect. As a result, matters discussed in any forward-looking statements are subject to risks, uncertainties, and changes in circumstances that may cause actual results to differ from those described in the forward-looking statements. The company assumes no obligation to update any of the forward-looking statements it may make today to reflect actual results or changes in expectations. Listeners should not rely on any forward-looking statements as predictions of future events and should listen to management's remarks today with the understanding that actual results, including the company's actual future results, may be materially different in what is described in or implied by these forward-looking statements. Please review the more detailed discussions related to these forward-looking statements, including the discussions of some risk factors that may cause actual results to differ from those described in these forward-looking statements contained in the company's filings with the Securities and Exchange Commission, including the previously filed 10-K for the year ended December 31, 2020, which is available on the company's investor relations website. Management's prepared remarks, including discussions of earnings and earnings per share, contain financial measures not prepared in accordance with accounting principles generally accepted in the United States or GAAP. Management has presented these non-GAAP financial measures because it believes they may be useful to investors for various reasons, but they should not be viewed as a substitute for or superior to the company's financial results prepared in accordance with GAAP. Please see the company's press release discussing its financial results for the third quarter of 2021 for more information, including a description of how the company calculates non-GAAP income and income per share and a reconciliation of these financial measures to income and income per share, the most directly comparable GAAP measures. With that, I'd now like to turn the call over to Ming.
spk04: Thank you very much, Nicole. Good afternoon, and thank you for joining our call today. to discuss our third quarter 2021 results. We had a very good strong third quarter with our core business being green momentum, while our resurgence of COVID infections with the Delta variants show a meaningful uptake in our COVID testing warning in the quarter. I will cover some highlights from the third quarter before turning the call to our chief commercial officer, Brandon Perthews, to discuss the product and the go-to-market updates. And Paul Kim will discuss our financial results and our outlook in detail. Taking a look at our third quarter results, revenue total $228 million. of 124% compared to third quarter of 2020 and up 48% sequentially. We delivered approximately 2.2 million tests in a quarter. More doubled the volume of our third quarter last year. Paul will cover the details on the breakout between our core and COVID business in the quarter. But at a high level, both sections of the business outperformed the guidance we set for last quarter. Our core business grew almost 300% year-over-year to over $40 million due to strength across the key areas, including KSI, CSI, and our revenue from JV in China. We also saw a meaningful increase in revenue from our contract with the CDC due to the widespread increase we have seen in code positive rate. We continue to drive strong profitability and generate $3.93 per share in GAAP EPS and 152 million in operating cash flow. We were pleased to achieve the results this quarter that exceeds our expectations across the board. While our business has benefited from unprecedented spikes in demands for COVID testing, we have continued to see the strength in our core business as we execute our strategy to expand the footprint in core NGS business confirmed by the CSI and our operations in China. One particular highlight for us in the third quarter is the initial attraction we are seeing in the acquisition of CSI. While we're still in very early in creating synergy across our business, We're pleased that the CSI staff and small sales team is fully supporting our continued operations. And we are beginning to expand our sales team to support growth of the organization. We are also working to build our West Coast Lab, which will duplicate the enhanced CSI oncology testing capabilities. particularly in dermatology and oncology. We have also supplemented CS venue with our next generation sequencing capabilities as a part of integration of CSI. We're already seeing a meaningful increase in our test volume that is being reimbursed by insurance. We're encouraged by the expanded relationship we have for third party payers and look forward to build on this momentum as we continue to scale and expand our test menu. We'll also continue to make progress on the development and the launch of HelioLeo with our partners at Helio Health. We announced some very promising data yesterday and the team will be conducting a post-presentation on the performance of Helio Liver at the Liver Meeting 2021, which will be held virtually in upcoming week. Brandon will discuss in more details about we are very encouraged by the progress we are seeing in the development of Helio Liver and hope to achieve the commercial launch in the coming month. Another exciting recent announcement is our partnership with O-Link Proteomics. We'll be offering O-Link proteomics through our lab in the U.S. and China, which will create more streamlined multi-omic solutions for our clinical and pharma customers. And finally, we're well pleased with the activity we've seen through the operations in China. We are seeing growing sales in our MGS test menu in China, while our sequencing service is also gaining traction. We believe there is a very large opportunity to ramp up our presence in the local Chinese market when we are in the early stage of growth. I'm very pleased with the ongoing progress we are making with the expansions to our core business, while our COVID-19 testing solutions continue to drive strong cash generation from our bottom line. While the volatility around COVID-19 testing could sum unpredictability in our businesses near term, particularly as the therapeutic treatments may become available in the near future. We remain very optimistic about our post-COVID strategy and the opportunity we have built to drive sustainable growth in the years ahead. Armed with our capital and technology platform, now I turn the call over to Brendan Perthews, our Chief Commercial Officer. Brendan?
