Hello and welcome to the Fulgent Genetics Q4 and Fiscal Year 2022 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Melanie Solomon, Investor Relations. Please go ahead.

Thanks, Kevin. Good afternoon and welcome to the Fulgent Genetics fourth quarter and full year 2022 financial results conference call. On the call are Ming Hsieh, Chief Executive Officer of Fulgent; Paul Kim, Chief Financial Officer of Fulgent; and Brandon Perthuis, Chief Commercial Officer of Fulgent. 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. As a result, matters discussed in any forward-looking statements are subject to risks, uncertainties and changes in circumstances that may cause actual results to differ from those described in the forward-looking statements. The company assumes no obligation to update any of the forward-looking statements it may make today to reflect actual results or changes in expectations. Listeners should not rely on any forward-looking statements as predictions of future events and should listen to management's remarks today with the understanding that actual events, including the company's actual future results may be materially different in what is described in or implied by these forward-looking statements. Please review the more detailed discussions related to these forward-looking statements, including the discussions of some of the risk factors that may cause results to differ from those described in these forward-looking statements contained in the company's filings with the Securities and Exchange Commission, including the previously filed 10-K for the year ended December 31, 2021 and subsequently filed reports which are 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 fourth quarter and full year of 2022 for more information, including the description of how the company calculates non-GAAP income and earnings per share and a reconciliation of these financial measures to income and earnings per share to the most directly comparable GAAP financial measures. With that, I'd now like to turn the call over to Ming.

Thank you very much, Melanie. Good afternoon and thank you for joining our call today. I will start with some comments on the quarter and the year. Then Brandon will review our product and go-to-market updates from the first quarter. And Paul will conclude with the financials and our 2023 outlook before taking your questions. Looking at the fourth quarter, we exceeded our revenue guidance, reflecting 97% growth in our core business compared to 2021. We have integrated our recent acquisitions and are seeing those benefits in our annual results. For 2022, our core businesses grew across all diagnostic segments, Precision Diagnostics, Anatomic Pathology and Pharma Services with the momentum in oncology and reproductive service. With the Inform Diagnostics businesses boosted our capability in Anatomic Pathology and adding significant revenue, we will see pressure on our bottom line in the near term which Paul will address. However, in long-term, we believe this acquisition will make a good strategic sense for us. We continue to be the leader in Precision Diagnostics due to our NGS platform capabilities. An example of our successful COVID-19 testing program between 2020 and 2022, led by our [indiscernible] contract, Fulgent delivered 19.3 million RT-PCR COVID-19 tests, generated over $1.7 billion in revenue for Fulgent. With the pandemic largely behind us, we're not inhibiting additional COVID revenue in 2023. We are proud of what we scaled our business so quickly and contribute so minimal to the testing efforts to fight the pandemic. We're seeing a similar opportunity to scale our platform to address the growing demand by our customers for our Beacon Carrier Screening Test. Today, we announced an expansion, Beacon787 which Brandon will talk more about it. And we are anticipating associated annual growth of more than 300% in Beacon sales as we grow this portion…

Thanks, Ming. With COVID-19 mostly behind us as well as our integration efforts for our acquisitions, we are able to intensely focus our efforts on our base business. We exceeded our expectations for the fourth quarter driven by an outperformance in our reproductive health business line and our Pharma Services division. At a high level, our core revenue was $55 million in the fourth quarter compared to $28 million in the same period the prior year and $56 million in the third quarter of 2022. Starting with our Beacon Expanded Carrier Screening product, for some time, we knew we had a successful product in service. Backed up against competitive products in the field, Beacon frequently excels as it relates to detection rates, our ability to discern pseudogenes, reliable copy number calls with our proprietary CNV exome [ph] algorithm plus other features. Our optimized workflow for variants with pseudogene interference has been validated and externally published as a method for analysis of genes with pseudogene interference and/or sequence homology issues, allowing for improved testing accuracy. This method also optimizes the turnaround time and reduces the need for unnecessary confirmatory testing to identify point mutations, copy number variants and gene conversion events in genes with pseudogene interference that other labs may not be able to detect. Using this pipeline, we can quickly distinguish positive and negative cases with NGS sequence misalignment, avoiding testing delays due to redundant confirmatory testing. Most bioinformatics methods do not discriminate genomic regions with extensive homology. This can lead to false negative or false positive variant calls and/or produce incorrect copy number calls due to misalignment of reads. Our bioinformatics algorithms compare read depth between homologous regions to identify sequence misalignment. In terms of the panel content, we have been offering one of the largest carrier screening panels…

