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

Great. Well, our next session is the management team from Fulgent Genetics. We are very lucky to join by Paul Kim and Brandon Perthuis. Paul and Brandon. Welcome.

Thank you. Thanks for having us.

Great. So you guys reported last Friday. Why not give us a quick kind of overview and then highlights of the quarter and then anything that you wanted to flag to the audience?

Yes, I'll start with the financials, and I'll turn it over to business who can color in where we sit from a business standpoint and our outlook going forward. So we reported a quarter of $84.1 million. Revenue came in higher than what we anticipated internally as well as what the Street was anticipating. Our gross margins also came in favorably as well as the other key financial metrics. We had a non-GAAP income for the quarter. And we raised guidance from $320 million to $325 million. We think that we're going to be finishing the year on a very strong note from a financial sense, and then Brandon can color in the status of the business.

Yes. I mean that was a good financial overview. I mean the business performed well, as Paul mentioned, above our expectations. So I mean, all 3 business areas are performing well. We break it down into Precision Diagnostics, Anatomic Pathology and our Biopharma Services. Precision Diagnostics was up nicely. Biopharma Services was up nicely. We had a down quarter in our AP business, but really was related to a onetime event of changing some billing software, delayed some claims going out. If that wouldn't have happened, I think all 3 areas probably would have shown growth sequentially and year-over-year. AP did still grow year-over-year. So I think it was a great quarter. I think the sales team is executing, really taking advantage of our expanded capabilities, and I think we're in a pretty strong position.

Great. So we're going to dive into the 3 business lines that you just mentioned. Maybe starting on the AP side. You guys have come up through like restructuring in the past 1 to 2 years. Can you just give us a quick update in terms of how much -- what has changed from maybe 2 years ago? And then what else that you wanted to fix the business?

Yes, certainly. I mean 2, 2.5 years ago, we did a couple of acquisitions. I mean acquiring Inform Diagnostics and CSI Laboratories. Shortly after the acquisition, I think our gross margins were in the mid-20s. That was 2, 2.5 years ago. And this quarter, we were 44%, somewhere around the mid-40s. So last 2 years, the gross margins have really grinded higher. And a lot of that has been integrating those acquisitions and really implementing Fulgent technology into those acquisitions. Some of the things we've been doing lately on the AP side is investing heavily in digital pathology, which is leading to operational efficiencies, improved throughput as well as the ability to leverage AI now that these slides have been digitized. So -- I mean, all areas of our business, we're constantly looking at operational efficiencies, automation, liquid handling, robotics, AI. I think we've done a good job really improving those operations and making them successful as we took them into Fulgent.

Okay. Great. We're going to talk about AI a little bit later. But just in terms of the sales organization within the AP, what has changed?

Yes. So it's grown. A few things have changed. The sales team has grown just in sheer numbers as we pick off territories where we did not have salespeople. We've also brought in some new sales leadership, which have done a really good job. And we've also tactically revamped some comp plans. We inherited some comp plans that we really didn't like that much on the sales team and how the sales team was being compensated. We really wanted to incentivize them for new business growth to go out there and hunt and find new opportunities. So I think the management, the size and just the restructuring of how we compensate our sales team has led to them closing some nice sized wins for us.

Do you think right now, it's like fully done? Or do you expect to hire a few more sales in 2026? So how should we think about...

Yes. On the AP side, yes, it's still probably a subscale sized sales team considering the size of our operations. I mean they're productive, which is great. But there's still green grass out there where we don't have coverage. So I think in 2026, you'll see that sales team probably grow by another 25%.

Okay. Got it. And then talking about the digital pathology, what kind of changes that you kind of expect that to be from an operational efficiency perspective or maybe like you can hire less people. So how should we think about the AI engine?