spk07: Thanks, Ming. We continue to fire on all cylinders as we have made great progress with our core business, our new HelioLiver liquid biopsy test, integrating the CSI acquisition, launching the O-Link collaboration, and continual response to the COVID-19 pandemic. I will address each of these in detail, but would first like to comment on the overall performance of the business. We recorded $228 million in revenue in the third quarter, an increase of 124% year-over-year. While a bulk of this was driven by COVID-19 testing, our core business grew to over $40 million, an increase of approximately 300% year over year. As we have discussed over the course of the year, we have continued to diversify the business outside of pediatric rare disease, and in this quarter, we were able to continue that trend in a big way with the addition of many new oncology services. As we mentioned on the last call, Fulgine has made a strategic investment in HelioHealth, and has secured exclusive rights to commercialize lab-developed tests in the United States and Canada. The first test we announce is a novel liquid biopsy test for hepatocellular carcinoma, HCC, called HelioLiver. HCC is one of the fastest-growing and deadliest cancers in the United States, and early detection is critical to successful outcomes, especially among high-risk populations. In the United States, more than 100 million people have non-alcoholic fatty liver disease, which is a major driver of liver cancer. HelioLiver leverages next-generation sequencing technology to test 28 genes from 77 CPG methylation sites in AFP, AFPL3, and DCP. For over a decade, there has been little to no improvement in the way HCC is detected. Today, the standard of care is ultrasounds. which is a relatively ineffective method of detection with some quoting sensitivity in the 40% range. Ultrasound results are highly variable depending upon the size of the lesion, the location of the lesion, the body mass index of the patient, the equipment used, and the experience of the operator. Considering the survivability of HCC is dramatically better in early stages, specifically approximately 50% survivability at stage one and approximately 12% and 3% at stages 3 and 4, respectively, a better test has been needed for some time. In addition, early stage detection allows for more potentially curative treatment options, such as ablation and transplantation. The folgent helio liver test has shown much better efficacy with sensitivity of 76% for early stage HCC and 92% for late stage at a specificity of 91%. These numbers could improve as we gather more data, but already show a major improvement over ultrasound. Another critical aspect of detecting HCC early is routine screening and surveillance of high-risk patients every six months. These include patients with cirrhotic liver, hepatitis B, and hepatitis C. Unfortunately, many do not follow through with the current ultrasound monitoring for reasons including difficulty in scheduling, traveling to medical centers, etc., With the HelioLiver test, it's a simple blood draw. This can be done at any physician office or phlebotomy service. This should allow for better adherence to the six-month monitoring guidelines. In summary, benefits of the novel Fulgent HelioLiver test include increased patient adherence, higher sensitivity, more curative treatment options, ease of use, and lower cost of care. Expanding on that last point, cost of care is estimated at $466,000 for a patient in late-stage treatment versus $132,000 in early-stage, HelioLiver becomes a more cost-effective test versus current standard of care, which should prove to be important as we have discussions with payers. HelioLiver is scheduled to launch this year, and we will certainly be keeping the market updated on developments regarding this exciting new test. Another notable development from the third quarter was our acquisition of CSI, which closed in August. As a reminder, CSI offers over 400 unique tests in molecular oncology, flow cytometry, fish, cytogenetics, and histology. We have completed the integration of CSI with nearly 100% employee retention and 100% client retention. We are now focused on the expansion of the business on a national level and the build-out of our cancer labs on the West Coast to better serve clients nationally. A key piece of our growth strategy with the addition of CSI and HelioLiver is the expansion of our sales team. Historically, Fulton has run a very small but very experienced sales team. However, considering the size of the addressable market for the new HelioLiver and CSI business, we are aggressively expanding our sales organization. On the HelioLiver side, we are onboarding approximately 10 new sales managers who will be responsible for the product. From a go-to market perspective, key markets include New York, California, Illinois, Texas, and Florida, all of whom have high incidence of HCC. However, this will be a national rollout. As we gain sales experience during the early launch, we anticipate the number of salespeople to expand rapidly as there are over 7,000 hepatology providers in the United States that are immediate call points and over 15,000 gastroenterologists as secondary call points. We have invested in data resources to assist in our account targeting and planning, allowing us to focus on those high-volume physicians with high spend on ultrasounds and MRIs. On the CSI side, historically their team has also been small, with only three to four salespeople. This number doubled this quarter, and we aim to double it again in the fourth quarter. We believe we have superior turnaround time, service, and quality for cancer diagnostics and look forward to leveraging an expanded sales team to take the