Ladies and gentlemen, thank you for standing by, and welcome to the Fulgent Genetics Fourth Quarter 2020 Earnings Conference Call. At this time, all participant lines are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. [Operator Instructions]. I would now like to hand the conference to your speaker today, Nicole Borsje. Please go ahead, ma'am.

Great. Thanks very much. Good afternoon, and welcome to the Fulgent Genetics fourth quarter and full year 2020 financial results conference call. On the call today are Ming Hsieh, Chief Executive Officer; Paul Kim, Chief Financial Officer; and Brandon Perthuis, the company's Chief Commercial 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 use 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 predications of future events and should listen to management's remarks today with the understanding that actual results, 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-Q for the quarter ended September 30, 2020, 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 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 fourth quarter and full year 2020 for more information, including the description of how the company calculates non-GAAP income and earnings per share and a reconciliation of these financial measures to income and income per share, 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 our call today to discuss our fourth quarter and full year of 2020 results. I will provide some opening remarks before handing it over to our Chief Commercial Officer, Brandon Perthuis, to provide updates on our commercial success. And finally, Paul Kim will discuss our financial results and outlook in detail. Before I start, I would like to say that our thoughts are with those who have been impacted by this pandemic, and the disruption it has caused was heavy on our hearts. We have continued to find a way to do our part in combating the spread of this virus and have been in the forefront positioned to provide testing and support for our customers throughout this challenging time. We look forward to leveraging our success and expertise for the greater good as we continue to battle this pandemic. With that being said, 2020 was truly a hallmark year for Fulgent Genetics. While the financial trajectory of our business transformed significantly over the last 12 months, our value remained consistent, and our genetic testing platform has expanded and evolved to meet the challenges that COVID-19 has presented. I won't go through the details of each steps that we took to get where we are today, as I have discussed much this in detail on prior calls. But I will say that we have emerged in 2021 as a stronger, more robust business than we were a year ago and that we are extremely well positioned to continue driving growth across our business through 2021 and beyond. Our results in the fourth quarter were truly outstanding. Our fourth quarter revenue of $295 million is almost 3 times the revenue we generated in the third quarter of this year and more…

Thanks, Ming. We'd like to again express our sympathy to those who have been impacted by this terrible virus. It has been a difficult time for many families in our country in general. The spike in cases in testing that was predicted by medical experts to happen in the fall, indeed, became a reality. During the fourth quarter, we again saw lockdowns increase across many states, which did slow our momentum in our non-COVID-19 business. However, we have seen increasing strength in our business outside of COVID-19. Our non-COVID-19 business grew approximately 43% year-over-year in the fourth quarter. And we signed on over 15 contracts with new customers for services such as hereditary cancer, cardiovascular genetics, carrier screening and neurodegenerative genetics. During the fourth quarter, we worked tirelessly to increase COVID-19 testing capacity, maintain our best-in-class turnaround time and expand our testing footprint nationally. These efforts led to a quarter where we were able to service over 3 million patients with COVID-19 testing. At this time, we had the capacity to handle north of 100,000 tests per day across our 2 laboratories with the ability to continue to scale. During the fourth quarter, we handled accelerating volume while maintaining our best-in-class RT-PCR turnaround time, delivering approximately 90% of tests within 24 hours. We believe our ability to scale our business to roughly 228 times that of what we were handling just 1 year ago is almost unprecedented in our industry and is indicative of everything Fulgent represents. We are a technology platform company with the ability to excel in many areas of health care. We are a team of engineers, geneticists, genetic counselors and business operators with a fierce motivation to make Fulgent a dominant force. We have proven with our platform and infrastructure that we can run a laboratory…

