Good day and welcome to the Fourth Quarter 2021 Fulgent Genetics Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Nicole Borsje with Investor Relations. Please go ahead.

Thank you. Good afternoon and welcome to the Fulgent Genetics, fourth quarter 2021 financial results conference call. On the call today are Ming Hsieh, Chief Executive Officer; Paul Kim, Chief Financial Officer; Dr. Larry Weiss, Chief Medical Officer; and Brandon Perthuis, 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 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, including the Company's actual future results may be materially different and 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 risk factors that may cause actual 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 31, 2021, which is available in 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 this 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 of 2021 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 to most directly comparable GAAP measures. With that, I'd now like to turn the call over to Ming.

Thank you [indiscernible]. Good afternoon, and thank you for joining our call today to discuss our fourth quarter 2021 results. We started the year with very strong note, there’s a continued growth in core revenue and re-acceleration in our core and COVID revenue. I will cover some of the highlights from the year and the fourth quarter before turning the call to our Chief Commercial Officer, Brandon Perthuis to discuss products and ongoing market updates, and Paul will discuss our financial results and outlook in detail. Take a look at our fourth quarter results, which exceeded our guidance in both core and COVID revenue. Revenue totaled at $252 million, compared $295 million in the fourth quarter last year, and up 10% compared to third quarter in 2021. We delivered approximately 2.5 million tests in the quarter, up 13% compared third quarter 2021 and through down – and though down from 3.2 million in the fourth quarter last year. Paul will cover the break up between our core and the COVID business in more details in a moment. But on the highlight, our core business grow 234% year-over-year to $41 million. Strength in our core business was driven by the momentum across the key areas included CSI, our JV in China and contribution from our NGS COVID contracts with the CDC. We continue to drive strong possibility, it generates $3.34 per share in GAAP EPS and 77.1 million in operating cash flow in the quarter. The first quarter capped the year with tremendous growth for Fulgent. We finished the year with just shy of $1 billion in revenue, up 135% year-over-year and generated $16.38 per share in GAAP, EPS and $538.6 million in operating cash flow. 2021 was truly a tremendous year for our business, but will always be genetic business…

Thanks, Ming. Our fourth quarter brought yet another unexpected COVID-19 surge and perhaps more so than previous surges, stress tested our systems, technology and operation. These massive swings in testing demand present significant operational challenges. However, we have proven we could be nimble enough to adapt in real time. While it is incredibly difficult to predict where COVID-19 goes from here, we can say clients all over the United States know and trust Fulgent will be here to help. While the pandemic has challenged us all in many ways, it has been an opportunity for Fulgent to step-up and forge deep, strong relationships with many organizations across the US and we hope to build on these relationships with additional partnership opportunities in the future. In addition to these commercial relationships, we have increased brand recognition and awareness of our consumer-initiated platform, Pitcher, with hundreds of thousands of patients and consumers who have used the platform for COVID-19 testing. Starting with an update on our HelioLiver liquid biopsy test for hepatocellular carcinoma. HelioLiver is a multi-analyte blood test that utilizes both cell-free DNA methylation patterns and protein tumor markers to detect early stage HCC with high accuracy. HelioLiver has the potential to reduce morbidity and mortality in HCC patients, as there are more curative treatment options when the cancer is found in early stage. A highly sensitive blood test can drive patient adherence to surveillance programs and provides a more convenient and cost effective way to detect HCC. We were excited to launch the test clinically in the fourth quarter. We first announced our investment in Helio Health in April and just eight months later, we were able to complete the technology transfer, the CLIA validation, and commercial launch. Also during the quarter, Fulgent and Helio Health presented data at the…

