Hello and welcome to the Fulgent Genetics Q2 2024 Conference Call and Webcast. [Operator Instructions] A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the conference over to Melanie Solomon, Investor Relations. Please go ahead, Melanie.

Thank you, Kevin. Good morning and welcome to the Fulgent second quarter of 2024 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.fulgentgenetics.com. A replay of this call will be available shortly after the call concludes on the Invest 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 that 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 looking to management's remarks today with the understanding that actual events, including the company's actual future results, may be materially different than 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 the forward-looking statements contained in the company's filings with the Securities and Exchange Commission, including the previously filed 10-K for the year ended December 31, 2023, and subsequently filed reports, which are available on the company's Investor Relations website. 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 prepared these non-GAAP financial measures because it believes they may be useful to investors for various reasons, but these measures should not be viewed as a substitute for or superior to the company's financial results prepared in accordance with GAAP. Please see the company's press release discussing its financial results for the second quarter of 2024 for more information, including the description of how the company calculates non-GAAP income or loss, earnings or loss per share, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating profit or loss and margin and adjusted EBITDA, and a reconciliation of these financial measures to income or loss, earnings or loss per share and operating margin, the most directly comparable GAAP financial measures. With that, I'd now like to turn the call over to Ming.

Thank you, Melanie. Good morning and thank you for joining our call today. I will start with some comments on the second quarter and our two business lines. Then Brandon will review our product and go to market updates for our laboratory service business in the second quarter, and Paul will conclude with the financial and outlook before we take your questions. We are pleased with our results in second quarter with $71 million of total revenue, we recognized $841,000 of revenue on previously built COVID-19 tests. Excluding COVID-19 revenue, second quarter core revenue of $70.2 million was driven by momentum in precision diagnosis, particularly reproductive health and oncology. We were pleased with the growth in all three areas of our laboratory service business this quarter, and we've seen good momentum ahead as we continue to invest in reproductive health testing and seeing the benefit of those investments. We have reached a very important milestone in consolidating the labs acquired as a part of the informed diagnosis transaction. With our new 96,000 square foot lab facility in Coppell, Texas, we believe we'll have an opportunity to triple a capacity, fueling the potential future growth and expansion. Brandon will talk more about this. In our therapeutic development business, we presented Phase 1 clinical data using our lead therapeutic development candidate FID-007, to treat head and neck cancer. At American Society for Clinical Oncology or ASCO annual meeting in June 2024. Of 11 head and neck, squamous cell carcinoma or HNSCC, available patients with weekly dose level from 50 milligram per square meter to 160 milligram per square meter. 5% or 45% had a partial response, and 7% or 27% had a stable disease by this. Three out of five HNSCC patients with a partial response had previously been treated with taxanes.…

Thanks, Ming. As a reminder, our laboratory service business includes precision diagnostics, anatomic pathology, and biopharma services. These three represent our core revenue streams and do not include COVID-19 testing. And we had another very strong quarter led by precision diagnostics with all three areas showing strength. This is the first time we have seen all three areas post quarter-over-quarter growth since 2022. In the past few quarters, we have experienced some headwinds in anatomic pathology and biopharma services, but we are seeing the investments we made in those areas begin to pay off. I'll talk more about each of those momentarily. Circling back to precision diagnostics, it was up $5.7 million, or 15% quarter-over-quarter, and $11.2 million or 35% year-over-year. The tremendous strength has been led by reproductive health testing, including Beacon expanded carrier screening. Beacon continues to be a bright spot for Fulgent. We have to have significant market share, establish strong B2B relationships, and continue to have a sales pipeline that gives us confidence and continued growth. The laboratory continues to perform exceptionally well, even with the record volume we are seeing. On average, our turnaround time has been 11 days, which is fantastic and a true testament to the power of our technology platform. To scale this rapidly and continue to provide rapid turnaround time is not trivial. We've also been able to give our clients the flexibility to custom tailor the gene panel to their specifications. In addition, our strong engineering capabilities have allowed us to rapidly interface with client-side EMRs, allowing for orders and reports to be delivered electronically. Beacon will continue to be a focus for Fulgent as we now find ourselves as one of the leading providers of expanded care screening services. Staying on reproductive health, last quarter we announced we have…