Thanks, Brandon. Record fourth quarter revenues totaled almost $295 million, an increase of more than 3,400% compared to the fourth quarter of 2019. Billable tests in the quarter totaled almost 3.2 million, growing more than 200 times the volume of Q4 last year. The vast majority of this volume was from our business related to COVID-19. Despite the reemergence of a statewide lockdown in California and stay-at-home orders elsewhere, we saw stable demand for our traditional genetic testing business in Q4. Our core business in Q4 was up 43% year-over-year and 17% sequentially from Q3. We finished the year at almost $37 million in revenues from our core business, which was slightly lower than our original projection before the pandemic hit. Overall, our Q4 results far exceeded our expectations, largely due to the unwavering demand for our COVID capabilities. Our customer base continue to diversify, and in the fourth quarter, we added 6 major customers who are contributing multimillion dollars each in quarterly revenues. Our ASP in the fourth quarter was $93, slightly lower than the $98 we saw in the third quarter. While our ASP has largely remained stable over the last few quarters, the modest decrease is due to the increasing mix of tests for COVID versus non-COVID. Cost per test for the quarter was a record low $16, an improvement of approximately 36% compared to the last quarter. Gross margin continued to improve and was up more than 8 percentage points sequentially. The gross margin improvement we've seen is a further testament into the scalability and leverage in our platform as revenue increased almost threefold sequentially, and we drove further efficiencies in our lab operations and unit economics. Now turning to operating expenses. Total GAAP operating expenses were $17.3 million in the fourth quarter, up from $11.9…

[Operator Instructions]. Our first question will come from the line of Steven Mah from Piper Sandler.

So just a couple of questions on California and then also on the 2021 guide. I know from our internal channel checks, you seem to be pretty overweight in California. So should we think of that trend continuing in 2021? And how that's been trending in the first months of the year as well? And then secondly, on the cadence of the guide. Your Q1 guide implies about 40% of total 2021 revenues. Just maybe a little bit of details on that. Do you expect a drop in COVID testing volumes in Q2? And just maybe a little bit more color on that.

Okay. Thanks for the question, Steven. In terms of the concentration in California, because we are positioned in Los Angeles and Los Angeles County, it is true that a meaningful amount of revenues come from that county. But having said that, we have continued to diversify our business within the state to various other counties as well as a number of other states. So if you take a look at the characteristics of our Q4 revenues at about $295 million, only about 1/4 of that came from L.A. County. The other thing that I would also say is, in terms of the guidance, that back in 2020, we were one of the few companies to have guidance throughout the course of the year, and we're pleased to exceed the expectations in each one of those quarters and for the year. In looking out at 2021, for a company that is largely centered around COVID and COVID testing, we believe that we have confidence in our market share as well as in our positioning to have a formal guidance even just earlier in the year. If you take a look at our confidence, that's based on the contracts that we have and the outlook, even as deep as Q3 and Q4. That can certainly change if the testing landscape changes. But on a conservative basis, we feel confident with the $800 million in revenues. So if you break out the $800 million of revenues in 2 components, NGS versus non-NGS, we see the non-NGS portion or approximately $730 million of revenues being a 65-35 split. That can certainly change if our market position and the testing environment changes as we get deeper on to the year, but that's what we feel comfortable with. On the flip side, on the NGS side, based on the progress that we made from a number of different fronts, including reimbursement and corporate customers that we have been introduced to through COVID, some of those corporate customers are very well aware of our capabilities. And we have executed on contracts which bolsters our confidence in being able to hit that $70 million. In terms of a grade of how that $70 million will play out, we see Q1 NGS revenues being flat to slightly up, but that should accelerate nicely as we get into the future quarters throughout 2021.

Okay. Great. And maybe just if I could sneak in one quick one. On the Department of Homeland Security's contract, can you give us a little bit more details, such as how many other parties are within that contract? And what proportion of that $2 billion can you get? Can you give us a sense, is it all the testing that you can handle? Or is there some other structure in terms of the volumes you might get from that?

Yes. Thanks, Steven. It's Brandon. So yes, the Department of Homeland Security contract, $2 billion over 5 years. It's an IDIQ contract. We're 1 of 4 laboratories that are named in that contract. So that's going to have pretty far reach. I mean the Department of Homeland Security, multiple departments, a lot of employees, and it's essentially driven by the demand for testing. So these are task orders from the government that come in that need testing services and testing kits. I think with Fulgent's delivery platform, our reach, our turnaround time of the lab that are a part of it, I do think we stand out a little bit. We do have the capacity to take on a meaningful portion of that. We mentioned kind of where we are today north of 100,000 per day capacity. And between our 2 labs, we can continue to grow that. So it will be entirely driven by the demand for testing. Some of these departments are still back to work full time, so to speak. So I think as the country begins to reopen and we start thinking about back to work and back to a sense of normalcy, testing it with the Department of Homeland Security will continue to be a growing area for Fulgent in testing in general.

