Earnings Labs

Fulgent Genetics, Inc. (FLGT)

Q3 2022 Earnings Call· Mon, Nov 7, 2022

$15.33

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Transcript

Operator

Operator

Hello and welcome to the Fulgent Genetics Q3 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It's now my please to turn the call over to your host, Melanie Solomon, Investor Relations. Please go ahead.

Melanie Solomon

Analyst

Good afternoon and welcome to the Fulgent Genetics third quarter 2022 financial results conference call. Today, we will also be discussing the acquisition of Fulgent Pharma announced after the market close in a separate press release. On the call are Ming Hsieh, Chief Executive Officer of Fulgent Genetics; Paul Kim, Chief Financial Officer of Fulgent Genetics; and Brandon Perthuis, Chief Commercial Officer of Fulgent Genetics; Lawrence Weiss, Chief Medical Officer of Fulgent Genetics; and Dr. Ray Yin, President and Chief Scientific Officer of Fulgent Pharma. The Company's press releases discussing these two announcements are available in the Investor Relations section of our website, fulgentgenetics.com. The webcast portion of this call contains a slide presentation that we'll refer to during the call. Those following along on the phone who wish to access the slide portion of this presentation, they do so on the Investor Relations section of our website. For those who have access to streaming portion of the webcast, please be aware that there may be a few seconds of delay, and then you will not be able to post questions via the web. 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. 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 expectation. Listeners should rely on any…

Ming Hsieh

Analyst

Thank you very much, Melanie. Good afternoon, and thank you for joining our call today to discuss our third quarter 2022 results and acquisition of Fulgent Pharma. I will start with some comments on the transaction and then my vision for Fulgent before turning the call over to my co-founder, Dr. Ray Yin. Then, Brandon will review our products and go to market updates from the third quarter. And Paul will conclude with the financial and the outlook before we take your questions. I'm pleased to announce that we have acquired Fulgent Pharma, a company I have been running with my co-founder, Dr. Ray Yin as a private entity. We believe this acquisition has a potential to rapidly transform Fulgent Genetics from a genetic diagnostic service business into a fully integrated precision medicine company focusing on oncology. We’re also joining our team of talented individuals, integrating our companies to address the continuum of care that we believe begins with diagnostics and ends with patient care. Let me take a step back and provide a brief history of these two companies. Moving on this timeline slide, Fulgent Pharma and Fulgent Genetics were previously both owned by the Fulgent Therapeutics until 2016 when the businesses were separated ahead of initial public offering of Fulgent Genetics. The Company has operated as a separate entity since 2016, enabling each business to focus on and skill its core business across genetic testing and the therapeutics. Over the last year, Fulgent Genetics has taken a major step to exhibit a foothold in the large market of oncology testing, most notably with acquisition of a CSI Laboratories, in August 2021 and opening the state of the art oncology testing facility in Southern California in May 2022. We believe with the platform we have built with Inform Diagnostics…

Dr. Ray Yin

Analyst

Thank you, Ming. I'm pleased to be here today to discuss the pharma business. As Ming mentioned, we have been working together for many years. In addition to Fulgent, I also founded ANP Technologies, Inc., a nanobiotechnology based company and has served as CEO and CTO since its inception. Prior to that, I worked at the U.S. Army Research Laboratory and managed its nanobiotechnology for chemical and biological defense programs. Our efforts at pharma are based on a novel nano drug delivery platform technology capable of delivering various water insoluble or poorly soluble drugs. Unlike some of the drug delivery materials, such as human serum albumin or HSA, which is only soluble in water, our nano drug delivery of materials used for drug candidate development are soluble not only in water but also in various organic solvents, as well as capable of hot melt mixing with active pharmaceutical ingredients or APIs. We believe these advantages will allow us to generate a much broader range of drug candidate formulations, particularly amorphous drug candidate formulations, which can be used for both IV and oral formulations, with a goal to improve pharmacokinetics or PK profile, as well as safety and efficacy. With this platforms, we believe we have the opportunity to use a 505(b)(2) approach to shorten development timelines for active pharmaceutical ingredients or API that the FDA has previously approved. This plug and play approach allows for multiple shots on goal during our development, therefore giving us more chances to win. In addition, the simple manufacturing process also lowers the product cost significantly. Our lead drug candidate, FID-007 has a manageable safety profile, with maximum tolerated dose not reached at 125 milligram per square meter per week. In a Phase 1 clinical trial, dosing at 160 milligram per square meter per week…

Ming Hsieh

Analyst

Thank you, Ray. This transaction reinforces my commitment to both businesses. And I believe it will realize our vision, building vertical integrated solutions to potentially combat cancer. Based on the current studies and the pre-designed criteria, we believe we have a proof of concept of FID-007 candidate in hand. And the initial target the indication for head, neck cancer provides an attractive entry point, and possibly rapid commercialization trends and assuming regulatory approval, are top of probabilities in therapeutic segment. In long-term, we have opportunities to leverage the data insight from diagnostics businesses to enable precision medicines through propriety or partner development strategies. As we continue to grow our diagnostic businesses through our clinical investment and strategic M&A. I will now turn over the call to Brandon Perthuis, our Chief Commercial Officer, to talk about our diagnostics business’s results during the third quarter. Brandon?

