Fulgent Genetics, Inc. (NASDAQ:FLGT) Q2 2023 Earnings Call Transcript
Fulgent Genetics, Inc. (NASDAQ:FLGT) Q2 2023 Earnings Call Transcript August 4, 2023
Fulgent Genetics, Inc. misses on earnings expectations. Reported EPS is $-0.37665 EPS, expectations were $0.33.
Operator: Hello and welcome to the Fulgent Genetics Q2 2023 Earnings 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 call over to Melanie Solomon, Investor Relations for Fulgent. Please go ahead, Melanie.
Melanie Solomon: Thanks, Kevin. Good morning and welcome to the Fulgent second quarter 2023 financial results conference call. On the call with me 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 31st, 2022 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 second quarter of 2023 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.
Ming Hsieh: Thank you, 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 for the second quarter and Paul will conclude with the financials and outlook before we take over your questions. We are pleased with our results in the second quarter with another record core revenue reaching $67 million and less than $1 million of COVID revenue for a total of just under $68 million of revenue. Our core revenue was driven by strong results across all three areas of our diagnostics business. Precision diagnostics, anatomicpathology and pharma services, including our expanded Beacon Carrier Testing for reproductive health services.
We are encouraged by the outperformance in the first half of the year and seeing good sales momentum as we move into the second half of the year. We continue to make good progress with our therapeutic business, Fulgent Pharma, our novel nano-encapsulation technology, including over 40 patents and a targeted therapy platform designed to improve therapeutic windows and pharmacodynamics profile of both new and existing cancer drugs. Our lead drug candidate, FID-007, has shown promising results for the treatment of numerous cancers, including head and neck, ampullary and pancreatic, with reduced side effects. In June, we presented safety and efficacy data from the ongoing Phase 1b study at the American Society of Clinical Oncology Annual Meeting in Chicago.
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In summary of 40 heavily treated patients of various cancer types with weekly dose level from 50mg/m² to 160mg/m². 18% had a partial response and 35% had a stable disease. Three out of four scoring cell carcinoma of head and neck cancer patients with a partial response had previously been treated with taxanes. No high grade neuropathy was noticed. FID-007 demonstrated preliminary evidence of anti-tumor activity in heavily pre-treated patients across various tumor types. Based on the overall tolerability, pharmacodynamics and efficacy, 125mg/m² has chosen as recommended Phase 2 dose. We received a positive response for the data from medical community and continue to optimize our manufacturing process as well as preparing the initial Phase 2 studies.
We look forward to sharing additional update of the start of that trial by the end of the year. We also have a deep pipeline in pre-clinical development focusing on targeted therapies for additional cancers. I'd like to thank our employees and the shareholders for your loyalty during the quarter. We look forward to the second half of the year and the momentum we are creating with our combined business. I will now turn the call over to Brandon Perthuis, our Chief Commercial Officer, to talk about our diagnostic business results during the quarter. Brandon?
Brandon Perthuis: Thank you, Ming. We had a record quarter for our core business, driven by strong growth in our Precision Diagnostics division. Precision Diagnostics was up 40% year-over-year and 12% sequentially. We are seeing strong demand for our reproductive services, specifically our Beacon Expanded Care Screening product, as we have now cemented ourselves as one of the market leaders. During the quarter, we saw our other divisions meet expectations with Pharma Services having another strong quarter. However, as we previously mentioned, we expect Pharma Services to be a bit lumpy depending on the timing of the service contracts. Looking forward, our Pharma Services pipeline and backlog remain strong as we continue to leverage our expanded capabilities in multi-omics and spatial biology.
Not since COVID-19 have we stress tested our technology platform like we did this quarter. Overall next-generation sequencing lab volume was up 112% year-over-year. We were able to take on this volume with minimal incremental investments and were able to perform the services with only minimal temporary increase in turnaround time. We feel time and time again, we are showing real-world evidence of the power of the Fulgent technology platform and overall lab operations and capabilities. We stated before that we are a laboratory founded, designed and built by engineers. Our mission was to create a differentiated lab operation using automation, AI and informatics to be able to scale genomic testing without the high cost of continually layering on professional hires.
During the quarter, we also installed additional sequencers, the most recent and highest throughput to-date, allowing us to additionally expand our capacity and lower the cost of exome and genome sequencing. We have also recently begun consolidating our two West Coast lab operations into one. Historically, we occupied two buildings a few miles apart. Bringing them together should lead to new operational and cost efficiency. We aim for the move to be completed by the end of the third quarter. Beacon Expanded Care Screening continues to be a key growth driver for our company. Fulgent stands out in this space as one of the few labs that controls the end-to-end product offering, allowing us to have a better handle on cost and turnaround time. As we ramp volume, we are focused on process improvement to continue to lower costs and improve turnaround time.