Thanks, Brandon. Revenue -- full year revenue totaled $619 million compared to $993 million in 2021, exceeding our overall guidance of $611 million. GAAP income was over $143 million or $4.63 per share. Revenue in the fourth quarter totaled $68 million compared to $252 million in the fourth quarter of 2021, exceeding our overall fourth quarter guidance by approximately $60 million. We are no longer reporting billable tests as we believe that revenue is a better measure of how the business is progressing rather than volume. Breaking down revenue a bit further, roughly $13 million came from COVID-19 testing in Q4 compared to our guidance of $8 million. Revenue from our core business totaled $55 million which exceeded our guidance of $52 million and grew 97% year-over-year. Gross margin was 19.2% [ph], down 56 percentage points year-over-year and down 24 percentage points sequentially. The reduction in gross margin was, again, due to test mix, including higher costs associated with our core genetic testing portfolio, including pathology testing and also due to inventory reserves and our accelerated equipment depreciation related to COVID-19. Now turning to operating expenses. Total GAAP operating expenses were $49.5 million for the fourth quarter, up from $45.7 million in the third quarter of 2022. Non-GAAP operating expenses totaled $38.7 million, up from $37 million in the third quarter of 2022. Non-GAAP operating margin decreased 45 percentage points sequentially to a negative 34%. While the expense structure of our legacy Fulgent business remains lean, we have incurred a number of incremental expenses as a part of our recent acquisitions as expected. So we have made significant investments in people, infrastructure and operations to support our growth and these investments are putting pressure on our operating margins. We remain confident that these investments will translate into demonstratable ROI and…

Certainly. [Operator Instructions] Our first question is coming from Dan Leonard from Credit Suisse.

This is Lilly [ph] on for Dan Leonard. I think first question on the guidance. I think previously, we were talking about $200 million [ph] base line revenue for core Fulgent. So just wondering what is the difference, like what are the growth drivers on the '23 guidance of the $240 million?

Yes, that's an excellent question. So I'll first comment on the numbers and I'll turn it over to Ming and Brandon, who can talk about where they see growth and penetration within certain markets based on our overall capabilities. So we talked about having a core revenue base of approximately $240 million. And given what we're seeing based on the prospects of our core business, our guidance is $240 million for the year. Now one of the things that actually surprised us during the fourth quarter is the stickiness of our core revenues and that's giving us additional confidence in our ability to achieve $240 million. And the other thing that happened, right, during the quarter and we stripped out completely is COVID revenues. We think that there will be some COVID revenues that we get in 2023. But for the purposes of this earnings call and the strategic focus of our company, we strip that out. A little bit more color on -- from a numbers perspective on our core revenues. We anticipate Q1 as we stated in the press release to be approximately $56 million for the core revenues. And regardless of like seasonality that we might have for the parts of our business, we see the momentum behind our core revenues increasing throughout the course of the year. But I'll turn it over to Brandon, who can talk more about the areas that we're excited about that gives us confidence within the $240 million.

Yes, certainly. Thanks, Paul and thanks for the question. We're seeing strength across all business lines as we've now broken them out a bit to give some more granularity. But in particular, we're seeing strong growth in reproductive health as well as our Fulgent Oncology. Now granted, Fulgent Oncology is coming off a base of essentially 0. It's a new product launch for us that happened in 2022. But the reproductive health space, we've been in for some time However, we didn't have the contracts we needed to really penetrate that market. So we are seeing tremendous momentum in reproductive health. There's been some market dynamics that have opened up some tremendous opportunities for Fulgent. But both of those areas are showing tremendous momentum. So I think we have a lot of confidence in the guidance for 2023 and look forward to delivering on it as the year progresses.

Got it. That's very helpful. I'm sorry, go ahead.

Yes. Adding the comments from both Paul and Brandon, I do see the long-term investment from Fulgent's R&D team in the -- into the artificial intelligence and data mining technique, I do see the -- continue to see the benefit for us to provide the leadership in the NGS space and continue to build the technology which should provide our revenue growth.

Got it. That's super helpful. Brandon, I think just one follow-up on the contracts. So do you have any updates on the contract roll up? I think in the last call, you expect everything to be done by end of 2022. Is that still on track or like can you give us any color on that?

It's not entirely done. We've made tremendous progress there but it was an incredible amount of contract we had to work through. So it will still be some time before 100% of those are rolled up. That said, the momentum we're seeing in the business is closely tied to the progress we've made around the contracts. As Ming mentioned, we're expecting, I think it's safe to say, explosive growth in 2023 as it relates to carrier screening, that would not be possible if not for the leverage we now have with those contracts. So rolling them up, merging them together with the different entities, still a work in progress but the progress we've made has been meaningful and has really helped us grow business in the back half of the fourth quarter and Q1 is off to a fantastic start.

Got it. One final question for me. It's very exciting to see you guys launching a new Expanded Carrier Screening panel. But at the same time, we also heard from the industry that there are some uptake in denials from some of the commercial insurers on the reimbursement. So wondering if you have any color on that or do you see that trend happening or do you expect any pressures in 2023?

