Fulgent Genetics, Inc. (FLGT) Earnings Call Transcript & Summary

Great. Well, welcome, everybody, to the Credit Suisse Healthcare Conference. I'm Dan Leonard, the life sciences and diagnostics analyst at Credit Suisse. We're happy to kick off the event with Fulgent Genetics. Representing Fulgent, we have Ming Hsieh, CEO; Paul Kim, CFO; Brandon Perthuis, Chief Commercial Officer; Dr. Larry Weiss, Chief Medical Officer; and Dr. Ray Yin, Chief Scientific Officer of Fulgent Pharma. Thank you, everybody, for coming.

Ming, I wanted to start off the session since you reported your third quarter results last night, asking if you could give us any key takeaways, highlights from that report.

Okay. Thank you, Dan. And thank you, everyone, who joined our presentation today. . So I think really one of the key takeaway for our third quarter results is our announcement of our acquisition of Fulgent Pharma. This really brings the Fulgent Genetics into the new level of -- by integrating our diagnosis, genetic services business with our therapeutic solution together. I think we're very excited for this transaction, and especially at the gate, when we know the -- with the winding down of the COVID test, and we exited this pandemic period. Fulgent Genetics did very well when the -- our society need for us to step up. We quickly ramped up our testing capabilities, support our society to fighting for the COVID-19. As the pandemic's under control, we accumulated quite a large full capabilities and we have a pretty strong capital. We invested in the diagnostics market very heavily. But for us to look into forward is we need an integrated total solution by the -- bring the therapeutic units into the business units. At the present time, we have a very, very good indication from our clinical trials, results are getting better and better. And what we're bringing, it is not only one drug. We bring the family of the drugs to our portfolio. But also, this is uniquely based on our patent IP protect delivery technology, nanodelivery technology, which is one of the key pieces of drug development for the formulation. Many drugs go through the initial discovery, fail at the [ formulation ] stage. It is not [ formulate ]. It has very good characteristics from the compound level or from the different kind of large multiple level. But how do you safely deliver the active -- the components to treat the cancer, and that becomes a challenge. Fulgent Genetics is now, by this acquisition, is [ we are now ] nano technology, which invented by Dr. Ray Yin when he worked at the Army Research Lab. Through our validations for the past 6 years, it's proven safe. It's proven effective. It also received 6the FDA's drug [ trial ] status. What that means is when we use this formula, formula for the drugs, the vehicle is approved, is safe. Only thing is now we need to try to substitute different kind of payload for the drug treatment, for the cancer treatment. But initially, our payload, we're using similar to the type of paclitaxel, which is widely used for the cancer treatment. What we showed from the initial data we see at the clinical trial, it shows the lower toxicity that we observed. And it also shows the better efficacy in certain cancer types, such as head and neck cancer, and [indiscernible] cancer and several other indications, especially in the patients being treated with immunotherapy. So we feel that this is the long term -- or bring the gross margin profitability profile we observed from -- during the COVID period. So I give you this as a really very strategic move from Fulgent Genetics side. We did a little bit of forecast when we do our investor calls yesterday. It is not a significant burn for us. Fulgent Genetics has been, during the past, demonstrated in this industry, we are very efficient and we can bring the -- use relatively efficient cost and bring the high-margin products to the market. So that's what we are so excited about it.

Well, you're very busy. You have a genetic testing business. You recently launched an oncology business. Now you have a pharma business. Can you take a step back and help investors appreciate the synergies between all the different businesses?

Yes. Thank you, Dan. So everyone probably knows my background. My background is information science. I'm not a life science expert. But from the information science, when you do anything, you do the spin chips, you do product design, you go through simulations. You simulate what the result is going to be based on the design, and then you spin the products, you build the product. In the life science, it's really strong area. And you go through the drug, the compound or the big molecules designed, and then you try to use the animals, mice, for certain prediction. Really, it's trial and error and they include the human results [ to go deeper ]. How could we build some kind of relevance in the life science from the person developed in the information side. And this is when we started working on the drug at the very beginning. We work with Dr. Ray Yin. This is back in 2011. We built the company to build the drug therapies. This is our initial concept. But in order to try to build some relevance for the drug discovery or how do the human react with the other drugs, most of the relevant information we could find will be the genetics. We can do the genetic profile for individuals and also do a genetic profile about the tumor. Based on the genetic profile, DNA, RNA and the proteins, we can try to see what the drug may be effective or what drugs are going to be drug resistant. This is where we built a separate business called the genetics business, diagnostics support, pharma research development. As we build these 2 components together, we felt each one has different objectives to reach our own destination. So we split genetic and pharma development at 2016. Fulgent Genetic went to IPO, Fulgent Pharma continues private. As we reach the status in the genetic diagnostic market, which is we're changing our initial focus from rare disease, we focused. We could go into the cancer and then we get the women's health, and we landed at the cancer market with acquisition of CSA Laboratory and Inform DX, we have hundreds pathologists, geneticists, scientists working on this area of cancer discovery. Now from the other end, our nano drugs went through the clinical trial. We had a very good indication from the certain cancer types. And also, we have a pile of the pipelines with strong pipeline and give us the long-term potential for the -- where is the drop in the pipeline. I think this probably is the time to merge these 2 together, okay? Leverage our relations, discovering from the diagnosis we find from the patients and using the therapeutics that we have, we generated, to provide the therapeutics. And after our services, the better thing is we also have the components, liquid biopsy, meaning disease monitoring. So really, we build an entire integrated solution.