services national. On the partnership front, we were also excited to announce the addition of Olink's proteomics capabilities to the Fulgent platform. Through this partnership, we will enable customers to leverage Olink's high-throughput protein biomarker discovery technology through our labs, which creates an end-to-end platform for biomarker research, discovery, and clinical trials. We are creating a one-stop shop for pharma. and clinical research customers by offering our extensive next-generation sequencing menu, oncology testing solutions, and now O-Link's proteomic assays across a single sample at our labs. This partnership will make it faster, easier, and more efficient for researchers to carry out their projects as it enables them to send their samples to one location and access all of the results from one portal. Fulgent is one of a handful of labs offering O-Link's capabilities in the United States and we look forward to providing this enhanced service to our research customers. And finally, as Ming mentioned, we saw a big rebound in COVID-19 testing in the third quarter, driven by the highly contagious Delta variant. We completed approximately 2.2 million COVID-19 tests in a quarter, which marks our third highest quarter for COVID-19 testing behind the first quarter of 2021 and the fourth quarter of 2020. These tests continue to come from a variety of sources, including counties, drive-thru sites, hospitals, clinics, et cetera. We also saw schools go back in session, which restarted the flow of back-to-school samples. At this time, we are serving over 1,000 schools. We are also supporting the back-to-work mandate and verification programs with our newly launched online platform. This new system allows employees to upload their vaccine records or their weekly testing results and provides dashboards and quick access to employers to track compliance. While symptomatic testing ebbs and flows with the positivity rate, these back-to-work and back-to-school programs are more predictable long-term contracts. During the quarter, we also saw a record in terms of our COVID-19 next-generation sequencing tests due to the elevated number of cases and increased positivity rates. We believe genomic studies of the virus will continue to play a pivotal role in fighting and understanding COVID-19. We are pleased with our third quarter results and excited about the future prospects of our business. We continue to have a pipeline of assets we are evaluating and expect to see continued activity on the M&A and strategic investment front. I'll now turn the call over to Paul Kim, our CFO. Paul?
spk06: Thanks, Brandon. Revenue in the third quarter totaled $228 million, an increase of 124% compared to the third quarter of 2020, well exceeding our guidance of $125 to $150 million. Available tests in the quarter totaled almost $2.2 million, more than twice the volume of Q3 last year. Breaking down the revenue a bit further, roughly $188 million came from COVID PCR testing, which exceeded our guidance by approximately 100 million and grew 105% year-over-year, while roughly $40 million came from our core business, which exceeded our guidance of 32 million and grew approximately 300% year-over-year. As a reminder, our core revenue includes our NGS business, contribution from our Chinese JV, and now contribution from CSI. It also includes contribution from our CDC COVID NGS testing agreement, which we saw a meaningful uptick in activity this quarter due to increasing COVID positivity rates amid the Delta variant spread. We recognize that COVID NGS testing volume from the CDC can vary dramatically depending on COVID positivity rates. So if we exclude the impact we saw from the CDC in the quarter, our Q3 core revenue still grew by more than 160% year over year compared to Q3 of 2020. While demand for COVID testing remains extremely volatile, we remain well positioned to capture this demand if and when it fluctuates higher, which we saw in the third quarter, a reversal relative to the slowdown we saw in the second quarter. We have continued to take a conservative stance on any expected revenue from COVID testing, given the inherent challenges in predicting COVID spikes or the emergence of other variants. We remain focused on executing on our post COVID growth opportunities, which include expanding the reach of CSI's capabilities, working with Helio on our joint commercialization opportunities, growing on the footprint on our China operations, and launching new initiatives, such as the only partnership Brandon discussed. Our ASPs in third quarter was $105, slightly higher than the $99 we saw in the second quarter. Our ASPs remained relatively stable over the last few quarters, trending modestly higher as our test mix shifts more to NGS testing. Cost per test in the quarter was $20, slightly lower than the second quarter, due to the efficiencies inherent in our platform as our testing volume scales. Gross margin increased to 80.9%, up more than six whole percentage points year over year, and up four percentage points sequentially, given our higher overall volumes and the continued operational efficiency of our technology platform. Now turning to operating expenses. Total GAAP operating expenses were $25.1 million in the third quarter, up from $18.9 million in the second quarter. Non-GAAP operating expenses totaled $21.7 million, up from $16 million last quarter. Our operating expenses increased primarily due to the ongoing investments in strategic headcount across our organization, as well as fees and services associated with our heightened M&A activity. Non-GAAP operating margin increased over five percentage points from the second quarter to 71.8%. Our expense structure remains very lean, enabling