Thank you, Brandon. Revenue in the second quarter of 2024 totaled $71 million, compared to $67.9 million in the second quarter of 2023. 841,000 came from COVID-19 testing in Q2, which was not part of our guidance. Revenue from our core business totaled $70.2 million. GAAP gross margin was 37% and on a non-GAAP basis was 40%. Gross margins continue to improve year-over-year showing the benefit of our continued efficiencies and streamlining of our business. Total GAAP operating expenses were $45.4 million for the second quarter, compared to $43.9 million in the first quarter of 2024, primarily related to higher R&D spend. Non-GAAP operating expenses totaled $33.8 million, compared to $32.4 million in the first quarter of 2024. Non-GAAP operating margins increased approximately 5 percentage points sequentially to minus 7.4%, primarily due to higher revenue and gross margin in Q2. Adjusted EBITDA loss for the second quarter was $727,000 compared to a loss of $2.7 million in the second quarter of 2023. On a non-GAAP basis and excluding stock-based compensation expenses and intangible asset amortization, income for the quarter was $4.7 million, or a positive $0.15 per share based on $30 million weighted average fully diluted shares outstanding. Turning to the balance sheet, we ended the second quarter with approximately $838 million in cash, cash equivalents and marketable securities. Cash used in the period included investment and building improvements in lab equipment for our Coppell lab, which Brandon mentioned. We relocated our Texas lab in the second quarter. Now moving on to our guidance. We're reiterating our revenue outlook for 2024 with minimal revenues from COVID-19 testing expected, we're guiding to core revenues, which is total laboratory services revenue for the company without COVID-19 testing revenue. We continue to expect a total core revenue to be approximately $280 million for…

Certainly, we'll now be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from David Westenberg from Piper Sandler. Your line is now live.

Hi. No, thank you for taking the question and great job in the quarter. I think this one would be for Paul. I know, I think it's really obvious right now that your cash management has been fairly terrific over the course of through all of your different acquisitions. So with an $800 million cash balance and your kind of like proven cash discipline. Is there any thought to capital allocation going back to M&A strategy? Or do you think you have maybe too many irons in the fire right now with all the different businesses and moving into more oncology tests and reproductive health and all the clinical trials coming up?

I think our cash balance is certainly sufficient to do the things that we want to do to address a wider market that we can with our capabilities. When we take a look at the efficiencies in our business, we see it combined overall with the companies that we have purchased over the last couple of years. As you remember, in 2022, our core revenues was approximately $181 million. In 2023, the core revenues were $262 million. In 2024, as of today's call, we're reiterating $280 million of our core revenues. When we take a look at our overall business, the momentum for our core has seen a very, very nice growth. But I think the other thing that we're very, very excited about is the improvement that we see in our overall operations, particularly our gross margins. If you look at the gross margins for the business, excluding COVID, the gross margins, excluding stock-based compensation in the first quarter of 2023 was approximately 28%. When within six quarters for Q2 of 2024, even if you take out the COVID, our gross margins are 39.4%, that is over 11 whole points of improvements that we have in the gross margins. And then you get into the operating expenses. The operating expenses have been more favorable than we have anticipated. Now, some of that was due to better collection experience that we had within our regular business, as well as COVID. But yes, you are correct. The overall efficiencies in our business, the efficiencies that we had with integrating our acquisitions, and cash management has been much better than we have anticipated.

Okay, great.

Maybe, David if I just…

I'm sorry. I'm sorry.

Sorry, David. It's Brandon. I just want to address the point. No, we don't have too many irons in the fire, to answer your question. However, we're going to be very careful with our acquisitions going forward. But the management team consistently evaluates opportunities for M&A. We've done two M&As thus far, and both have worked quite well. That's not always the case with companies. If we do a third or a fourth, we want to make sure it's something we can make work. But we don't have too many irons in the fire, and we consistently evaluate opportunities.

Great, great. No thank you, Brandon. That was a great clarity there. I'll stick with you in terms of the questions here, Brandon. Just in terms of the reproductive health business, that's a growing opportunity there. Can you talk about some of the differentiation that you have in the NIPT test? We talked about this in [EMO] (ph) a couple weeks ago, but I think it's pretty important to reiterate this. And if there is any guideline expectations, obviously not in the guide, but what's the latest there? And would you indeed benefit from both expanded carrier screening, ACOG recommendation and in addition microdeletions, particularly [‘22 Q] (ph), if that comes out. And just in terms of time lines for when that could come out. Thank you.