Great question. It's something we're really proud of. I mean I think we've really pushed the envelope there. And I think we're really far ahead in terms of our competition and our peers in digital pathology. So a year ago, pathologists were literally sitting in our office at their desk, over a microscope, manually manipulating glass slides. So if we wanted to recruit new pathologists, we would have to relocate them and their family to one of our laboratories, for example. Digital pathology has allowed us to recruit nationally. So a lot of our pathologists now work from home. Sample shows up at the laboratory. We do the sample preparation, we create the image. And then no matter where our pathologist sits, they can sign those out. So one of the big advantages has been our ability to now recruit really top-tier pathologists and top-tier talent. Certainly, it's going to make them more productive as well. A lot of the cost of sales are in the professional sign-out of these things. So if we can make them more effective, that's going to have even more impact on our gross margin. So I think we've invested significantly in digital pathology. We recently announced our [indiscernible] system that we built from the ground up to be our system that we use to view and manage and store these slides. And because we have hundreds of thousands of images now that are clinically annotated, that's the data we're able to use to really train our AI tools. And long term, AI is going to make our pathologists faster and better, leading to efficiencies. And again, we really pride ourselves on operational excellence. So anywhere where we can make it more efficient, that's what we want to do.

Great. I think the next one is more on the AP side. I think about like 2 years ago, we were talking about how to kind of utilize the payer contract to add on the NGS services. But that has been a little bit slower than expected. I wonder, like, can you give us a quick update where we are right now? And then what are the pain points that you have seen during kind of like the conversion?

Yes. So it just didn't happen how we thought it would happen actually, but it happened in a different way. So it's actually worked out quite well for us. We're really proud of the progress we made in managed care. Another area we've invested in some good talent, and we've been able to organically go out there and grow our contracts. So I think not this past earnings phone call, but the previous; for the first time in a couple of years, we mentioned it because we have made so much progress in managed care and the number of millions of new lives we now have under contract. So I think the combination of all of our entities forging organically and our acquisition, they've given us a robust customer contract list. And that's important, right? I mean people want services performed in network. Out-of-network patient cost shares are through the roof in terms of co-pay, co-insurance and deductibles. So it is hard to sell if you're out of network. But where we're at now, I mean, we're in a really strong position with managed care.

Okay. Great. Do you have an attach rate that you kind of like wanted to disclose or any target rate that you want to have?

Well, I mean, if you're thinking about in terms of like cross-selling and penetrating the clients with new products and services, it's not lost on us that through our AP business, we have a lot of really good clients in terms of dermatologists, gastroenterologists, urologists, breast pathologists. It hasn't been a huge focus in 2025 to cross-sell the NGS products. We've been focused on some other areas, but it's certainly not lost on us that there's value there. So we think in 2026, one of the initiatives is going to be carving out a limited number of NGS tests that we think are applicable to that same client base, train that same sales team and go to market with those products.

Perfect. Well, I mean, talking about 2026, how should we think about the AP in '26, like high single digit? I mean '25 came on like a really weaker '24, right? But how should we think about '26?

We haven't guided to 2026 yet. But I mean, we see momentum in the AP business. We think it's going to continue to grow. We think the operational efficiencies we've made are really beginning to pay dividends. we're going to be increasing the size of the sales team. So not ready to guide yet for 2026 and give out any real concrete numbers, but we think the AP business has momentum behind it.

Great. So let's move to Precision Diagnostics. 16% growth, which is really impressive. What are the drivers? And then how sustainable is the double-digit growth?

