Fulgent Genetics Is Fundamentally Sound (NASDAQ:FLGT)

Fulgent Genetics (NASDAQ:FLGT) had a very good 2019, but it won’t come as a surprise to realize that 2020 is going to be considerably more challenging. At the time of the Q4CC (March 10), the US was still a different place, so management did not see much impact of the coronavirus.

In fact, they were touting the test they have developed swiftly to detect infections, and while this is awaiting FDA approval, there might actually be some upside.

But, in a few weeks, the US reality on the ground has changed pretty dramatically, with many healthcare systems being overstretched and an economy in free-fall. We’ll get to that below. First, the excellent year.

2019 results

ChartData by YCharts

These are GAAP figures, adjusted EBITDA was $5M for the year, and adjusted net income was also positive, as was cash flow.

Organic revenue growth was 50% (48% in Q4), although this was somewhat embellished by a very big customer resolving backlog in Q3 (when it made up 40% of revenue in that quarter, down to 13% in Q4). The company gained over a dozen new customers in Q4, so there is compensation for that.

Their Chinese JV grew 223% in Q4 (y/y) reaching $4.1M in revenue. ASP grew 20% to $600, and there was a modest increase in cost per test in Q4 to $260 (GAAP) or $246 (non-GAAP).

Competitive strength

While the market is competitive (but also fragmented as there are many different tests for many different conditions and situations), Fulgent touts a cost advantage, as we discussed in an earlier article.

We can’t independently verify that, but a pretty strong indicator is that other companies outsource their testing at Fulgent. But there are other reasons why the company is doing well. Here is Brandon Perthuis, the newly appointed CCO (Q4CC):

I’ve come to understand how our technology and approach truly set us apart from other laboratories in the market. Specifically, the Fulgent Laboratory Information Management System, or FLIMS for short, serves as the engine that drives many of our efficiencies… Our technology platform also allows us to be the only lab that enables our physician clients to customize genetic tests in real-time. We also recently became the first lab to routinely use next-generation sequencing for parental studies, which we have shown to be critically important in detecting clinically relevant germline mosaicism; this was recently published in the Journal of Molecular Diagnostics.

The company is also very good at rapidly expanding their testing menu, enabling them to have one of the largest testing menus around and allowing the company to evolve quite significantly in a short amount of time (Q4CC):

At the time of our IPO in 2016, Fulgent was a rare disease company; today, we are comprehensive lab offering testing that spans all areas of genetic health, including prenatal, preimplantation, reproductive carrier screening, cardiovascular disease, neurodegenerative disease, and both, hereditary and somatic cancer.

Margins

ChartData by YCharts

Non-GAAP gross margin (the figure shows the GAAP numbers) increased 600bp to 59% in Q4 (y/y), while non-GAAP operating margin was 6%, a whopping 14-point improvement over last year.

The company has plans to ramp up hiring in R&D and S&M, but it remains to be seen how much of these plans survive under the present conditions.

Cash

ChartData by YCharts

The company is achieving something what few of their competitors manage (see below), positive cash flow, and their balance sheet is very strong adding $20M in a recent financing, producing a kitty of $70.2M and no debt. Balance sheet strength matters under the present conditions, needless to say.

Guidance

For what it’s worth, management provided the following guidance:

  • $40M in revenue (+23%)
  • Q1 revenue between $7.5M and $8.0M, with subsequent quarters adding $1.5M per quarter.
  • Cost per test coming down every quarter
  • GAAP gross margin of 55%
  • Positive cash flow and non-GAAP net earnings

Coronavirus

The Q4CC was held on March 10 when the US only had 1,300 confirmed coronavirus infections, and this already seems from another era. So, it’s not surprising that management didn’t seem too worried about any impact.

In fact, when asked about possible ramifications, management talked about the test they have developed for detecting the coronavirus and which China is validating and which has been submitted to the FDA (Q4CC):

So specifically, in terms of coronavirus, we knew the current test method, which is used globally has roughly about 30% to 40% detection rate. At Fulgent, our team here has been developed [ph] new test method, one method that will be more accurate than the current one. We did submit our tests based on the regular method, PCR to FDA already, and we will submit our new comprehensive method in the next few weeks.

In terms of disruptions in access to hospital, management had this to say (Q4CC, our emphasis):

Fulgent does have the ability to do at-home collections of samples, if necessary via saliva or buccal samples. So, I think Ming is correct that, in general, we don’t expect any sort of disruption to patients, patient flow or patient’s access to our types of services.

We don’t know about you, but we’re not entirely convinced by that. Take, for instance, Exact Sciences (NASDAQ:EXAS), a competitor which provided the following update on March 19:

  • Effective March 13, employees who can work from home have been asked to do so, minimizing the staff to those who perform patient-critical work.
  • The company has suspended field-based, face-to-face interactions by its sales force.
  • Exact Sciences’ testing labs will remain operational at this time.
  • EXAS is working to facilitate the use of online care for patients to access Cologuard for their colorectal cancer screening needs, which continue notwithstanding the COVID-19 pandemic.
  • Also, the company is withdrawing its previously announced Q1 and annual guidance for 2020.

There was something similar (without the withdrawal of guidance) from Veracyte (NASDAQ:VCYT) on March 17 and Seattle Genetics (NASDAQ:SGEN) (unknown date) also argued that some of their clinical trials might be affected.

Natera’s (NASDAQ:NTRA) labs continue with high throughput, although they announced protective measures (no date). Invitae (NYSE:NVTA) argues it is fully operational and is also taking steps to safeguard employees and patients (unknown date).

Competition

The genetic testing space is quite crowded, and it won’t be a surprise that, as a group, the shares have produced wild swings in March, when the coronavirus pandemic started to affect the US market:

Chart

The only exception to that is Seattle Genetics, which managed to hold up pretty well so far.

While Fulgent isn’t the fastest growing genetic testing company, it’s doing pretty well:

ChartData by YCharts

Its gross margins are in the middle:

ChartData by YCharts

And it’s the only company producing positive operational cash flow, which in this environment is pretty important:

ChartData by YCharts

Valuation is fairly modest versus the competition:

ChartData by YCharts

Conclusion

The shares are wildly volatile, but that can also work to the advantage of the patient investor catching a few on a lurch downward, which is what we suggest.

The company is fundamentally sound, producing positive cash flow (unique among the peers we reviewed here) and having a very strong balance sheet.

The big unknown, of course, is how much the fallout from the coronavirus pandemic is going to affect business. So far, the picture doesn’t seem to be too alarming, whilst the shares have basically halved from their recent top only a month ago.

Growth was going to come down anyway this year, so one could argue the shares got a little ahead of themselves in February, but we have little doubt this is a solid growth company.

Disclosure: I am/we are long FLGT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Be the first to comment

Leave a Reply

Your email address will not be published.


*