Yes. Thanks for the question. We also are hearing rumors of expanded ACOG guidelines going forward for expanded carrier screening. Certainly, that would benefit the industry. clinically, we're there. If you look -- especially on the infertility side of the business, expanded care screening is standard-of-care. That is what doctors are ordering for their patients going through infertility treatments. So it would be great to see the guidelines become more aligned with practice today. Most the biggest benefit there being payers often fall in line with the guidelines. So we'll continue to monitor that. I know it's being worked on. And I think it will be positive for the industry as it relates to expanded carrier screening. In terms of our NIPT test, the main differentiator there is being able to screen for de novo point mutations. Most NIPTs out there are screening for any employee as well as microdeletions and so micro duplications, but don't include de novo point mutations for these monogenic conditions. And these monogenic conditions are quite serious they do cause severe disability. They are relatively common when you group them together. So we think this novel approach over time could be something clinicians really see as added value when they think about picking an NIPT partner.

Great. And then just because I haven't asked one from Ming, and I'll ask, I'll ask one for you. Just in terms of the head and neck opportunity, you said in the call, you have begun to start to enrollment. When would enrollment end? And then how long would the study be? And then can you help us size the opportunity of head and neck cancer, particularly for FID-007? Thank you.

Okay, thank you, David. We are excited with the performance or results of our Phase I study of FID-007. So we are doing the second phase trial for the second-line head and neck cancer patients. So the expected enrollment to be in early 2026. So -- and then we definitely -- based on the results, we'll probably move into the -- next is Phase III or if the result is really impressive, which is around above 50% response rate, it might have a chance to apply for the fast track of the FDA approval process. So giving for that's the opportunity for the head and neck cancer patient. Currently, the first-line treatment for head and neck cancer patient is using the immunotherapy using the KEYTRUDA for the treatment. Typically, the immunotherapy, the first line failed there was no real standard second-line treatment. We see the opportunity and try to get into this market for the second line, the treatment. There's over 50,000 patients of head and neck cancer in the U.S. alone. And that definitely globally is much, much bigger in terms of the cancer patients. So we are excited about the opportunity, and we do see a tremendous potential for us to grow in that area. This is only for the FID-007 definitely, we're pushing for a next drug will be into the market into the clinical study in 2024 -- '25, I'm sorry.

Thank you guys. That's it for me.

Okay, the next question is coming from Dan Leonard from UBS. Your line is now live.

Thank you. My first question, what changed on the expense side?

Yes. What changed on the expense side. That's a good -- you're talking about operating expenses. Is that correct?

Yes. That was the big change in your guidance. I'm curious what would functionally happened there?

Yes. We had -- the biggest change that we had -- was we had a lower G&A costs than what we anticipated, meaning that we were anticipating the G&A expense for the second quarter to be approximately $25 million to $26 million. But we had favorable collections from what we had previously reserved for. So that reduced our expenses.

So it was a change on the reserve side, as opposed to head count or anything like that?

That's right. I mean the head count and our operating plan, it was about what we anticipated. But we had a reduction in G&A due to better collections. And then the reason -- yes, and the reason why we narrowed our EPS was due to that. And then to a lesser extent, we had some tax benefits and credits come through the provision. But overlaying right, the overall condition of the company, we've had better gross margins, as I indicated before, our revenues were slightly higher and then just the efficiencies that we have in running our business.

Understood. And then, Brandon, I appreciate the thorough discussion on the FDA regulation of LDTs. But you did flag the uncertainty there. And I'm curious, how does the uncertainty around implementation of that regulation impact how you manage your business?

Well, it's a good question. Thank you. And I think for the most part, it doesn't. We believe whichever way they decide to go, we're in a good position especially benefiting from the tremendous size of our test menu. We have over 20,000 tests on our menu, which would predate the new regulations. And in addition, most -- a lot of our tests anyway are New York state approved. So should they continue down their current path. We think we're in a good position. And I mentioned on the call that maybe creates a bit of a moat around our business. If the lawsuit is successful and all this goes away, then we're back to where we were a few months ago running our business. So I think we're in a good position either way.