Well, I want to make it clear that we offer Expanded Carrier Screening panels or Carrier Screening panels that range from 1 gene, all the way up to the new large panel, 787 and we allow our clients to customize anywhere in between. However, we do see a trend towards more larger panels as we want to look across pan-ethnic populations for rare diseases where a couple may be a carrier. Certainly, there are some payers that consider Expanded Carrier Screening as investigational experimental or unproven. But we think that's very temporary. Certainly, clinicians have embraced Expanded Carrier Screening. It is, for the most part, standard of care in a reproductive setting. The payers perhaps are a bit behind as it relates to some of the coverage. But it's a minimal amount of payers out there that have not embraced Expanded Carrier Screening. And there's multiple organizations and companies that continue to educate and work with the payers as well as multiple academic societies that continue to update the guidelines around Expanded Carrier Screening. So any changes in the future should all be upside as coverage broadens.

Next question today is coming from Andrew Cooper from Raymond James.

This is Liam [ph] on for Andrew. I guess just to start out on capital allocation priorities. Now what we saw in the quarter, you acquired, you repurchased a number of shares. And obviously, we had the recent Fulgent Pharma acquisition. Going forward, what do you think the balance is between looking for more tuck-in acquisitions or more focused on share repurchases? Appreciate some color there.

Yes, I will take the answer from the CEO's position and definitely Paul will add his color from the CFO's position. I do see the -- Fulgent still have a lot of capabilities in terms of addressing this growing space in terms of NGS and the diagnostics. We see a lot of opportunities arising during the last year. So all our options are open. We continue to evaluate the companies which is adding to our capabilities in terms of technology or broaden our offerings. But in addition, we're also looking for the -- in this space, we see the consolidation. But meanwhile, we also continue using our set of funds capabilities to internally develop the technology and which fill our long-term growth. The test we announced today which is the largest of the gene panels for the carrier screening space. You've -- from previous questions -- answers, certain companies, of course, not feel capable to run -- exist in this space. But we feel that even with this largest gene panel, we can offer the efficiency and we can offer more quality tests and to address the market demand. So our fund will be allocated to continue in terms of the R&D to boost our capabilities. We're looking for the set of space and looking for the consolidation but in addition, Paul, can address some of the share repurchase program.

I think your question is excellent, because at the end of the day, our unallocated cash position on a relative basis is as strong as ever. We've been very aggressive doing stock buyback. We've acquired a number of businesses. We feel so comfortable with our business capability and the prospects for the future, we still have a sizable cash balance. I think that you've seen that even with the losses for the quarter, excluding investing and financing activities, we still generated cash during the quarter. The other thing, as we talked about revenues and the color around revenues and yes, we're guiding towards losses for the entire year. And part of that is because of the reduced growth in the operating margin. But underneath that, if you take a look at the dynamics for the fourth quarter which included a number of charges that were COVID-related and then -- which also included, right, Anatomic Pathology which typically has a lower margin profile. But when we take a look at the micro dynamics of what we believe will happen in 2023, aside from the confidence that we have with the core revenues, so we do anticipate an uptick in growth as well as operating margins. In other words, you saw the low gross margin in the fourth quarter of 2022, in the first quarter of 2023, the gross margins can be as high as 7 points, 8 points or 9 points of what you've seen in the fourth quarter. And that kind of increase in the gross margins we anticipate it to increase throughout the course of the year. And then a similar thing for the operating expenses, you saw a number of charges and things that were COVID-related in the fourth quarter. On an absolute dollar basis, you should see lower operating expenses in each of the quarters than what you saw in the fourth quarter. Aside from onetime and other kind of like normal charges, we do see containment, right, within our cost structure. And if you combine that with our capabilities and what we laid out in the core, yes, we're not projecting profits for 2023 but the cash burn, right, should be significantly reduced which kind of gets us back to what are we going to be doing with that cash? I think all of those options are still very much open for the company.

Appreciate the significant color there. The one thing I have a question on there, talking about OpEx moving lower. I believe Brandon mentioned we might see some S&M adds to the commercial team over the summer. Could you maybe discuss some of the dynamics there and what we can expect in terms of dollar impact?

Yes, yes. So I'll kind of like frame it and I'll turn it over to Brandon. The thing that you saw in the fourth quarter which we kind of began prior to that was the wind down of COVID. So there were a number of alignments that we made reductions, right, that was related to COVID. And then that pivot has started, right, over a quarter ago as to how we look at 2023. So aggressive hiring and what we can do to further bolster our entire commercial organization has been built into the 2023 plan. So now I'll turn it over to Brandon, who can talk about where he sees his focus and expanding the team and spending for us to achieve these targets.

