Hello and welcome to the Fulgent Genetics Q1 2023 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 morning and welcome to the Fulgent first quarter 2023 financial results conference call. On the call today are Ming Hsieh, Chief Executive Officer; Paul Kim, Chief Financial Officer and Brandon Perthuis, Chief Commercial Officer. The company’s press release discussing the financial results is available on the Investor Relations section of the company’s website, www.fulgent.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 first quarter of 2022 for more information, including the description of how the company calculates non-GAAP income or loss earnings or loss per share and adjusted EBITDA and a reconciliation of these financial measures to income or loss and earnings or loss per share 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 morning. And thank you for joining our call today. I will start with some comments on the quarter. Then Brandon will review our product and go-to-market updates from the first quarter. And then Paul will conclude with the financials and outlook before we take your call. We are pleased with our results in the first quarter. Exceeding the revenue guidance we provided earlier this year on our last call, we also had $3 million in revenue from COVID-19 testing, bringing us to a cumulative $2 billion in revenue from COVID-19 testing since 2020. More importantly, revenue from our core business outperformed our expectation. This was driven by strong results from our pharma services segment and the precision diagnostic segment. Including launch of our expanded Beacon testing, we see continuing momentum for Beacon testing, as well as other reproductive health service. According to recent report from Frost & Sullivan, it is estimated that global prenatal testing market was over $8 billion in 2021, and is forecasted to grow to over $11 billion by 2026, a 7% CAGR. Over $8 billion in 2021, 31% was carrier screening, over $2.5 billion. It is forecasted to grow to $3.2 billion by 2026, with a consolidation in the space. We now find our company as one of the top providers of carrier screening in the U.S., with a significant runway for growth. I want to make comments on Inform Diagnostics. As we have mentioned, the Inform Diagnostics business bolsters our capabilities in Anatomic Pathology, and adds significant revenue, though it has put some pressure on margins. As we continue to integrate acquisition, our focus on the implementing improved process to increase margin and continue to grow the top line with a new kind acquisition. This will take some time.…

Thanks Ming. We had a solid first quarter. While we are seeing [Indiscernible] across the entire organization the first quarter outperformance was led again by our offering for pharma services and reproductive health. I will cover these in detail momentarily at a high level first quarter sales with $62.7 million an increase of 150% year-over-year and 14% sequentially. This does not include any COVID-19 testing while a fraction of what it was a couple of quarters ago, we still do some COVID-19 testing. Now giving additional color on the business by breaking it out into three categories;. these include precision diagnostics, which is most of our clinical NGS business, Anatomic Pathology, and pharma services. Starting with our reproductive health business, which would fall into precision diagnostics. We are seeing tremendous growth here. The marquee product for reproductive health is our Beacon Expanded Carrier Screening Service. We addressed the features and benefits of this product in detail on the last call, but as a reminder, Beacon is a suite of products that range from small panels of 3 to 4 genes all the way up to 787 genes, which is one of, if not the largest panels offered today. The first quarter saw triple digit percentage growth in Beacon. Clients are choosing Fulgent and Beacon based on our comprehensive and customizable panels, our detection rates, especially for those genes complicated by high sequence homology, as well as our turnaround time. In all areas of reproductive health, but especially in the fertility clinics, turnaround time is critical. We are currently returning results within two weeks for over 90% of our patient samples, and those that take longer are usually because they require orthogonal confirmation. So even with triple digit percentage growth, our laboratory hasn’t missed a beat. We showed the power of…

Thanks, Brandon. Revenue in the first quarter totaled $66 million compared to $320 million in the first quarter of 2022. Roughly $3 million came from COVID-19 testing for Q1, which was not part of our guidance. Revenue from our core business totaled $63 million, which exceeded our guidance of $56 million and grew 150% year-over-year. Gross margin was 28.4%. The declining gross margin year-over-year is primarily related to the higher costs of Anatomic Pathology revenues from InformDX, which we purchased in Q2 of 2022. However, we are pleased to have achieved a 9 percentage point improvement in our gross margin sequentially over the prior quarter, as we see our efforts to create efficiencies across our acquired businesses pay off. Turning now to operating expenses, total GAAP operating expenses were $43.6 million in the first quarter, down from $49.5 million in the fourth quarter of 2022. Non-GAAP operating expenses totaled $33.8 million, down from $38.7 million in the fourth quarter of 2022. Non-GAAP operating margin increased 15 percentage points sequentially to a negative 19%, more than offsetting the increase in R&D of $1.2 million, which was primarily related to our pharma business, was a decrease in G&A of $7 million, as we continue our integration efforts to achieve efficiencies with our recent acquisitions. Adjusted EBITDA for the first quarter was a negative $7.2 million, compared to a positive $213.5 million in the first quarter of 2022. On a non-GAAP basis, and excluding equity-based compensation expense and intangible asset amortization, loss for the quarter was $6.5 million, or $0.22 per share, based on a $29.5 million weighted average shares outstanding. Turning over to the balance sheet, we ended the first quarter with approximately $868 million in cash, cash equivalents, and marketable securities, excluding investments pending settlement. Now moving on to our outlook…

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

Thank you. So I had a question on carrier screening. How much of the growth that you’re seeing is market growth, same-store sales versus share gain?