Thanks Brandon. Revenue in the fourth quarter totaled $252 million, compared to $295 million in the fourth quarter of 2020, while exceeding our guidance of approximately $189 million. Durable tests in the quarter totaled $2.5 million, compared to $3.2 million in Q4 of last year. The decline was due to COVID testing dynamics we've done in the fourth quarter as Brandon mentioned the testing surge resulting from the Omicron variant starting December 1st. Spikes in COVID testing will continue to be unpredictable in the future and we remain a leader in the market what customers with now more accuracy turnaround plans and hands on service. Breaking down the revenue bit further, roughly $212 million came from COVID PCR testing, which exceeded our expectations. Revenue from our core business totaled $40.1 million, which exceeded our guidance of $32 million and grew 234% year-over-year. Just as a reminder our core revenue includes our NGS business, contribution from our Chinese JV contribution from CSI. It also includes contribution from our CDC COVID NGS test agreement, which was again elevated due to increasing COVID positivity rates, have met the Omicron variant outbreak. Going forward, we plan to give core revenue guidance, which exclude NGS COVID testing from the CDC. If we exclude the impact of the revenue from the CDC in the quarter, our Q4 core revenue totaled $28.2 million, an increase of 134% year-over-year, compared to q4 of 2020. As the demand for COVID testing remains volatile and unpredictable, we continue to take a conservative stance on expected revenue from COVID testing. We remain focused on executing on our post-COVID growth opportunities, which includes expanding the reach of CSI’s capabilities, executing on additional investment and partnership opportunities such as spatial genomics, which Brandon discussed, working with Helios on our joint commercialization opportunities and…

Hey, guys, congratulations on the quarter. Maybe just a question on 2022 core guidance. I think if I adjust 4Q, it's kind of 28.2 excluding the CDC or you're kind of guiding to 120 the full year. I think off that 28 here we might have expected a more aggressive guide, so just kind of walk us through sequentially kind of what else might have been in 4Q that we should be thinking about that's impacting that base core run rate going into 2022?

Sure. So, first and foremost, we did experience Omicron, both here in the US as well as internationally. Omicron is still out there and until we're fully back to business from those scenarios, and we believe that it's more prudent to be conservative in giving this guidance. The other point that I'll make is this is just the first guidance that we're giving, given the fact that it's February, and as we get additional comfort behind how the COVID environment is going to look, combined with getting additional comfort behind the synergistic aspect of some of the acquisitions that we made, we believe that the $120 million conservative guidance is the right way to approach it at this point in time. We have been known to beat estimates in the past and that certainly is in the cards and the quarters to come.

And then the spatial genomics equity investment is very attractive and interesting. Can you just kind of maybe walk us through really two things kind of how that product may fit into the -- specifically from a commercial testing perspective to the Fulgent portfolio in the future? And at least your own assessment as to a timeline is the one that technology might be viable from a commercial perspective in a Fulgent lab?

Hey, Kevin, its Brandon. I'll tee it up and turn it over to Dr. Weiss here, but our biopharma business has become a meaningful portion of our revenue and more importantly, a meaningful focus for us. We think the space special genomics technology is going to further open up opportunities for us in that market. When we'll be commercially available for biopharma? We think sometime in 2022, maybe on the back end of 2022. Clinical applications are probably a bit further out, but we do see it becoming available to market, to our biopharma clients sometime in 2022. We're incredibly excited about the investment we do believe it's a new frontier molecular biology. We invested in spatial genomics, based on their technology, incredibly impressive technology, their superior resolution, their ability to have much higher multiplexing, the multi-omic facet of the technology. So, it's going to be an exciting year for Fulgent with a lot of applications in the future. Larry?

Well, as you know, next generation sequencing is dominated at least the last five years of genomic testing. We think the next generation -- the next wave of interest is going to be within the area of spatial genomics. With this technology, it identifies as Brandon said, dozens, tens of thousands of biomarker molecules while preserving the architecture. So you can do this with single cells and in tissues. And what biomarkers are you looking at, RNA for transcriptome, DNA for looking at mutations and organization of the genome, as well as immunofluorescence for proteomics, so it's really the complete package. It's almost the Holy Grail, as we were just as excited for next generation sequencing five to 10 years ago. I think it will be a very powerful tool for drug discovery for pharma. As for clinical applications, it remains to be proved, but these always will follow the discovery that goes on in pharma and I have no doubt that there will be clinical applications, if not in the next year or so at some point.

Thank you.

So, Kevin, and you probably know, my background as an intrapreneur. I'll be sitting on the Board with spatial genomics, work hand-in -hand with the team and tried to bring this product to the market. So, I'm aware already excited that with this opportunity, and the professor Kai Long is still working at the Caltech which is in a few minutes away from our headquarters. So we are very excited with this opportunity and looking very much forward to bring this innovation and the product to the market.