Appreciate that. And then just final question. Curious how the market share picture is evolving since we last caught up one of your big competitors was acquired or at least the acquisition was finalized. And I'm curious if you've seen anything different in the market?

Yes, good question. A little bit, not a lot. The competitor, you said, was acquired. So there was minimal, I think, disruption to their business there. I do think there was some and we did pick up some market share, but it wasn't like the previous event where we picked up very significant market share in Reproductive Health testing. But certainly, there was some instability there and some market shake up, but not to a large degree.

Got it. Thank you.

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

Hey, everybody. Thanks for the time. Maybe just first, I don't know if Brandon, maybe you're the right one to answer this. But just on NIPT, I mean, talk to us about sort of what's happening now in terms of starting to detail clinicians and kind of how you see that process playing out? When we should be thinking about potential ramp potential further appreciation of some of the differentiation given you said it is going to take some education to get there. So just would love your thoughts on what that pathway can look like?

Yes. Thank you, Andrew. I think it's going to take some time. This is the first novel NIPT product to hit the market in some time. So you're spot on. It is going to take some significant physician and clinician education. I do think there is a powerful message behind it. The de novo point mutation for the monogenic conditions really does add a lot of clinical value, but it is going to require a lot of clinician education. Right now, we have a pretty small sales team focused on that area. So I would expect some more meaningful volume, probably not until 2025, as we really said, focused on the education part as well as doing some additional publication and validation studies and some expanded indications. So I'm thinking more of a meaningful volume in 2025.

Okay, helpful. Maybe shifting a little bit, just anatomic pathology. You talked about winning new accounts and some real positive things there. The business isn't necessarily growing materially though. So -- maybe just give us a sense, are these new account wins more recent? Or what's the moderating factor where maybe you're seeing some customers go out the door on the other side or some volume transition one way or the other to keep that business from growing a little bit better?

Yes. Well, look, it's been going the wrong direction for some time, which we've been working on. Some of that was macro factors, some of that was around contracted rates and reimbursement and other situation. But either way, the business is going the wrong way. We've addressed most of those. And I think the biggest thing we've done is make sure we adhere to our turnaround time, at the lab, which we've done. Even moving -- even during the move, which we did in the second quarter, we still maintained our turnaround time. We've also revamped the sales team. We've restructured the sales team. We've restructured comp plans, to more align with our corporate objectives. So we've tackled this at all different angles, and we're seeing it pay off. I know this quarter wasn't much growth, but it was some. So we think the business has been stabilized. And when we look at the sales pipeline, in the recent wins, the very recent wins, the sales team is finding bigger deals. So I think the back half of the year for AP should continue to have some really good momentum.

Perfect. That's super helpful. And then maybe for Paul, we've seen you guys active in terms of buybacks in some recent quarters. So I just would love -- maybe any thoughts on that given not executing on M&A, having a great cash balance and doing well from that cash management side of things, maybe how you think about potential deployment of that capital, whether to more repurchases again or elsewhere?

Yes. So as you remember, we have a $250 million stock buyback program. To date, we bought back about $100 million, so there's $150 million left. We do see buyback as one of the options that we have for the usage of our cash. There are times where we can buy and there are times where we can't buy. We've shown also in the past that we deployed that cash in making two significant acquisitions CSI and InformDx. And I think the operational results show that we have had tremendous success in integrating and creating value from those acquisitions, which are being reflective in our overall results. And we believe the best way to return share -- return value to shareholders and an ROI is to continue to invest in this market and to expand our business.

Yes. I think Dan, adding the point for Paul mentioned, I think we are actively looking for the target for M&A. But taking a look at what we did for those two transactions, Inform Diagnosis and CSI laboratory services, not only we spend money for the acquisition, but also we need to spend the time and reinvestment to integrate those business. I did a rough calculation. Besides, we spent about close to $220 million to buy those business -- two business. We also invested more than $60 million of cash and try to integrate and streamline those business. We do see those acquisitions making this as very strategic move, which lead us the capability to grow our Precision Diagnostics business, which is we show the results without those insurance contracts, we're not able to get us into the position to be a major player in the Reproductive Health area. We continue to execute our strategy. We are looking for the old opportunities for the M&A and as well as our internal development. So that's the way we will spend our cash.

Great, I'll stop there. Thanks again.

Thanks, Andrew.

Thank you. We've 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.