Hey, this is Brandon. Thanks for the question. It’s almost entirely share gain. We’ve executed well. We’re going to market with our Beacon Carrier Screening product. Clients’ demands are extremely high as it relates to turnaround time, quality, other features and benefits, and we’ve excelled in all of those areas. So our new client acquisition rate has been tremendous in the first quarter and carrying into the second quarter.

Thank you. And Brandon, could you give me an update on the billing transition, moving some of the contracts from InformDX to the legacy Fulgent offering?

Yes, certainly. In progress, going well. I think historically we’ve used the terms rolling up the contract, rolling them up to our tax IDs, the corporate level, etcetera. While some of that happens, I think we sort of want to look at it from a contract optimization standpoint as we have now multiple subsidiaries and obviously many hundreds of contracts. Our goal is to optimize those contracts across our several subsidiaries and labs, and it’s going pretty well. The progress we’ve made has helped us go to market with certain products and services, and as we continue to make additional progress, it’s just more opportunity for us to sell in the marketplace. So it is a long process, and we’re talking many, many hundreds of contracts to go through, so it’s probably taking a bit longer than we anticipated, but all things are going pretty well.

Thank you. And then my final question, how do you anticipate gross margins are going to trend throughout the year?

Yes, that’s a very good question. We see both growth and operating margins gradually improving throughout the course of the year, and that’s coming from two primary points. One is the continued efficiency and the automation that we see throughout our business, but it’s not going to be as fast as we might have anticipated just because we’re going to continue to invest in the infrastructure and the operations for continued expansion in our revenues throughout the course of the year. So you will see a gradual improvement in growth and operating margins, but with that improvement, we will still continue to make heavy investments in our operations because we anticipate the momentum that we see, particularly in the reproductive market that Brandon mentioned, to continue.

Okay. Thank you.

Thank you. Your next question is coming from David Westenberg from Piper Sandler. Your line is now live.

Hi. Thank you for taking the question. Congrats to a great start to the year. I want to actually follow up with Dan’s question in terms of market share wins in carrier screening. Any sense for if this is maybe share wins or new customers from Semaphore [Ph] shutting down that business or if it’s moves from existing players? And I guess the main reason why I’m kind of curious about the Semaphore is that I think a lot of those are the larger panels, and I just want to also maybe ask about reimbursement in those larger panels in carrier screening because I think some of the larger private insurance companies have been a little bit more, what’s the word, stricter on the payouts with those.

Yes, certainly. No, we certainly benefited from Semaphore exiting the market. So I mentioned on the previous question that a lot of the growth, which has been tremendous, has been from market share and new client acquisition. But we still see a long runway for adoption. As we join the Access to Carrier Screening Coalition, I mean, it’s clear that that reproductive population is still underserved as it relates to carrier screening. So we see a long runway for continued growth as expanded carrier screening is used more frequently in reproductive settings. And we have the support of the American College of Medical Genetics and Genomics. We have the support of ACOG. We have the support of the genetic counselors. So we see this as an evolving field that still has a long runway for growth. As it relates to reimbursement, from what we’re seeing, we’re pretty satisfied with what we’re seeing. I think most importantly is controlling the cost structure, right. So pre-COVID, we were always pretty proud of our cost structure. We often said we had one of the lowest cost structures in the industry. That translates to Beacon, right. So our goal is to automate as much as we can, use Informatics as much as we can. We process all of our samples in-house, including the orthogonal confirmations. We don’t have to outsource anything. So we think it’s incredibly important to control the cost structure. And with our cost structure and what we’re seeing right now in terms of reimbursement, it’s healthy. And we think it could only improve from here as we work with the payers to continue to expand coverage policies.

All very helpful. Thank you. I just have one more because, unfortunately, my computer just crashed and I can’t see my list of questions right now. So I think you said strength in the pharma services business. Can you talk about some of the high-demand offering that’s powering that? I mean, is this your new movement to a lot of different oncology tests that’s pushing this strength in pharma services? I mean, what’s going on there that’s really driving that?