Brandon Perthuis

Analyst

Thanks, Ming. Turning to our core business, which we define as our sales minus all COVID-19 related testing both PCR and NGS. Core business revenue was $56 million in the third quarter compared to $27 million in the same period the prior year, and $45 million in the second quarter of 2022, representing 110% growth year-over-year and 24% growth sequentially. Our investments in Fulgent Oncology, Pharma Services, CSI Inform Diagnostics are performing well as we begin to tap into the synergies across the business units. With our diversification into oncology and pathology, added to our robust test menus for pediatric genetics, reproductive health, hereditary cancer, neurological conditions and more, we have created one of the largest test menus in our industry. Not only do we offer one of the largest test menus, we also continue to excel as it relates to turnaround time, depth of coverage, reliability of CNV calls with proprietary algorithms, ease of use and access with custom portals and interfaces, along with the ability for our clients to customize their gene panels. Historically, we have served as a reference lab for many hospitals, academic medical centers and commercial laboratories. However, now with direct access to the payers in over 300 million covered lives, we'll be able to address the commercial pay market. This opens up an entirely new channel for Fulgent. That said, while hoped we would have these contracts rolled up with the ability to sell into for the fourth quarter, it is taking a bit longer than we predicted. We now anticipate the contract roll-up will be completed by the end of the year, allowing us to penetrate the direct pay market starting in 2023. Paul will address our Q4 forecast in detail, but at a high level, we are projecting the core business at…

Paul Kim

Analyst

Thanks Brandon. Revenue in the third quarter totaled $106 million compared to $228 million in the third quarter of 2021, in line with our overall guidance of approximately $105 million. Billable tests in the quarter totaled 952,000 compared to 2.2 million in Q3 of last year. The year-over-year decline was again due to COVID testing dynamics. Breaking down revenue a bit further, roughly $50 million came from COVID-19 testing in Q3 compared to our guidance of $51 million. Revenue from our core business totaled $56 million, which exceeded our guidance of $54 million and grew 110% year-over-year. As a reminder, our core revenue includes our NGS business contribution from our JV, CSI and Inform Diagnostics, and excludes NGS COVID testing from the CDC. As demand for COVID PCR testing remains volatile and generally trending lower, we continue to take a conservative stance on expected revenue from COVID testing. We remain focused on executing on our post-COVID growth opportunities, which include the integration of Inform Diagnostics, expanding the reach of CSI capabilities, executing on additional investment and partnership opportunities, ongoing work, with Helio on joint commercialization and growing our footprint from [indiscernible]. Our ASP in the third quarter was $111, higher than the $94 we saw in the second quarter of 2022. Our ASP has fluctuated along with a mix of coding testing. Cost per test for the quarter was $63 versus $45 in the second quarter of 2022, largely due to the shifting mix away from COVID testing, to more of our core testing, including testing from Inform Diagnostics. As a reminder, cost per test on our core portfolio can be as high as $200. So, as COVID testing continues to decline, the average cost per test will increase to a more normalized level for our core genetic testing portfolio.…

Operator

Operator

Thank you. We’ll now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from David Westenberg from Piper Sandler. Your line is now live.

Q - Unidentified Analyst

Analyst

Hi, guys. This is John Peterson [ph] on for Dave Westenberg. Thanks for taking questions and congrats on the acquisition of Fulgent Pharma. It's a really exciting opportunity. So, first off, I’d just like to ask your implied, like the organic growth rate seems to be like very high for your core business. Can you talk about how you're able to pick up so many hospitals and so much volume during the pandemic? And how -- just how that's been going for you? Thank you.

Ming Hsieh

Analyst

I think that we all folks know of one of our major businesses for the -- during the past two years has been the COVID. And we are very proud to be part of the Company combating the pandemic. As the pandemic is we've seen getting to the end, that is a very good sign for the country and for the entire economy. But we always have been to trying to invest in the resources we have to see how do we build a long-term growth. As you'll see, we announced that we have -- our core revenue has outperformed the COVID revenue for the Q3. Part of the revenues we have is from our acquisitions, from the CSI and Inform Diagnostics. It will take us a little bit more time to build more efficiencies from these acquisitions and integrate with our genetic testing business. But we see the strategy has been working for us. But definitely we're adding our new acquisition we have announced today, we hope it will build integrated solution, not only focused on the diagnosis, but increase the complete solution, which is the patient care.