Thanks for taking my questions.

Thanks, Kevin.

And the next question comes from Sung Ji Nam of BTIG.

Hi. Thanks for taking the questions. Paul, could you break out – I know you broke it out for the fourth quarter. Could you break out what the COVID NGS testing was for the full year 2021?

Sure. The COVID NGS testing for the full year was approximately $30 million and if you take out the COVID NGS testing for the entirety of the year, the revenues for the core X that amount was approximately $93 million. And the initial guidance that we're giving for 2022 is $120 million.

Great, that's super helpful. And then for Helio Liver, obviously very exciting there with the launch and then also the ongoing prospective trial clim, would you say kind of able to talk about what you know, the commercial strategy, as you've launched, as an LDT and then what the timeline might be for – I know you talked about the enrollment being completed by the third quarter, when this might, you know, the data might be available from the prospective trial and also your thoughts, behind how to, you know, whether this will be an IBD product down the road or just if you could talk about that?

Yes, certainly, it’s Brandon. So, we brought the product to market as an LDT. Most genomic test were LDT, so we started to see value long-term in taking the product to an FDA path, but that doesn't prevent us from going to market as an LDT. So I think we've executed at a high level regarding our go-to-market strategy. We believe hepatocellular carcinoma is an area that's – that's underserved. The fact that you know, ultrasound diagnosis hepatocellular carcinoma, so few times early stage is just an unacceptable tool for monitoring this disease. We know the survivability of HCC is much, much higher in Stage 1 and Stage 2. However, it’s just not diagnosed frequently enough at Stage 1 and Stage 2, ultrasounds aren't sensitive enough, we know that. There's a lot of variability among ultrasound. So we've created a much better tool for clinicians to monitor and diagnose HCC. Like any test that's changing the way medicine is practiced. You know, it's a marathon. But the feedback we received from our key opinion leaders, our early adopters has been fantastic. A simple blood draw, that is markedly better than the current standard of care has been a powerful message for our sales team to take the market. So we still have a lot of work to do ahead of us. Make no mistake about it, you know, as we expect our CPT code to be published here in the near future, as we expect to wrap up our clients study. But I think we are exactly where we want to be. As I mentioned earlier, the call point for this is hepatologist. So we had to go out and build that specialized sales team but we were able to recruit some amazing talent. And we can – we'll continue to build that team over time. So I think Helio Liver is going to be an important test proposing going forward and we really look forward to improving patient outcomes in the future.

One additional point is that ultrasound may not have the best compliance, but a simple blood draw. We expect to have better compliance.

Got you. Super helpful. And then just on the spatial genomics side, does that technology have its own proprietary instrument or instruments?

Sung Ji, yes, it does have its own instrument, so from the spatial genomics, they do will reduce release of this products in this year. And Fulgent Genetics will have to commercialize through our clinical related to spatial.

Got it. If I might be able to squeeze one more question, the antibody testing that you guys launched, sounds obviously very interesting. I was curious how that's tracking whether there is -- there's demand for that.

Hi, Sung Ji. It’s Brandon. We do see demand. I think it's not yet to be fully implemented like we believe it should be. Obviously, testing is incredibly important. It has been since day one. But I think we're getting to a point where we need to think about what does an endemic state of this virus look like, and we believe monitoring your antibody levels is going to be an important aspect, whether that's through acquired immunity from infection, or from vaccines. We believe antibody testing can help guide people when they should get boosters. But globally speaking, we haven't seen the adoption yet, but perhaps to come as we learn more about this virus and the best way to fight it going forward.

Great. Thank you so much.

Thank you.

We can go to David Westenberg of Piper Sandler.

Hi. Thank you for the question, and congrats on the numbers. As we're dealing with the tail-end of the Omicron variant, can you talk about maybe some of the exits you're seeing from competitors that are refocusing on their existing business? And whether there is an opportunity to capture market share from some of them?