Our next question will come from the line of Kevin DeGeeter from Oppenheimer.

This is Susan calling in for Kevin. First question, I actually just want to tap on to the geographic split between California and other areas. Based on our model, it looks like the percentage from California increases at 1Q. Is that correct?

The percentage of business that we have in California, it should be pretty consistent with what we saw in the fourth quarter. If you take a look at our major customers that are providing, say, over $10 million of revenues within the fourth quarter, we have a number of different counties that's driving those revenues aside from L.A. County and San Bernardino County. We have Santa Clara County, Long Beach, Anaheim, several others. And we see the level of testing and the demand for our services being pretty consistent within those customers compared to the fourth quarter.

Great. Just one more related to COVID. Do you guys have a sense of how large the market is for COVID variant characterization?

So the market definitely is there. I'll make a few comments, and then I'll turn it over to Brandon. And the market is there in a bigger way for the variants aside from the testing on the NGS side. And that's what has us really excited. Because if you take a look at the NGS and the contracts that we have signed, these are major organizations that are in the business of policy and standard setting. It's a very, very competitive bid. These are sizable contracts, and they chose Fulgent based on our quality capabilities and the value that we have. And the value that we have is really unique because the amount of COVID volume that we do is obvious, but what is not so obvious is the capabilities of the company before COVID. Because we're a genetic testing company that was at the highest end of testing capability for next-generation sequencing, we were at a perfect spot to capitalize on some of those opportunities and ink those contracts. We believe that these contracts will have very good legs because it is more predictable, it's sustainable, it's less volatile, and it's not tied directly to the demand for testing. And we see these contracts as something that will have years of growth for the company.

We also compete -- we are also bidding several projects with various pharmaceutical companies related to NGS test for COVID-19.

So Susan, to answer your question, right, I mean, how does the market look. The market for testing goes up and down through each one of the ways. And we're in a different environment now because of the vaccine distribution. So we fully recognize that, and that's the reason why we have confidence in the $800 million. But we're anticipating just the immediate testing revenues from, say, like drive-through sites to go down. If it doesn't go down, then we can certainly change our guidance. But what we are excited about is our positioning within that testing market. We believe that we're gaining market share, and we can clearly see that. The other thing that we see in the testing area is I think that you will begin to see that the concentration, not only in L.A. County, but in the state of California being more diversified. We -- I've talked about the state of New York, but other big states like Texas and Florida, we believe that the testing share in the testing revenues in those states, they would increase. And then if you combine what the need to do work for the variants analysis, which first centers around COVID, but it really is about highly infectious diseases. We believe that we can offer tremendous amount of value to governmental bodies by being invited to execute on full sequencing. And then the other thing that Ming just mentioned is from the commercial basis, we are being invited more to do full sequencing for pharmaceutical organization. So if you take a look at the testing environment, we think that it's a better characterization to report not just COVID and non-COVID, we think a better way to characterize it would be NGS versus non-NGS. And then if the software revenues, which we're very, very excited about -- because if you take a look at the foundation of the company, our previous publicly traded company was a software company. If we get more meaningful traction within our software applications and our software sales, and we certainly look forward to updating the investment community based on that model.

If I may, sorry, that was a very good long answer. A couple of questions on your core business. Do you guys have a priority listing in mind for the different things that you mentioned for business development in the future?

Yes. So let me take a shot at that, and then I'll turn it over to Ming about business development. So in terms of the COVID landscape. If you take a look at how we configure the business, the amount that we invested in COVID from a dollar perspective was very, very minimal. So in terms of the priorities, we believe our ability to run a business efficiently and by our ability to show our capabilities, we can certainly have a very good positioning within the COVID marketplace. What we are more concentrated on is the NGS side and really utilizing our technologies to bring better business discipline, value cost and sustainable adoption into the marketplace. So that includes things like next-generation sequencing that we're fully comfortable with. We are also evaluating other kinds of modalities to address the wider market. And I'll turn it over to Ming, who will make comments on business development and investment in certain areas in the future.

