Fulgent Genetics, Inc. (NASDAQ:FLGT) Q1 2024 Earnings Call Transcript May 3, 2024
Fulgent Genetics, Inc. beats earnings expectations. Reported EPS is $-0.01, expectations were $-0.33. Fulgent Genetics, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to the Fulgent Genetics First Quarter 2024 Conference Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Melanie Solomon, Investor Relations for Fulgent Genetics. Thank you. You may begin.
Melanie Solomon: Good morning, and welcome to the Fulgent first quarter 2024 financial results conference call. On the call 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 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 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 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 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 first 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 operating 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.
Ming Hsieh: Thank you, Melanie. Good morning, and thank you for joining our call today. I will start with some comments on the first quarter and our therapeutic development business, then Brandon will review our product, go-to-market update for our laboratory service business in the first quarter. Paul will conclude with the financials and outlook before we take your questions. We are pleased with our results in the first quarter. With $64.5 million in total revenue, we recognized $1.3 million of revenue on previously built COVID-19 test. Excluding COVID-19 revenue, first quarter core revenue of $63.2 million was driven by momentum in precision diagnostics, particularly reproductive health and oncology. All Fulgent revenue at this time originated from our laboratory services business, previously referred as our clinical diagnostics business.
Brandon will discuss this business further. Turning to our therapeutic development business. We continue to make good progress with the Fulgent Pharma. Our novel nanoencapsulation technology includes over 30 issued or active patents and active patent applications and target therapy platform designed to improve therapeutic windows and the pharmacokinetics profile of both new and existing cancer drugs. We are excited about this platform because it’s potential to yield several drug candidates. We believe that our lead drug candidate, FID-007 has shown promising results in clinical trials to date for treatment of numerous cancers, include head and neck, ampullary and pancreatic. An abstract of a preliminary HNSCC clinical results from our Phase 1/1b study has shown — has been accepted for presentation at the 2024 ASCO Annual Meeting, which will be held May 31 through June 4 in Chicago.
Our Phase 2 clinical protocol for second line treatment of HNSCC was accepted by the FDA, and we expect to enroll first patient this quarter. We look to bring FID-007 to more patients in the clinical trial setting and keeping you updated on the progress of the trial. We are advancing a second drug candidate, FID-002, a nanoencapsulated SN38 toward an IND or investigational new drug application by end of this year. We believe our nano drug delivery platform has the potential to address the challenges of currently available treatment for the colon, bile duct and other cancers using SN38 inside of a pro-drug of SN38. Building up our nano particle technology, we are also developing next-generation antibody drug conjugates ADC technology platform that could potentially provide even broader killings towards heterogeneous cancer cells than those ADCs with bystander killing effect.
Our ADC platform is not target-driven and maybe potentially being applied more targeted ADCs, particularly new targets with low antigen inflation, where existing ADC platform have failed to show the effect. Overall, we have a strong strategy with both laboratory service business and the therapeutic development business. We continue to maintain a strong balance sheet with which we will execute this strategy. I’d like to thank our employees, partners, stakeholders for your hard work and loyalty. We look forward to continued progress in 2024. I’ll now turn over the call to Brandon Perthuis, our Chief Commercial Officer, to talk about our laboratory service business results during the first quarter. Brandon?
Brandon Perthuis: Thank you, Ming. Our laboratory services business includes precision diagnostics, anatomic pathology and biopharma services. These three represent our core revenue streams and do not include COVID-19 testing revenue. First quarter core revenue was up approximately $500,000 year-over-year, however, down about $3.3 million sequentially. The sequential decline was attributed to timing of biopharma service contracts and a decline in our anatomic pathology revenue. However, looking at our precision diagnostics revenue stream, precision diagnostics was up $9.5 million or 34% year-over-year and increased $2 million or 6% sequentially. The growth in precision diagnostics was led by reproductive health and oncology.
We saw volumes continue to trend up late in the first quarter, and we exited the quarter with great momentum. We believe this momentum will carry into the second quarter. Thus, we expect approximately 10% sequential core revenue growth for the second quarter. In terms of reproductive health, the outperformance was driven by our Beacon expanded carrier screening product. We continue to execute on the operational front, delivering excellent turnaround time, clinical support and comprehensive gene content leading to increased detection rates. We also continue to execute on the commercial front, winning new accounts and working with our B2B partners to win new accounts. We have a robust pipeline for Beacon opportunities. Thus, we are predicting continued growth in this area.
Our Beacon volume has mostly been limited to IVF clinics due to carrier screening often being coupled with noninvasive prenatal testing, or NIPT, at the OB-GYN level. However, for the first time, we are launching a new NIPT test. This will allow us to shift gears and focus more on the OB-GYN market. This will include hiring a new sales team with OB-GYN experience currently in progress. Our new NIPT test, which we marketed as KNOVA spelled K-N-O-V-A is a unique first-of-its-kind approach. KNOVA will include aneuploidy screening, deletion duplication screening and de novo point mutations, all on one maternal blood sample. While there are test on the market today that include aneuploidy screening and deletion duplication analysis and other tests that look for de novo point mutations, there has not been one lab to offer both and more importantly, not one test to combine all three into one.
This will streamline the process for physicians, allowing them to use one lab for their NIPT needs. We expect KNOVA volume to start slowly as we onboard early adopters and our key opinion leaders. Moving to our oncology services. As you may recall, we have two oncology laboratories, one based in basin Alpharetta, Georgia, and one based in Phoenix, Arizona. Both laboratories offer comprehensive heme and solid tumor testing. The laboratory in Alpharetta caters to a pathologist clientele, while the Phoenix laboratory caters to an oncologist clientele, enabling us to specifically tailor our reports to the relevant client base. Both provide full-service expert hematopathology diagnosis, cytogenetics, flow cytometry, immunohistochemistry, FISH and molecular.