Unidentified Analyst

Analyst

Great. Thank you. And also, next, if you could just talk to me about -- given that the COVID revenue, the guidance has come down, how should we think about the underlying margins going forward, given that COVID is tailing off? Thank you.

Paul Kim

Analyst

Yes. So, I'll take that one. The biggest surprise for us during the quarter was a drastic drop-off in the COVID testing demand, which we incorporated into our conservative COVID guidance for Q4. And because of the sharp drop-off, it's going to take us a little bit of time, our guess is one to two quarters, for us to realign our investments and our cost structure particularly related to the COVID part of the business. And then Brandon mentioned temporary weakness and our ambitions for the core revenue. We believe that that will be back on track in 2023. So, what we're doing and what we have been doing is realigning and restructuring our cost to make sure that even on an intermediate basis, that our margin profile and our leverage is there. And we believe that that'll take one to two quarters for us to adjust. And then once we're back on the growth path for our overall core business, without counting too much on COVID, we anticipate -- the weakness that we anticipate in the margin profile for Q4 to start grading up again.

Unidentified Analyst

Analyst

And also about the Fulgent Pharma acquisition, you mentioned several different indications that you could potentially be going after in the next coming years is -- are there any of those in particular that you're most interested in? Because there were several that were mentioned. Thank you.

Ming Hsieh

Analyst

Yes. Thank you, David. The first, we are -- from the data we have so far, we have very good indications initially focused on head and neck cancer. That's the area -- which is the area are lacking of some of the therapies, but also the indication we have with the pancreatic, ampullary and other disease. But in terms of the pipeline, we also see our strong cancer candidate, which focuses on the colon cancer. And that drug is that we’re trying to push, accelerate the clinical research approaches as we push it into -- as soon as possible to the clinical trials. So, we will provide the update once we get two businesses integrated, and when we meet with FDA authorities.

Operator

Operator

[Operator Instructions] Our next question is coming from Dan Leonard from Credit Suisse. Your line is now live.

Dan Leonard

Analyst

Hello and thank you. Is there any way you could frame for us the cash and capital needs of the Pharma business over the next, call it, one to two years?

Paul Kim

Analyst

Sure. I'll take that on, and then, after my comments, if Ming and Ray have any additional comments to that. The capital needs for the former business for 2023 and 2024, we believe won't be that significant. We anticipate that the totality I -- in each of the years, will be somewhere in the mid-teens, millions, so anywhere from [Technical Difficulty] million of cash needs. We believe that the advantage that we have is, there's been a lot of work and investment that went into the Pharma asset as Ming indicated from its inception in 2011. So, again, the capital needs, for the next couple of years, should be in the $15 million, $16 million, maybe $17 million per year. So, it's not going to, disrupt the capital optionality that we have, the cash position for the Company.

Ming Hsieh

Analyst

And as we can see, we’ve [Technical Difficulty] more than the cash as a Paul indicated, and that is a good sign, doesn't mean that we will be provided some kind of [Technical Difficulty] in terms of development, or the new drug candidates are getting into the clinical trial.

Dan Leonard

Analyst

And then for my follow-up question, for Brandon, I wasn't sure I fully understood the contract roll up feature you were talking about with your guidance. Could you circle back to that and maybe elaborate on what's evolved differently than plan?

Brandon Perthuis

Analyst

Yes, certainly. Thanks for the question. It's just mechanics, Dan. So, those contracts need to be assigned to Fulgent. We have to work with the payers to do that. So just mechanics, just contracting, just pushing paperwork, and it's just taking longer than we predicted. I don't know if there's any reason behind it, staffing shortages, I don't know. But it's just mechanics taking longer than we thought. So once they're all rolled up to the Fulgent corporate level, then we will have -- be able to deploy those contracts across our various entities.

Dan Leonard

Analyst

And then final question. You mentioned the new $200 million baseline in revenue for core Fulgent. Do you have any framing thoughts for us and how rapidly you think that could grow in 2023?

Paul Kim

Analyst

I believe our intention for any kind of investment that we make is to grow faster than the marketplace. And because of our diversified portfolio, and the overall market reach that we have, we wouldn't be surprised if the growth -- the growth of our overall business is, anywhere from say, like 10% to maybe like 20%, 25% range, I mean, that would be the goal that we have at the moment. I mean, again, we're going to be laying out guidance when we announce the next quarter call for 2023. So, we'll have more specified ranges and details that we can talk about at that point. Our intention has always been to grow faster than the marketplace.

Operator

Operator

Thank you. We reach the end of our question-and-answer session. And ladies and gentlemen, that does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.