Fulgent Genetics, Inc. (FLGT) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the First Quarter 2018 Fulgent Genetics Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, this conference call is being recorded. I’d now like to introduce your host for today’s presentation, Ms. Nicole Borsje of Investor Relations. Ma’am, please begin.

Great. Thank you. Good afternoon and welcome to the Fulgent Genetics first quarter 2018 financial results conference call. On the call today is Ming Hsieh, Chief Executive Officer; and Paul Kim, Chief Financial Officer. The company’s press release discussing its financial results is available in the Investor Relations section of the company’s website, fulgentgenetics.com. An audio replay of this call will be available shortly after the call concludes. Please visit the Investor Relations section of the company’s website to access the audio replay. 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 results – 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 full-year 2017, which is 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 the 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 2018 for more information, including the description of how the company calculates non-GAAP earnings and earnings per share and a reconciliation of these financial measures to loss and 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, Nicole. Good afternoon, and thank you for joining us on our call today to discuss our first quarter 2018 results. I will spend a few minutes discussing update on our recent initiative before Paul discuss our financial results in detail. Let me first provide a brief overview of our financial results for the first quarter. Revenue totaled $4.7 million, compared to $5.3 million in the first quarter last year and up 9% sequentially from Q4 2017. Billable test in the quarter grew 5% year-over-year and 10% sequentially to our quarterly record of 4,621. Our ASP was $1,007, essentially flat compared to the fourth quarter. Non-GAAP gross margins in the fourth quarter was 43.1%, down slightly from 43.8% in the previous quarter. GAAP loss was $1.9 million and non-GAAP loss was $1.2 million. Non-GAAP loss per share was $0.06 in the first quarter. We are pleased with our first quarter results and I believe we are beginning to see stability in our business. We have begun to see momentums from our new initiatives, particularly our Beacon carrier screening test. As we discussed last quarter, we are now using accrual method of recording this revenue and are using a conservative estimate on collection rate for this test. Looking at the section across our business overall, we saw increase of approximately 6% compared to first quarter of 2017. We recognize that we are early in the process of reaccelerating our growth, but we are pleased with our initial traction and the start we had for the year. I would like to focus on updates on key drivers of our business. First, we’re seeing strong demand for our Beacon carrier screening test, [we just have] [ph] internal volume growth. We are expanding relationships with clinics, networks and organizations. As such, our customer base continue to expand. Further, we are planning to introduce a newborn screening test in coming months. Second, we launched our somatic test panel. With introduction of this panel, we expand our test menu beyond the traditional germline, screening to provide the more comprehensive cancer screening option. With the launch of the somatic panel, our test menu remains one of the most comprehensive in the industry. Though we are still very early in the low of the somatic test, we have started to receive some samples. Third, we made programs in reimbursement agreement and assigned several regional third-party contracts in the quarter. Fourth, service revenue from the biopharma organizations is great and now accountable for more than 10% of our overall revenue. Fifth, we won strategic government contract with the veterans administration and look forward to serve their genetics testing needs. Fourth – fifth – sixth, our China JV is operating well and we look forward for long-term business opportunities in the market. Lastly, expanding our lab, including automation and integration, we have made a meaningful investment in our lab operation and we now have ample capacity to handle increased volumes we expect to see. Overall, we’re again pleased with the trend – traction we’re seeing in our business, and I believe the first quarter makes the beginning of the positive trends in 2018. I’d like now to turn the call over to Paul to provide detail on our financial performance in the first quarter and he will also provide update on our outlook for 2018. Paul?