The Alpharetta lab, in particular, provides solid tumor consultation services to pathologists along with prognostic immunohistochemical and FISH testing, including tech-only services while the Phoenix operation — while the Phoenix solid tumor service concentrates on providing prognostic immunohistochemical and FISH testing to oncologists. NGS is available to both pathologists and oncologists and is performed centrally in our El Monte laboratory. This includes separate state-of-the-art NGS assays for solid tumor, including liquid biopsy in hematological neoplasms as well as offering germline testing. We believe that our heme assay is extremely comprehensive and is exclusively devoted to hematologic neoplasms unlike other providers, which usually offer a heme assay, either combined with solid tumor or something else like soft tissue.
Clients use Fulgent based on two main points, turnaround time and rate of insufficient specimens. We not only promise a turnaround time of less than 10 business days for our somatic cancer assays, we actually deliver on that in 96% of cases. And due to our expertise in nucleic acid extraction, our insufficient rates have been lower than what is generally seen in the industry with an overall QNS rate of 8.5% and 4.5% QNS rate specifically for lung. For heme, our QNS rate sits at 0.6%. Our Alpharetta location is growing nicely, transitioning from an excellent regional lab it was before Fulgent acquired it and growing into a more national footprint with an expanded sales force. In the oncology lab, which started as a regional laboratory with a focus in Southern California has now expanded into multiple regions in the country as we have grown its sales team.
Turning to anatomic pathology. While this revenue stream has seen some headwinds, we are beginning to see the new sales team and structure pay off. We are continuing to gradually layer on additional sales team members and expect to see this business stabilize in 2024. In addition, we have been diligently working on improving operational efficiency. We have recently purchased a new building just outside of Irving, Texas, where we will be able to consolidate our existing Texas operation and our New York operation. In addition, we continue to invest in digital technology for slide imaging and AI to improve both efficiency and quality of our operation. Finally, in terms of our biopharma services revenue stream, we are tracking on plan for 2024, and we continue to believe this revenue stream will perform well over time.
With our expanded product offering, the focus is to build a deeper opportunity funnel to help smooth out the lumpiness in this business. To that end, we are continuing to look at expanding on existing biopharma relationships and forging new ones. We have recently expanded the biopharma sales team to a small degree, and we continue to build on a robust product offering that we believe biopharma clients value, allowing us to address a large market for these types of studies. We are encouraged by the momentum in the business, and we look forward to updating our investors on our progress throughout 2024. I’ll now turn the call over to Paul Kim, our CFO. Paul?
Paul Kim: Revenue in the first quarter of 2024 totaled $64.5 million compared to $66.2 million in the first quarter of 2023. $1.3 million came from COVID-19 testing in Q1, which was not part of our guidance. Revenue from our core business totaled $63.2 million. Gross margin was 34.3%. The increase in gross margin year-over-year is primarily related to a decrease in overall compensation expense as we optimize our cost structure. Total GAAP operating expenses were $43.9 million for the first quarter, a decrease from $176.4 million in the fourth quarter of 2023, primarily related to the one-time non-cash goodwill impairment charge incurred in the fourth quarter. Non-GAAP operating expenses totaled $32.4 million, decreased from $45.1 million in the fourth quarter of 2023.
Non-GAAP operating margin increased approximately 12 percentage points sequentially to minus 12.9%, primarily due to lower bad debt reserve and legal fees. Adjusted EBITDA loss for the first quarter was $3.2 million compared to a loss of $7.2 million in the first quarter of 2023. On a non-GAAP basis and excluding equity-based compensation expense and intangible asset amortization, loss for the quarter was $269,000 or $0.01 per share based on 30 million weighted average shares outstanding. Turning to the balance sheet. We ended the first quarter with approximately $846.2 million in cash, cash equivalents and marketable securities. We are reiterating our outlook for 2024 provided in February. With minimal revenue from COVID-19 testing expected, we’re guiding to core revenue, which is total laboratory services revenue for the company without COVID-19 testing revenue.
We continue to expect total core revenues to be approximately $280 million for 2024, representing core growth of 7% year-over-year. There’s no revenues from our therapeutics development business anticipated in our 2024 guidance. Turning to expected margins for 2024, excluding COVID-19 revenue and stock-based compensation, we expect non-GAAP gross margins to continue to improve as the efficiencies of our integration efforts take effect, increasing from the mid-30% range we saw in Q1 to our target of 40% or slightly above 40% by end of year. We expect to see slightly lower non-GAAP operating margins in the quarters ahead as we further invest resources to grow our business with operating margins approximately at minus 18% for the year. We remain focused on managing our spend and continue to believe that our foundational technology platform supports a strong margin profile longer term.
We expect associated cash burn for therapeutics development business of approximately $15 million to $17 million this year, which is contemplated in our EPS and cash guidance. Utilizing a non-GAAP tax provision and average share count of 31 million, we reiterate our full year 2024 net non-GAAP loss of approximately $1.05 per share for our shareholders, excluding stock-based compensation and amortization of intangible assets as well as any one-time charges. Moving on to cash. Cash position remains strong. Excluding any stock repurchases or other expenditures outside of ordinary course, we would anticipate ending 2024 cash with approximately $800 million of cash, cash equivalents and investments and marketable securities. Overall, we see strength in our core business, which has grown organically through our strategic acquisitions and see good momentum ahead.
Thank you for joining the call today. Operator, now you may open it up for questions.
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