We've done a good job capturing meaningful market share in the infertility space, and we will look to penetrate the OB market in the future. While most clinicians today are using a panel of around 400 genes, a standard of care, we've already built the next version, which includes 787 genes, and we are seeing more and more adoption of this larger panel. Our thought process is that clinicians will continue to look for broader coverage, which is what we've seen over the last few years, going from approximately 100 genes to approximately 400 genes. Before too long, the most efficient test could be an exome at which time, we'll be ready to address with our proprietary sequence alignment tools, bioinformatics and capture probes along with our robust sequencing capacity.
Our Anatomic Pathology division continues to perform well with a lot of our focus on continuing to improve operations. These improvements include standardization of systems, revenue cycle management, logistics and managed care, among others. In addition, we have been investing heavily in digital pathology. Digital pathology is revolutionizing the space, leading to better turnaround time, cost and quality. For example, shipping prepared glass slides to our labs and to our clients had the burden of at least one day shipping and associated costs plus the physical storage. Now we can scan, digitize and share electronically immediately. In addition, we have built one of the only end-to-end solutions to allow our clients to view the digital images or even sign out their own cases.
Turning to Fulgent Oncology. Now with both our Lumera solid tumor profile and our Lumera heme NGS approved and priced by MolDX at $3,288 and $2,950, respectively, we turn our attention to expanding beyond our soft launch on the West Coast. We have placed a small number of reps in strategic territories across the nation and expect this team to continue to grow. Armed with a multidisciplinary portfolio, Fulgent Oncology is a near one-stop shop for specialty oncology testing. We feel very strongly that we will be able to continue to penetrate the community oncology segment beyond the West Coast and establish ourselves as a national contender in precision cancer diagnostics. As Ming mentioned, we are pleased with the performance during the second quarter and we remain encouraged by the business prospects we see moving forward.
I'll now turn the call over to our CFO, Paul Kim, to walk through the detailed financials. Paul?
Paul Kim: Thanks, Brandon. Revenue in the second quarter totaled $68 million compared to $125 million in the second quarter of 2022. Less than $1 million came from COVID-19 testing in Q2, which was not part of our guidance. Revenue from our core business totaled $67 million, which exceeded our guidance of $62 million and grew 48% year-over-year. Gross margin was 30.3%. The decline in gross margin year-over-year is primarily related to the higher cost of Anatomic Pathology revenues from InformDx, which we purchased in Q2 of 2022. Non-GAAP gross margin was 33.8%. We are pleased to have achieved a two-point improvement in our gross margin sequentially over the prior quarter as we see efforts to create efficiencies across our acquired businesses pay off.
Now turning over to operating expenses. Total GAAP operating expenses were $40.4 million for the second quarter, down from $43.6 million in the first quarter of 2023. The non-GAAP operating expenses totaled $30.4 million down from $33.8 million in the first quarter of 2023. Non-GAAP operating margin increased eight percentage points sequentially to a negative 11.1%, which is primarily due to adjustments and bad debt expenses and few other items, combined with continuing operating efficiencies. Adjusted EBITDA for the second quarter was a negative $2.7 million compared to a positive $37.7 million in the second quarter of 2022. On a non-GAAP basis and excluding equity-based compensation expense and intangible asset amortization, loss for the quarter was $2.4 million or $0.08 per share based on 29.8 million weighted average shares outstanding.
Turning over to the balance sheet. We ended the second quarter with approximately $847 million in cash, cash equivalents and marketable securities. The decrease from the first quarter is primarily due to cash used, approximately $25 million to pay off our margin loan in full and to purchase real estate. From operations, cash provided by operating activities for the second quarter was a positive $9.7 million. Moving onto our outlook for 2023. Given the outperformance in the second quarter, we're raising our core revenue guidance to $260 million. The number does not anticipate additional revenue from COVID-19 testing. Looking ahead, we expect gross margin and operating margins to continue to improve as we implement efficiencies to our integration efforts with our recent acquisitions.
The margin improvement is forecasted to be incremental for the remainder of the year as we plan to make further investments in resources to position the company for longer-term growth. For the full year 2023, utilizing an estimated 28% tax rate and a share count of 30 million, we now expect our non-GAAP losses to narrow to $0.95 per share from the previous expectation of $1.25 for our shareholders, excluding stock-based compensation, amortization of intangible assets as well as any onetime charges. Overall, we have further strengthened our core business. We bolstered our portfolio through strategic acquisitions and are already seeing improved financial performance in the first two quarters of 2023 and see good momentum ahead. Thank you for joining the call today.
Operator, you may now open it up for questions.
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