us to drive significant profitability from our revenue outperformance. Adjusted EBITDA for the third quarter was $167.3 million compared to $67.4 million in the third quarter of 2020. On a non-GAAP basis and excluding equity-based compensation expense and intangible asset amortization, income for the quarter was $126.3 million or $4.05 per diluted share based on 31.2 million weighted average diluted shares outstanding. This takes into account a tax effect for stock-based compensation and intangible asset amortization in the quarter. Turning to the balance sheet, We ended the third quarter with $877 million in cash, cash equivalents, and marketable securities. We also generated $152 million from cash from operations during the quarter, fueling our cash balance. Despite the cash investments we have made this year, including the cash investment of $43.4 million for CSI, which closed in the third quarter, $20 million for Helio, and $19 million for controlling interest in the China JV, we are on our track to reach our goal of reaching a billion dollars in cash, cash equivalents, and marketable securities on the balance sheet before the end of the year, excluding any additional M&A announcements, which is certainly a possibility. Now moving on to our outlook. Starting with COVID revenue, as we discussed, COVID revenue continues to be volatile due to many factors outside our control. As cases trend higher, we tend to see a positive correlation in test volumes. At the same time, government agencies and schools have put regular testing protocols in place to both supplement vaccination programs and monitoring potential breakthrough cases. With that, we expect COVID revenues for the year will be at least 815 million, up from our previous guidance of 690 million. This increase of 125 million accounts for the outperformance in Q3. As a reminder, COVID revenue guidance includes only revenue from RT-PCR COVID testing, including picture at-home COVID kits. Moving on to our core revenue guidance, which includes revenue from our core NGS testing, COVID NGS testing, and the impact from CSI. We expect our core NGS business will continue to see strong growth as we further capitalize on our investments. We expect core NGS revenues will total approximately $95 million consistent with our previous guidance. For COVID NGS revenue from the CDC, we're raising our guidance to 20 million from 15 million given the strength we saw in this program in Q3 due to higher positivity rates. Altogether, we expect our total core revenues will be 115 million for the year. With the 815 million in COVID revenues and with 115 million in core revenue, we expect total revenues will be approximately $930 million for the year, up from our previous guidance of $800 million. We acknowledge that the vast majority of this increase will be coming from COVID-related testing, but remain confident in our core business and believe we're at the very early stage of ramping on our numerous opportunities as we're focused on our core business. From a profitability standpoint, we continue to expect to show ongoing leverage in our business which drops to the bottom line and drives cash flow generation. Our foundational technology platform that underpins our business operations continues to drive extremely high growth and operating margins. That being said, we could see some fluctuations in the near term as we continue to digest investments and headcount and M&A. For the fall year 2021, utilizing an estimated 27% tax rate and a share count of $31 million, we expect net non-GAAP income of approximately $502 million, or $16 per share for shareholders, excluding stock-based compensation. Our updated guidance is posted on slides on our investor relations website, which shows the details that I just discussed. We feel very good about the positioning headed into the fourth quarter, as we have set ourselves up to benefit from a number of long-term strategic initiatives. We are excited about the potential to drive sustainable growth in our core business in the quarters ahead. Armed with a large cash balance and capital structure, we're also continuously evaluating more and more M&A opportunities that could be complementary to our expanding platform. Thank you for joining our call today. Operator, now you can open it up for questions.
spk02: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure the mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity to signal for questions. Our first question comes from Kevin DeGieter with Oppenheimer.
spk05: Hey, guys. Thanks for taking my questions. Congrats on a really nice quarter here. A few things I think Ming highlighted in his prepared comments progress on commercial reimbursement across the portfolio. I guess maybe two points on that. Can you kind of quantify the portion of revenue that came from third party reimbursement and just kind of more generally, how do you measure going through the next couple of quarters you know, continue, you know, strength in gaining expanded reimbursement? Is it, you know, being able to, you know, disclose, you know, specific, you know, coverage or in-network decisions with national payers? Is it lives covered? Is it percentage of revenue? Just kind of, you know, what's the best way to measure improvement on that metric?
spk04: Yeah, thank you, Kevin. I think in general, our insurance in terms of life coverage, we have about 160 million lives covered under our insurance contracts. But in terms of revenue, most of our COVID revenue is through the reimbursement. So And we also have the non-insurance contract, which would be our relationship with the farmer, bio-farmer companies. So, Paul, probably you can take over to add some color for what Kevin's questions.