You mentioned the acquisitions of CSI and Inform DX. Can you offer an update on how the integration of both of those acquisitions has developed?

I can provide you some colors from the overview, and then probably let Brandon to take over a little bit more. But in general, CSI, it is cancer pathology laboratory. It's a smaller operation than ours. When we acquired the CSI, it's about 100 people. It is relatively straightforward integration. We built the CSI, mirrored the CSI lab from the Atlantic East Coast, we build the CSI West at California, which is in Almonte, it's not far from here. So we built the environment, we're starting to try to market the CSI product as a part of our clinical service and the pharma service offerings. Meanwhile, we also acquired Inform DX, which is in May this year. We went through some kind of modeling on what -- how does units perform. And the company Inform DX is much larger company, about 500 to 600 people. We're trying to make a cleanup that definitely -- as we're getting into the new market, we want to bring our new technology into the both CSI and the Inform DX. Definitely, there is a lot of challenges. Many acquisitions, it doesn't work. But we feel that we are confident through our series of reform that both units will be getting into the growth market next year.

Brandon, you talked...

I have a whole lot to add. But as a company who's not been a serial acquirer, meaning we've done everything organically. These are our first 2 acquisitions. Our grade is pretty high, to be honest with you. CSI was a smaller acquisition. Integration was pretty seamless, as Ming said. Inform Diagnostics was a much bigger acquisition; 500 people, at least 4 locations, national sales team. And I think the team here did a wonderful job integrating that business. As Ming mentioned, we did rightsize the business. We put in new leadership, mostly focused on stabilizing the company, stabilizing the client base. And again, I give ourselves pretty high grades on that. My focus has been a lot on the commercial side. They did have a smaller sort of newer sales team. And we want to add to that, which we've done, and we spend a lot of time on training and cross-training our existing sales team. So integrating that team into Fulgent has been important, cross-training our team to sell their products has been important. But our customers are happy. The business is solid. Like I said, it's headed in the direction we thought it would. So for a company that hasn't done a lot of M&A, I think we did pretty well.

Can you elaborate on the cross-training that you've accomplished so far?

Yes, certainly. So IDX had -- IDX, Inform Diagnostics. They had, let's just say 12 or 14 salespeople, historically trained in anatomical pathology, and some in hematology as well. Fulgent had a similar sized sales team that was focused on next-generation sequencing across our broad portfolio of NGS test as well as our new HelioLiver product. Those skill sets are quite a bit different. The call points are different, the technology, the terminology, the fields of medicine are a bit different. So we did do a robust training program for both teams, right? So we -- the IDX team went through a multi-week training on NGS and vice versa. The NGS team went through a multi-week training on IDX products and services. There are some overlapping customers. And actually, that's one of the reasons we bought IDX, right? So they have a huge client base, arguably one of the largest client bases for GI and GU in the United States. A lot of those customers can use Fulgent NGS products. But the IDX reps were not overly familiar with our technology. So we needed to do some robust training. That's all been done as of a couple of weeks ago, here recently. It took a while to really get them proficient. But now, we have a combined sales team in that sector of about 25 or so people that are selling all products for Fulgent Genetics as well as Inform Diagnostics. And working together sort of in a cross-functional way. We built a new leadership team, right? We put IDX and Fulgent leadership over both teams. So they have the expertise of the sales leadership. And I think the sales team is headed in the right direction.

How are you trying to track and measure cross-selling synergies amongst the 2 sales forces -- or now one sales force?