Yes, certainly, I echo what Paul said. I mentioned in my section that we may expand this summer, that's purely driven by the opportunities we're seeing. Fulgent was presented a fantastic opportunity to grow our reproductive health space by one of the larger competitors exiting the marketplace. We scaled up our operations incredibly fast as we did with COVID-19 to take on this new volume and we're hitting our turnaround time, hitting our quality metrics, clients are happy. We started this late last year. So we're a couple of months into it so far. The reimbursement in ASPs we're seeing, we're very happy with and there's still a lot of opportunity out there. So we think we're very well positioned to win in this space, thus hiring the right salespeople to help us capitalize that is a good investment for the company.

Perfect. Really appreciate that. And then just last one for me would be so far, how have you seen Fulgent Pharma come into the fold? Just curious on the integration status there? It sounds like there's a lot of exciting pieces working in that business and would appreciate more color?

Yes. Thank you for the question. The integration is in process. We converted the employees to the Fulgent and we are -- still build up a more robust GMP manufacturing capabilities. So literally, we're making all the polymer, the GMP in-house. So that's the one very important components for the pharma and manufactured process. We also started to line up another contract manufacturer to provide the polymer and the drug mixing, filtering and labelization [ph]. So that process is also in place which will make another few thousand vials [ph] of the drugs for a clinical trial. So in general, the integration is pretty successful. In addition, we are getting additional clinical data from the Phase Ib trial. The data has been submitted to the ASCO for presentation in June -- in June later this year. Due to the ASCO's requirement that we cannot release data before they release data. So that's why the data will be presented at ASCO. This is a continuation effort and we provided ASCO data in 2021. Now 2 days later, we provided an additional update. So then by then, you will see the additional data which we feel very good about it.

Next question is coming from Tyler Anderson from Piper Sandler.

Sorry about that. This is Tyler Anderson from David -- I mean I'm representing David Westenberg at Piper Sandler. I was wondering what are the expected margin outlook for the new business segments that you're breaking out? And what levers are you going to be pulling to improve them? And specifically, how is the pharma spending looking throughout the rest of the year? And do you see any opportunities to further expand your menu? And if so, do you think you're going to be taking any inorganic or an organic approach to that?

Okay. So I'll kind of tee it up. There are a lot of different questions that were built on there but we'll take follow-up -- we'll take several follow-up questions from you because I want to make sure that we hit all those points. First and foremost, on our guidance for the overall business, when I was talking about operating margin, that actually includes the $15 million to $17 million of funding for pharma. So even if that is not commercialized, that's fully built into the model. And then, we'll kind of like lead into the 3 areas of our business, the Anatomical Pathology, the Precision as well as the Pharma Services. And I'll kind of tee it up and share the answers with Brandon from a margin perspective. I think it goes without saying that the margin profile for Precision as well as the Pharma Services that remain highly attractive for the company. I think for the Anatomical Pathology, that market traditionally has a lower margin profile. And although we're doing everything possible to gain efficiency for that marketplace, utilizing right, the systems that we have, it is going to take time. It's not something that is going to happen overnight. That was not our expectation. And we -- our anticipation is that the margin profile for that business, although it's low, will slowly, right, begin to look more favorable, right, throughout the course of time. But come the Precision as well as the Pharma Services, both the margin profile for those businesses are attractive to begin with. But I'll turn it over to Brandon, who can talk about, right, the margin profile in those markets.

No, I don't have a lot to add there. Maybe I'll just move on to your second question which was menu expansion. I'm not aware of any company that's launched as many tests as Fulgent has in the last several years. I mean, we clearly have an ability to rapidly launch test and commercialize them at scale. We're continuing to do so. We talked about a few on the phone call today. We launched our largest ever carrier screening panel today. We talked about launching our new Heme NGS Profile which we actually have MolDX approval for with a really attractive reimbursement rate. And we're going to continue to launch new products in essentially all the areas of our business, precision medicine as well as Pharma Services Also, we talked about launching today, new Pharma Services that we can better serve our clients. So we certainly see as part of our mission to continue to expand our testing portfolio via more of a one-stop shop for all of our clients. And our R&D and our technology really allows us to do this with modest investment in R&D. So I think the answer -- short answer is yes, you can expect continued menu expansion. And then the third question you asked is about organic versus inorganic growth. What we're seeing in the back half of last year and early into this quarter is fantastic organic growth. We are capitalizing on market opportunities with product and technology we had available at Fulgent and we are seeing fantastic organic growth in the company. That said, we continue to look at M&A as an option. And this leadership team consistently evaluate companies and assets. So I think as Paul mentioned on the call, the growth is likely to come from organic -- a mixture of organic and inorganic but all of the above is certainly in play and we think we have that optionality for 2023 and beyond.

Thank you. We reached 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.