Thanks, Ming. First quarter revenue totaled $4.7 million, a decrease of 12% compared to the same period a year ago, but an increase of 9% compared to the fourth quarter of 2017. We’re seeing increased momentum in our business as we gain traction with our Beacon carrier screening test, and as we secure more business from our service agreement with pharma organization. As we discussed last quarter, we’re now using the accrual method of revenue recognition for all our business. Specific to our carrier test, we’re using a very conservative estimate on the collection rate of test when recording this revenue. We will adjust the rate in the future based on actual collection experience. Revenue from Asia has contributed – continued to decline and represented less than 3% of our total revenue in the first quarter, compared to 29% in the first quarter of 2017. Countering this decrease was notable strength in the United States, which caused our revenue to increase sequentially and resulted in record quarterly billable test. Billable tests were 4,621 in the first quarter, an increase of 5% over Q1 of last year and an increase of 10% from the fourth quarter of 2017. Our average selling price was 1,007 flat with the fourth quarter. Cost per test for the quarter was $600 on a GAAP basis and $573, excluding equity-based compensation of 124,000. Although average cost per test was essentially flat what we saw in the fourth quarter 2017, we believe we’re beginning to benefit from the onset of accelerating test volume, which will lower our average cost per test going forward. We anticipate that our average cost per test will begin to decline as we see benefits from increased volume, better productivity and make collections on insurance claims beyond our conservative initial estimate. Our non-GAAP gross margin was 40.1%, down slightly from 43.8% in the fourth quarter. Our gross margin will continue to fluctuate as our test mix varies and our volumes scale. Longer-term, we remain confident that our differentiated technology and operating efficiency, both led to improving gross margin. Now turning to operating expenses. We continue to balance investments for growth while managing expenses with a goal of reaching sustainable profitability in the future. Sales and marketing expense on a GAAP basis was $1.1 million for the quarter flat from last quarter. Our sales organization is now stable and we’re just beginning to see the payoff from the restructuring we made in 2017. On research and development, we continue to invest to maintain our technology advantage and expand our test menu as evidenced by the development of our somatic test this quarter. R&D expense in Q1 was $1.5 million, up from $1.3 million last quarter. We incurred several hundred thousand of dollars in expense related to the development of somatic test and enhancing our proprietary approach. This effort is largely complete, as such, incremental expense related to probe and somatic test should be minimal in coming quarters. Lastly, total G&A expense was $1.5 million, slightly up from $1.4 million in Q4. Total GAAP operating expenses were $4.1 million for the quarter, up from $3.8 million last quarter. Non-GAAP operating expenses were $3.7 million. Adjusted EBITDA loss for the quarter was $1.1 million, compared to loss of $1 million in the fourth quarter and $1.3 million in Q1 of last year. On a non-GAAP basis and excluding equity-based compensation expense, non-GAAP loss for the quarter was $1.2 million, or $0.06 loss per share based on $17.9 million common shares outstanding. The GAAP and non-GAAP tax rate at the end of the first quarter was 22%. Turning to the balance sheet, we remain well-capitalized to support our growth and we’re comfortable with our cash position. We ended our first quarter with $38.8 million in cash, cash equivalents and marketable securities with no debt. This equates to $2.17 in cash per share. Moving on to our outlook, as Ming discussed, we’re pleased with our first quarter results and are off to a good start for the year. We are beginning to see stability in our business as our sales organization matures, and as we’re growing – and we see growing contributions from our new initiatives. We are still very early in the process of reaccelerating our growth, but are confident in our position. We made investments and changes last year in the sales area and we are beginning to see signs that those investments are paying off. We remain on track for reaching our goal of, at least, $20 million of revenue for the full-year. We also expect that our gross margin will continue to improve over the course of the year as volume increases combined with experience on insurance claims. We also remain focused on controlling expenses, while investing for growth. Out profitability goals remain unchanged, but we expect a modest loss next quarter before moving towards break-even at the end of the year. It is still early on our cash flows reaccelerating growth, but we remain confident that our technology advantage, as well as expanding test menu and lab capabilities can continue to drive growth in the quarters ahead and will demonstrate the viable business model we have. Thank you, again, for joining our call today. Operator, you can now open it up for questions.

[Operator Instructions] Our first question or comment comes from the line of Erin Wright from Credit Suisse. Your line is open.

Great. Thanks. Can you talk or speak to the test mix in the quarter? How that influenced the ASP? And kind of how we should think about that progressing, I guess, over the course of the year? And how maybe some of your newer R&D initiatives and newer test offerings influence that overall ASP metric? Thanks.