Right. Well, it's a product mix. We can see the product mix. If some of our pathology clients begin to order next-generation sequencing -- so I mentioned we have a large client base for gastroenterology. If we start seeing an uptake in our hereditary colorectal cancer test, our lynch syndrome panels. We have a big GU base, right? We think there's a big opportunity for hereditary cancer testing for prostate cancer. So the product sets are unique, so we'll be able to track it pretty easily. Now we did mention on our earnings phone call that these markets are direct pay markets, right, meaning we need to build third-party insurance. And since we went public, that's been a weak area for Fulgent. We didn't have the managed care contracts to penetrate that market which is why we focus on the cash pay market, the institutional market, the hospital market. Inform Diagnostics has spectacular contracts, over 300 million covered lives, national. Fantastic job negotiating those contracts. There's still a lag on getting those contracts rolled up to the Fulgent corporate level. It's just mechanics, right? We had to go through the exercise of assigning those contracts to our corporate level tax ID and CLIA and CAP, so haven't been able to, as Fulgent, penetrate those contracts yet, but we expect those contracts to be rolled up to the corporate level by the end of this year. So starting fresh in 2023, we can go to those clients with those contracts to now sell our NGS test through third-party payers.

How confident are you that, that roll-up process won't lag further?

Well, I mean we're pretty far into it, to be honest with you. Some of them are -- have been rolled up, just not some of the bigger sort of more important ones. And we're not seeing any pushback, any issues. People are busy, right? Those companies are busy. It's just -- I think it's just a timing thing. We have a spectacular VP of managed care that manages these relationships. He works with me very closely. He says we're on track for the end of this year. Everything I see says that's the case. So pretty confident by the end of this year, these contracts will be rolled up to our corporate level.

I think for the contract, Brandon is pretty focused on the rollout, all the contracts into one, integrated the contracts. But just prevent something happened, this project delayed. We do looking for the second channel, using the existing contracts from Inform DX or CSI, make sure that our sales force can individually also use those contracts, can sell our products. So that is also done in parallel.

Back on the IDX side, it's not just about cross-training and cross-selling. There's still a lot of opportunity for IDX organically. I mean now that we have a larger sales team, it seems every day, I'm getting a call from one of the reps saying, "Hey, I walked into this practice. They're not happy with their existing provider." There's a lot of these smaller regional pathology labs that don't provide the same level of quality as Inform Diagnostics. They don't have subspecialty trained pathologists. They don't have our contracts or turnaround time or connectivity. We do a great job with EMRs and interfaces and portals, little things like supplies. One of our reps just this morning said, ran into a customer today, their current lab makes them buy all their supplies at a higher price. We can do better than that. So we're running into a lot of opportunities. There's organic growth opportunities for IDX. There was a lot of territories, they didn't have reps. They didn't have coverage. So we want to target those green territories where we have the contracts. We don't have much of a presence. It's a bit of a numbers game, boots on the streets. We got to get to these doctors. We got to go knock on their door, but we're doing that, and we're uncovering a lot of opportunities organically for the Inform Diagnostics business. And I do expect, over time, that sales team will grow. We're not rightsized. We do everything pretty calculated here as you've seen through our history. So we're going to grow slowly, but we're not rightsized on the sales team yet.

Brandon, how would you describe your market share gain opportunity? You mentioned a couple of examples in pathology just then. Is that where you see your primary opportunity for share gain? Or are there opportunities in genetics and oncology as well?

Well, we think pathology may be the lowest hanging fruit, although there's no really low-hanging fruit in this industry, but we do see a lot of opportunity for the pathology business. I mean, look, it's not a novel business. It's been around a while. But again, Inform Diagnostics has a lot of good benefits that clients are interested in. So we do think the pathology business can grow significantly. We think there's also opportunity in genetics, especially as it relates to some of our hereditary cancer panels. We recently launched Fulgent Oncology. Small sales team, 1 sales leader, 4 or 5 sales reps. We did a sort of a soft launch on the West Coast. And we've been able to penetrate the West Coast market pretty quickly. In a matter of a few weeks, we were able to go to some pretty premier clients using our competitors and flip that business, at least if they're willing to try us, mostly because their existing labs are not doing great with turnaround time and having some other issues. So we think we can penetrate both the hereditary cancer market as well as the somatic side with our improved turnaround times, improved offering of the number of panels, as well as the flexibility we offer our clients on the gene panel side, willing to let them customize and really dial in the product to their specifications. A lot of our competitors can't do that.

Pivoting back to some of the broader strategic questions. Even following the Fulgent Pharma acquisition, Fulgent has a lot of cash in the balance sheet. How are you thinking about your uses of cash and capital deployment?