Thank you, Paul. So I think we've talked about a little bit about the COVID-19. Most of our fourth quarter and the first quarter's revenue come through the drive-through test. But as the school reopening, people go back to work, start to travel, we will see the revenues will shift from the drive-through to the return-back-to-normal situations. So that's related to the COVID-19 side. In terms of NGS, Brandon mentioned about our pharmacogenomic testing. And that's the new product we offer, which is also go to our partner channels to offer the same disease, which have seen the customers use our products for the patient treatment relate to the precise -- precision medicine. So Brandon, you probably can cover -- will be more regarding about our product lines.

No, Ming. I think that covers it adequately. And we'll move on to the next question.

Our next question will come from the line of Erin Wright from Credit Suisse.

Great. So just to clarify, and sorry if you said this already, but in terms of the $70 million in NGS testing revenue, how much of that is related to COVID testing versus the underlying business?

A minor portion is related to COVID testing. Some of these contracts are new. We're very excited about it. We think that those new contracts certainly have a lot of upside that we haven't incorporated into that $70 million.

Okay. That's helpful. And then what does your guidance assume now in terms of reimbursement for COVID PCR testing? I guess, how are you thinking about the sustainability of ASPs?

Yes. Erin, it's Brandon. Our expectations for ASP is to stay generally flat. I think they're in a sweet spot. We haven't heard of any expected changes in that. So our model would keep ASPs pretty flat.

And then the collection experience, Erin, has been very, very good. We've written off hardly any receivables that we have on the balance sheet. So the reimbursement experience has been fast because over half our revenues are through reimbursement right now. And the experience has been very, very good. So we feel very good with the rate as well as what we'll encounter in 2021.

Yes. It's evolving, but it looks like the NGS COVID-19 is going to -- that's a bit more of a premium in terms of ASPs as well. So we'll see how that folds into the mix.

Okay. Great. And when we think about some of these partnerships with like sports teams, cruise lines, are they largely exclusive relationships? Or have any sort of minimum volume commitments? And how are you thinking about the competitive landscape with like antigen testing, for instance?

Some of them are, Erin. Some are exclusive. Some are semi-exclusive. Some are multiyear. Some have minimum, some don't. I mean with the number of clients we have and the volume we're doing, you can imagine it's pretty dynamic in terms of what these terms look like. But there is a lot of competition out there, but I do think we stand out of the crowd quite a bit. I think we have the complete service offering. Our customers love us. I mean we deliver. We meet our turnaround time. We make their life easier with our technology platforms. We have the capacity. So we're confident in the contracts we have. We'll continue to be their preferred partner. Antigen testing, it pops up. Some of our largest municipalities have tried some of those kits that were given to them by the federal government. They don't use them very much. It's just the accuracy is not there. It's faster, but I think people want to get the answer right. So the feedback we receive from our customers that have sort of run those in parallel, they continue to see RT-PCR as the gold standard, especially when Fulgent can turn it around less than 24 hours. Depending upon when we get the sample, some of our RT-PCR results are around 8 hours. So I think that's a pretty powerful tool that we have to continue to offer.

Okay. Great. And then one last one -- sorry, go ahead.

Yes. Adding Brandon's comments. I think the people are even more the importance of the back end, the software tracking system. If you take a look, review the operation results, we handled 4.4 million tests last year. If you hear the labs, where is the labs, from the largest labs to the new commerce, they always have issues dealing with the customer. Missing the samples, not accurate test. But Fulgent Genetics last year tremendously stand out among the crowd. We never reported the loss of the single sample, and we never run the test with the failures. So I think the -- looking forward, our platform will be continue to expand and will continue to deliver in this market and also address the new market that we see emerging.

Okay. That's helpful. And in light of like new markets and what you're contemplating. I mean how should we be thinking about your revenue mix in 2022? Do you think a huge component of it will be non-NGS testing? Will it be meaningful in 2022? Or does it just become all NGS testing? Or is there another third leg that we don't even know about?