Yeah, I can take that one. Thanks for the question. Fulgent never stopped focusing on their existing business. So to the extent other companies have to refocus on it, too bad for them, I suppose. We've continued to focus on our base business, our base business has been healthy throughout the pandemic, and we were able to respond in a big way to the pandemic without losing that focus. As I mentioned earlier, at least on the oncology side, we have heard from the field competitor labs, not performing as well as they should in the area of turnaround time, for example. So we do believe there is a window of opportunity for Fulgent to execute on the commercial side to gain market share from some of our competitors. So we'll see how quickly they're able to, I guess, as you mentioned, kind of, pivot back to the focus. But we're certainly being aggressive on the commercial front, as you've seen with our hires. We're hoping those hires coupled with this window of opportunity will allow us to gain further market share.

I think backing what Brandon said David, if you take a look at our business ex COVID, even if you strip out NGS, we have grown our base business throughout this whole pandemic. I think from a strategic standpoint, that focus has never stopped, actually probably accelerated, but the additional capital that we have been able to garner through the COVID experience. So a number of things that we have announced last year, CSI being one of them. We have almost completed the integration, and now we're at the synergistic stage of really capitalizing on incorporating that asset. So from a strategic focus basis, it's always been a mainstay throughout the COVID environment that we got focused on expanding our core capabilities. If you take a look at where we sit right now from a capital structure standpoint. So on top of the cash balance that we have, we are guiding the year initially at $600 million. So that will produce additional capital on the balance sheet. And what we have noticed is on the strategic side, we have a number of different projects that are happening right now, but the valuations are becoming closer aligned to real business prospects rather than some of these long-dated assets with colorful stories. The other thing is, we have shown to the street our ability to execute with precision and efficiency of scaling up a business from $30 million pre-COVID to close to a $1 billion within two years. Now with the M&A journey, we are ready to capitalize and get more active on that front. And we are looking forward to showing the street that we do have just as much ability to integrate assets and show synergies not just from the expense side, but from the revenue side as well, all leading to our reach into wider and bigger markets.

Yeah, I didn't pause the answer. I think David will probably review what we did in 2021. In April last year, we announced our contracts for CDC $43 million contracts. There are two phases, phase one and phase two. Not only we executed the contract, we delivered solid revenue last year. So the CDC -- were competitive bid. We compete with all the institutions, top end institutions, nonprofit organizations, hospitals, and the genetic testing company. We won the competition. Not only we won that completion, we delivered our results. So with our own technology, we designed this multiplex PCR to help CDC to detect the pandemic variations. It's become a very successful project. Now we reach the end by March that the contract will be recompete again. We will be compete in that space again as we got the results will update the street with what is the upcoming year in 2022, what that revenue will be for the NGS services. So we're very much looking forward to continue to bring the innovation to this space as we walk into the post pandemic world. Definitely with our new entry into the spatial genomics, we're very much looking forward to bringing the new challenges and new solutions to this market. So we're excited for the opportunity.

I appreciate all the color. So maybe I'll just ask one more and sorry if I missed this, but I do think that needs a little bit more attention. If I did miss it and that's on the gross margin, it was down, it looks like close to 600 basis points from Q3 to Q4 despite the fact that the revenue was up. And even if we look at like the low point of Q2, you're still off from there. And, you might have given a little bit of commentary. But if you can give us maybe a more complete bridge or a lengthier kind of bridge on why that stepped down -- in my opinion, at least optically, pretty big. Thank you.

Yeah. So the gross margins, throughout the course of last year, was almost running like a software company, close to 80%. I think the focus at our company throughout the COVID experience was to make sure that our customers were satisfied as much as possible, given the fact that utilizing our technology and our operational platform, and that it was pretty clear that our margins, whether it be gross or operating would be at a pretty high level. So as we kind of shore that up towards the end of the year, there were some reserves and some write off that we had to take within our inventory balances that impacted that. Going forward, since you're asking questions about the gross margins, we anticipate that the gross margins will eventually normalize and get a little bit closer to what the gross margins are for our traditional genetic testing business. So as we get into each of the quarters in 2022, if the COVID situation continues to dissipate, we anticipate that the gross margins will get slightly lower in each one of those quarters. The other thing is, we continue to invest in our operations, as we have a larger scale company, which was also impacting the gross margin somewhat.

Appreciate it. Thank you very much.

There are no further questions. That now concludes the fourth quarter 2021 Fulgent Genetics earnings conference calls. We thank you for your participation. You may now disconnect.