Yes, I'll take that. That's a very good question. I think the audience has heard a lot about the history and how things are going. But from a financial standpoint, if you step back 2 years, we were approximately a $32 million company before COVID. During the COVID experience, I think the obvious thing is the generation of the cash and our cash balance. But more importantly, people should note in our ability to execute as an organization, when we're all motivated to reach a strategic goal. So COVID, during the 7 big quarters that we have fulfilled the demands, right, of the market that's out there, has provided over $1 billion of cash to the company. Some, we raised in the capital markets, but mostly, we generated. And then the other thing that we did was when we acquired CSI and Inform DX. So if you take a step back, and look at the company right now, the core revenues that we have, it's over $200 million, right, without counting any of COVID. And if you listen to the acquisition of Fulgent Pharma and the capital that was needed to purchase that asset, we still have well in excess of $850 million, right, of cash that's there. I guess, my point is our capital is largely untouched, right, from the COVID experience, even with the series of acquisitions that we have done and a number of investments, right, in the spatial biology area as well as liquid biopsy. I think if you take a look at what we have commented on fueling, right, the pharma pipeline and the capital that's needed in the next 2 years, our capital balance is still going to be relatively untouched. So from an optionality standpoint, I think that we're in a great financial position. And then if you take a look at the full capability of us as an organization, those capabilities are only going to grow. And the addressable market just becomes bigger and bigger. So this is a very exciting time for Fulgent. We believe that these issues for the core revenues are going to be back on track. It's temporary, we believe. But the base business that we have and the platform, right, of those diagnostics customers, it's well in excess of $200 million. So combined with that, combined with the motivated team, combined with the technology that we have, and combined with the capital balance that's still relatively untouched, we're very excited about the next chapter of Fulgent.

And how are you thinking about -- you mentioned optionality with the $850 million cash, how are you thinking about different options?

We think we have a lot of options. I'll turn it back over to Ming from an overall strategic basis. But even kind of on an ancillary side, we mentioned on yesterday's earnings call that we were very, very aggressive in buying back our stock. We announced a $250 million stock buyback program. And I can't remember the exact numbers, but the -- we purchased close to $50 million already within a short time frame, and we have been active out there in the marketplace since September 30. But I'll turn it over to Ming, who can give additional thoughts on how we're going to be deploying that cash into the future.

Yes. Dan, this is a very good question. A, we have a lot of cash, but that doesn't mean we're going to spend the cash randomly. Given the current market environment, I think some of the audience here, you might own such certain diagnostic stocks. The whole sector is under pressure. The growth at any cost that model doesn't work. Typically, that's the market we compete. You use $2 of capital to gain $1 of revenue. That's the model. It's not sustainable. So as we see, more discipline needs to be applied to this area. There's a lot of companies. They are under pressure. Given the current environment, that give us a good opportunity to look at the company or sector or interest to do the M&A at a lot more reasonable cost than before. So that's one area. Second one, we will strongly continue to invest in R&D. When we purchased the CSI and Inform DX, what we see is the lacking of the systems. They are laboratory information systems, lack of the digitalization. So we only do quite a bit of work because that's the areas we are very strong. We will be -- it will take time for us to integrate, bring the laboratory information to the level of what Fulgent Genetics is offering. In addition, we're going to push for the digital pathology drop. This will bring the new market for us and to compete in the new market, which is our strength. So we talk about the sales force integration cross-training. We do need to make sure our sales force is not as the traditional diagnostic sales force. Just bring the samples, forget about the collection. We have been disciplined in this market, making sure we can build a sustainable business model. Our salespeople does not get paid if a company don't get paid. That has been our standard. We do not do the money lose business. It's not our business to get involved for losing money. I think given the acquisition of Fujian Pharma, it brings more science and technology for us to compete in this market. Everybody talked about provide pharma services, we do too. And the pharma services ask how much do you charge for the whole genome? [indiscernible] some people charge $200, you had to bill 180. And some people even give free. What do we bring the difference, okay? We have multi-omics. We have a single cell. Now we have a drug formulation. We can provide more service to our customers than our competitors do. Our business is how do we build an integrated solution to provide to our customers and increase our capability to compete within this market. I think that's the areas we're more focused. We demonstrated this team, we have been working together and that we have a very stable management team since the IPO. And also, we have been demonstrated our capability to bring the efficiency in R&D. You can name all the companies in the diagnostic market. They have pathology, molecular diagnostics, genetic, single cell, liquid biopsy. We have them all. Why we haven't tried to aggressive market product? Because no one pay for it. They all want those products, does many free, other things. Why do I pay you for some other people could get free. But I think the market is changing. This is going to be back to this market. I know some of the investors here, you might own some certain diagnosis stocks. Do not let that business model continue to grow at any cost, okay, using $2 of the capital to generate $1 of revenue, okay? That model doesn't work. That's not a business we are chasing. We bring them more science and technology into this market, and we also bring the discipline to this market. We have a lot of capital, okay, definitely we can last for a long time.

Well, with that, we're out of time. Ming, Ray, Brandon, Paul, thank you so much for being with us today.

Okay. Thank you.

Thanks, everybody.