Thank you for the question, Erin. So as far as the test mix for the quarter, our core customers who purchased the complex and the larger panels, they continue to grow and they grew from what we had in the fourth quarter. We also had decent quarter for the sequencing for service with the pharma organization, and as Ming indicated, now that accounts for over 10% of our revenues. And then we’re beginning to see the recognition of revenue from our carrier and our cardio test, which we launched towards the late part of last year, and we’re just beginning to see the revenue is being recorded from those two particular tests, the carrier and the cardio. To give you a little bit more color into orders and revenues, our sessions are at a record, as Ming indicated, on a year-over-year basis, where sessions were up 57% or 56%. But a huge chunk of the increase in a session comes from the introduction of those new tests. But if you take a look at the revenues that we recorded from the carrier and the cardio test, it totally represents 2% to 3% of our booked revenues and that’s because we used a very, very conservative rate initially on the collection based on the little experience that we had of processing insurance claims. We believe that the rate that we used, which estimates the collections is very conservative. And we believe, as that becomes more normalized, we should get an uplift in the revenues that we booked from those tests. As far as your comment on the ASPs, because a larger portion of our business now is being processed through insurance, although we booked a very small piece of revenues from that. The ASPs are being normalized with the various tests that are under our belt now whether that be the complex panels, the exome, the carrier tests, the sequencing for service, the cardio. The ASPs on average as we process more to insurance should come down. But the thing that will come down even more than the ASPs will be the COGS for tests, because we’re processing all those tests in a lab now and our costs are being recorded in the cost of sales. I think, in the near-term, when we take a look at even as early of Q2, what all that translates into is higher billable tests, we should see top line revenues increase from what we posted in the first quarter in Q2. We’ll see gross margins being raised from what we currently reported. And on the operating expenses side, we should see that potentially be even lower than what we posted in the first quarter, because in the first quarter in the operating expenses, as I indicated, we had up to $300,000 in costs that were booked for the development of the somatic test in addition to the redesign of the new probe. And then, as another example, on the G&A side, we had the year-end audit, which is not going to be booked and its full impact in the second quarter, so you should see operating expenses be potentially lower than what we had in the first quarter.

Okay. That was great. There was a lot of information what I needed. The – I guess, one other question, just on the evolution of your sort of commercial payer relationship, I guess, where do we stand now and how is that sort of evolving?

Erin, we are continuing to develop some of those relationships. But as you may know, the insurance collection is still kind of in the early stage, because [indiscernible] depends on the year – beginning of the year, end of the year in network, of network, deductibles and non-deductibles. But – from what we are seeing, as Paul discussed earlier, we do see – we’ll see the volume offered on the session and we do start to try to make a reasonable collection. So overall, we feel it was good in the area we have been always will be pioneered in the – in terms of technology. But now we are focusing some of the third-party relationships, includes collections. And we do build a pretty or good collection team at the present time.

I think the other thing to note, Erin, is some companies are out there. Reimbursement is a such a huge part of our current strategy. For us, it’s a very important part of our strategy. As Ming indicated, we are making good strides at improving the process around insurance and we’re going to see more of fee income processed through insurance, as I indicated. But from a positioning perspective, we have a core set of institutional clients, which continue to purchase from us. We have developed our sequencing for service capability. We’re in the process of finalizing the development for our somatic test. We have a sizable portion of our revenues still coming from the international side. And then, as Ming indicated on the call, on the government, we made inroads by manning a contract with a better administration. So we think that there are lot of things under our belt. We just need to be able to capitalize on those opportunities and get the volumes and ultimately the revenues up.

Great, thanks. And one quick last one, if I can. Do you still have a relationship with some of the larger reference laboratories like the LabCorp and Quest [of the world?] [ph]

Erin, we do. Actually those who reference labs start and turning were good and we expect to generate revenue, which is specific collectible with cash. In addition with those relationship with the Lab3, we also have our independent contract now working with [Leahi Hospital] [ph].

That’s, great. Great, thank you so much.

Thank you.

Thank you. Our next question or comment comes from the line of Bill Quirk with Piper Jaffray. Your line is open.

Hi, this is [Tyler Etten] [ph] on for Bill. I guess, building up of this last second question, how much in terms of reimbursement, where we’re at for lives under coverage at this point?

It is very hard to try to talk about what is life. We are telling about the $70 million.

Yes.

…in the range.

Okay. And then, I guess, you mentioned it, but then I was wondering if you could just expand on the China JV and any milestones or progress made in the quarter of any significance?

The products who are in operation now and we collected some of our royalties from that operation, such as – it does run slightly below our expected schedule. But in general, it will move forward.

Got it. And then just an update on the carrier screening test. Should we assume that you’ll be building out other supporting tests, such as NIPT?

The NIPT, it will require the test. We do have that capability, but our intention is totally more of the better value of the test such as newborn, we will introduce newborn test, as well as test for the personal genetic profile test, which will give you a pretty comprehensive test related to all the genes related to the disease and potential treatment.

Great. Thank you.

Thank you. [Operator instructions]. I’m showing no additional audio questions at this time. I would like to turn the conference back over to management for any closing or additional comments.

Well, thank you, again, for joining us for our call today. And operator, I think, we’ll be – you can close the last. Thank you very much. We report our progress and talk to you again in next quarter.

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.