Well, when we first launched pharma services as sort of a division and a focus for Fulgent, it was mostly NGS, right? Whether it was single gene, panels of genes, maybe exomes or genomes, but it was just NGS. Today, it’s a full multi-omic product offering. Probably one of the most comprehensive product offerings out there as it relates to providing services for pharma and biopharma. So whether it’s spatial biology, proteomics, RNA sequencing, I don’t even know, honestly, how many total tests we’re providing to pharma services at this point. It’s grown tremendously. So all of those platforms allow us to both sort of bid on new contracts as well as drive deeper relationships with existing customers.

Thank you.

Thank you.

Thank you. Next question today is coming from Andrew Cooper from Raymond James. Your line is now live.

Hey, everybody. Thanks for the questions. Maybe just first, I want to check one on the guide. I know the 240 prior didn’t include any COVID. I just want to make sure the 250, I think you said no incremental COVID. Is part of that raise, a couple million of COVID in 1Q or is that 250 numbers purely core and anything in COVID is above and beyond?

Yes. Thank you for that question. So the 250 is pure core.

Okay.

250 is pure core for the year. And to give a little bit of color on the breakout of the areas, when we initially laid out the guidance about eight or nine weeks ago, we said that the core revenues would be approximately 240 million. We said that pharma services would be approximately 13 and precision diagnostics and Anatomic Pathology would be evenly split at about 113.5 million each, adding up to the 240. We see momentum across all of our businesses, but virtually all of it is coming from the strength and precision diagnostics, as well as strength and pharma services. We like that very, very much because we think both those two areas are at the core of what the company was founded upon and we’re translating those kinds of capabilities over into Anatomic Pathology. But in short, we see momentum within the last eight or nine weeks from the time that we initially gave out guidance across all three of our businesses.

Okay, great. Maybe just one last quick one on guidance before I transition a little bit. The 2Q number is down just very slightly on core at about 62. I’m assuming that AP and precision diagnostics are growing, but pharma can be a little bit lumpy. Is that the right way to think about why there’s not a little bit more sequential progress from 1Q to 2Q?

I think you might be reading a little bit too much into it. I mean, if you take a step back, it’s only been two months since we provided our fiscal year guidance and now we’re raising it. The rise and the particular strength in the reproductive health and what Brandon has talked about has only happened in the past couple of weeks. And we’d like to see how that plays out before potentially raising. This is only the first quarter and we have plenty of opportunities to communicate where we think the business is going and where we think that we’re going to be ending the year. And that’s also associated with the question that I got on the growth of the operating margins. We are seeing a lot of those efficiencies, but then again, on the flip side, we are anticipating this momentum to continue throughout the course of the year. So we continue to make incremental investments in infrastructure and operations for that momentum because we anticipate that to actually strengthen as we get into the later quarters.

Okay. Helpful. And then maybe shifting gears a little bit, just sticking with expanded carrier screening, like you mentioned, kind of a newer, newer business for you, at least at the scale that you are in the U.S., you’ve got this big cash balance. I think a lot of the other players out there we see, you know, selling carrier screening have additional offerings there. Is there anything, whether from an inorganic perspective, potentially you feel like you need to add to be a little bit more interesting or at least that you could capitalize on to bundle with carrier screening to go to, more than just necessarily IVF clinics, but out into the OB/GYN field? How do we think about, you know, where there’s potential opportunity or need to expand now that you’ve found some real footing in that business?

That’s a great question. You hit on an area that we talk about quite a bit. So you are correct that a lot of our expanded carrier screening business is coming from the IVF clinic, so couples trying to get pregnant. We have everything it takes, the product, the turnaround time, the contracts, to penetrate the OB/GYN market, but we are missing a piece there, right? So often expanded carrier screening is ordered in tandem with non-invasive prenatal screening, NIPS, or NIPT as it was once called. We don’t have that today. It’s something we’ve talked about for a while. We could maybe do a strategic partnership, we could maybe launch it organically, but that’s the one sort of piece of the reproductive puzzle that we don’t have right now. We do have pre-implantation genetic testing for aneuploidy, which is important in the reproductive setting, but we’re exploring all options and I wouldn’t rule any additional product launches out in the future.

Okay, great. I’ll stop there. Thanks, everybody.

Thank you. We reached the end of our question-and-answer session. I’d like to turn the floor back over for any further or closing comments.

Yes. Thank you very much for everyone who joined our call today. And we are looking forward to provide you the update in the coming quarters. Thank you.

Thank you. That does conclude today’s teleconference webcast, and we disconnect your line at this time, and have a wonderful day. We thank you for your participation today.