spk05: Hey, Ming. Thank you. Brandon, just by way of clarification, I'm referring to non-tomates.
spk07: Right. The synergies between Fulgen and CSI in terms of leveraging the contract really hasn't begun to be realized, meaning we've been focused on integrating CSI and not cross-selling traditional Fulgen tests with CSI, Salesforce, and contracts. So long story short, those efficiencies have not been recognized yet. So the insurance billing we would see to date would be the traditional CSI business you know, flow, IHC, fish, cytogenetics, those products and services. In terms of, you know, on a go-forward basis, we continue to put effort into becoming more in-network. I think we're really happy to be able to sit here and say today that we have 160 million covered lives, but it's a never-ending feat. We continue to go after these sort of smaller regional contracts, some of the blue cross-blue-shield contracts we don't have yet. So we do have resources working on that on a daily basis to continue to improve and increase the number of covered lives we have.
spk05: And with regards to the Salesforce expansion for CSI and the oncology franchise, I think your comments suggest somewhere around 15 reps by the end of the year. At least with the current portfolio, how do you think about appropriate sizing for a clinical oncology sales force over, say, an 18- to 24-month horizon?
spk07: Much bigger than that, right? You know, what we're doing, Kevin, from a go-to-market perspective is looking at those states where we're particularly strong with managed care, and we think that's a good place to start in terms of increasing our headcount. As we mentioned, historically, CSI has been a wonderful business. They've run that business very well for a long time, but it's been a bit focused in the southeast region Our first objective is to take that laboratory national, expand outside the Southeast region. We believe we have the managed care contracts to do that, and we believe in certain states we're particularly strong in managed care. So that's where we're placing our headcount. I think over time that number must be bigger. It is a massive market with a ton of call points. We are differentiating a little bit as it relates to oncologists versus pathologists, and we may have some subspecialty salespeople for oncology, But I think it's a number that's going to continue to grow, especially as we land additional managed care contracts in those states. So I think we'll be reporting likely each quarter sort of how this headcount expands. But I could see in 2020 that number being significantly more than 15. And I'm specifically talking about the CSI sales force, not the Helio sales force, which would be a different call point. Understood.
spk05: And then, I mean, just with regard, one more, and then I'll get back to you. With regard to, you know, balance sheet, Ian Hall, with your guidance of close to $1 billion on the balance sheet by the end of the year, and that's, you know, equivalent to 40% plus of current market cap. Yeah, how do you think about, you know, buybacks or just, you know, balance sheet management, you know, here? just kind of given the current balance sheet profile relative to the current stock price?
spk06: Yeah, thank you for that question, Kevin. Buyback and other options are certainly things that we can consider, but our primary focus is investing in this business and executing on our post-COVID and our M&A strategy. If you take a look at our core revenues, You know, the amount of core revenues that we threw up in 2019 was 32 million. The amount of core revenues that we had in 2020 was 36 million. The amount of core revenues that we had in a single quarter now is $40 million. Even if you strip out the NGS from the CDC, because it's hard to predict which way COVID is going to go, we still had accelerated core revenues in a massive way. And this was possible because of our expanded operational capabilities, our quality, our reputation, quality of the people. And they're more senior people. They're gravitating towards Folger, as well as progress in our reimbursement. If you take a look at our strategy, particularly for M&A, what we're doing is we're using the capital, being very conscious about which assets and which companies to evaluate. And we're doing both. So, for example, CSI had bolstered and strengthened, you know, traditional capabilities, you know, for us in the cancer market, being able to provide an end-to-end solution. And then, you know, for Helio, an investment such as in that area was, you know, evolving newer markets for liquid biopsy. We also made an investment in China, now taking over controlling interest. which will expand our footprint on an international basis. So if you take a look at the approach that we're taking, we're using the massive amount of capital that we continue to generate additional cash with, and we're deploying that from an M&A perspective. And we're bolstering the traditional markets as well as looking forward, all utilizing our technology and our operational platform. So the long and short of it is buybacks are certainly an option, but it's our intention to deploy this capital externally as well as investing aggressively within our internal structure.
spk03: Thanks for taking our questions.
spk02: And there are no further questions at this time. I will now turn the call back to Ming Hsieh for closing remarks.
spk04: Again, thank you very much for joining our conference. We are very, very excited for the opportunity we're facing. And definitely we have armed with capital and technology and will be the major player in this very exciting genomic diagnostic market. So thank you very much for joining the call and looking forward to update you in the next quarter.
spk03: Thank you. And thank you for joining us. This concludes today's call. You may now disconnect.
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