Yes. Let me -- I'll key it up, and then I'll turn it over to Ming, who will comment on how the mix might look after this year. We believe -- I mean, the short answer is, we believe that we'll have both, both NGS as well as non-NGS testing. If you take a look at how we laid out the guidance, we talked about the $70 million, what that includes and why we're excited about that $70 million. But on the COVID testing front, there are different categories of COVID testing. There are the drive-through sites, and then there are COVID testing contracts that we have signed on that is largely post the vaccine environment. These include things like schools, they include travel and leisure, they include opening up corporations. So when you take a look at what they want to do in terms of testing that's part of their policy, we believe that, that has business extension beyond 2021. Now to the extent on how much that would be, we see what we have signed on, and we feel comfortable with the guidance that we have given, but there's a potential that, that market might still continue to be healthy. What we have more confidence in, regardless of how the landscape looks like, is our positioning within that market. We believe that we're continuing to capture market share within the COVID testing space even today as vaccines are being administered.

So adding Paul's comments. We do believe the COVID-19 test will be remaining for our business for a while. University of Hong Kong research team yesterday just published the paper on the lucent and the science. It identified that even though individual be vaccinized that, that person still will have capability to transmit the virus. So this brings a new challenge to the society, is how do we do the prevention, even the people being vaccinized and this person still continue to be the transmitter for the infections. So with that being said, with the return back of travel, the airlines will require the travelers being tested with COVID-19, that program will start. The people go back to work, go back to school, still need make sure that there is no infections. So we do believe that COVID-19, the test will be still there. It is very early for us to make predictions. We did not add all those things into our guidance. Same thing for the -- Brandon mentioned that the DHS contract win. We did not add that one as part of our estimate. So as Paul mentioned, it is early of the year. We are armed with the technology and our capabilities, not only to address the COVID-19 market, our capabilities far beyond what we could do for the COVID-19. We will work on aggressively for the new R&D development. We will invest heavily in cancer and cancer related to the diagnostics. So we do believe we have a sustained power in this market to continue to gain the market shares while protect our -- the shareholders' value.

Our last question comes from the line of Sung Ji Nam from BTIG.

Hopefully, a couple of quick ones. One on COVID surveillance going forward. Just a clarification on the Department of Homeland Security contract. Does that entail next-gen sequencing solely? Or is that a combination of both PCR and next-gen sequencing? And are you seeing -- and it's great to see interest from local and state governments around surveillance of COVID pandemic. But are you seeing kind of any concerted effort at the national level in terms of building out infrastructures for not only COVID surveillance, for other pandemic surveillances down the road? Are you seeing anything internationally in terms of potential interest or demand there?

Yes. Sung Ji, it's Brandon. Department of Homeland Security contract is strictly RT-PCR. So they're looking to screen their employees, enable early detection, get people out of the workforce, keeping the rest of the workforce healthy, minimize the spread. I think it's exactly what RT-PCR is meant to do in an asymptomatic screening-type setting. We are seeing national efforts around NGS. The CDC is involved. HHS is involved. We are involved at that level. Genomic testing, again, in the spotlight right now. I think monitoring these variants, seeing how they're responding to therapies, seeing how they're responding to the vaccine, are the vaccines working on these variants. We've seen some home-grown variants pop up in the United States. And I also think we're going to learn a lot about therapeutics in the future. I see RT-PCR also playing a role as a bit of a companion diagnostic as we differentiate between the flu and COVID-19. Those symptoms are very similar, but perhaps those treatments could be vastly different. So we do need a definitive diagnosis more so than just symptoms. So I think we'll continue to see a push to do more genomic studies and applaud the money that's being set aside as part of the budget and the CDC and HHS' involvement.

So adding Brandon's comments, I think if you take a look where we were last year, we're not involved in the respiratory infection disease detections. The agencies now will be the leader in that area, not only the COVID-19, but all respiratory tracking infection disease, we will be in that market

Great. That's very helpful. And then just lastly, in terms of your international opportunities or investing in international opportunities going forward. Could you talk about what that could look like? Would that largely mirror what you're doing in the U.S.? Or are there distinct opportunities outside the U.S. that you're considering?

Ming, do you want to take that last one? Thank you.

Yes. I think, Sung Ji, we are looking other expansions in Europe, and we are looking expansions in Asia. So we'll update you in the coming quarters about our improvements.

And I'm not showing any further questions in the queue. I'd like to turn the call back over to the speakers for any closing remarks.

Thanks so much. Looking forward to speaking to investors in the week ahead. Have a great day.

Thank you.

Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.