There's been a few different drivers. I mean, we really have made a name and a brand for ourselves in reproductive health. A lot of that has been carrier screening. So our Beacon Expanded Carrier Screening product has done really, really well in the marketplace. We were the first lab to launch a really large panel, 700-plus genes. I mean that's important in the infertility space. So we've gained significant market share in reproductive health with our carrier screening test. That continued into this quarter, obviously. And I mentioned on the phone call, we now expanded that to 1,000 genes. So we now have, by far, the biggest expanded carrier screening test on the market. And there were some questions around clinicians' appetite for a panel that big. And because of the segment we sell into, the infertility clinics, most of these couples are there trying to get pregnant. They're not pregnant yet. The clinicians really want as much risk mitigation as they can during this process. So the more they can test for in a pre-pregnancy setting, the better. So there is a big appetite for a larger panel in the IVF space. So carrier screening was big for us in the quarter. We've also launched a few new products in rare disease. We launched a new whole genome with RNA, which is huge. I mean the literature shows 15%, 25%, 30% increase in diagnostic yield when you add RNA. We now do that with almost all of our exomes and genomes, which is a big differentiator for us. This quarter, we announced a new ultra-rapid NICU genome, 48-hour turnaround time. So we think that's going to be important. So the sort of the rare disease pediatric portfolio in terms of capabilities has expanded, and our sales team is leveraging that.

Great. I wonder how do you kind of break out the disease area in terms of revenue, right? So how big is the women's health? How big is the rare disease? Can you help us quantify that?

In terms of the market size?

No, just the revenue mix that you have, right?

We haven't. So we break it out into Precision Diagnostics, AP and Biopharma Services. So within the Precision Diagnostics, you have your rare disease, our oncology business, our pediatric rare disease business. So we haven't broken those out more granularly. But I think just sort of qualitatively, our reproductive health business is probably our largest business, probably followed by rare disease.

Okay. Another thing that people focus on kind of like women's health in general is how do you grow bigger, right? So you need to have NIPT to kind of go into the OB/GYN channel. And you do have a pilot, but it's still pretty small. So I'm wondering how do you think about the strategy going forward in that specific area?

Well, we don't think we penetrated the IVF space fully yet. I mean we're still closing opportunities in the IVF space. And I think the IVF space for us is attractive because it's more centralized, if that makes sense. There's a lot of OB/GYN clinics across the country, but much fewer larger IVF clinics. And the impact we've made there has been tremendous. I mean our turnaround time last month was 8.8 days for carrier screening. I mean that's incredible. Certain labs out there -- several labs out there, 2, 3, sometimes longer weeks. So we believe we still have runway in the IVF setting. The team is doing a really good job closing those opportunities. We do now have an NIPT test. And as you mentioned, if you want to penetrate the OB/GYN space, you really need those 2 together. So we did make a decision to launch NIPT test. We launched a novel NIPT test, but it hasn't been a sales focus yet in a big way to penetrate the OB/GYN market. So still focused on the IVF clinics. But perhaps next year, we could see more penetration in OB/GYN.

Do you think the test might need further improvement given that the space I keep talking about main competitor have a single gene NIPT. There are other competitors doing a combo test where you have NIPT and carrier screening altogether. How do you think about the road map in that specific case?

Well, I mean, our NIPT was a novel NIPT test. I think we're looking for 50 or so single gene mutations. I think that's the biggest on the market, maybe I'm not sure, but I think I believe it to be as well as really good sensitivity for the deletions and duplications. I believe we test for more microdeletions and duplications than some of the other labs. So the idea was to test for all the common aneuploidies with very good sensitivity and specificity, but also have a larger number of microdeletions, microduplications as well as the de novo single gene mutations. So I think we're out there in terms of being in front of the curve. I think at this point, we need to really perform commercially. We decided to build out the sales team, really focused on calling OB/GYNs. You mentioned earlier, now that we have all the contracts, we're in network, I believe we have the tools to do it. We just need to execute.

Okay. And then in terms of the rare disease side, there are lots of competitors out there, right? And then now you're also launching the RNA feature, the rapid whole genome sequencing. How do you think you differentiate versus like other competitors in the market? And how do you really gain share?

Yes. Well, I feel like there's a lot fewer competitors today than there was maybe a few years ago. Look, I think the RNA part is a big differentiator. I believe we're the only laboratory offering RNA in parallel with all of our exomes and genomes. And as I mentioned, it depends on what literature you cite. It's anywhere between 13%, 15% up to 30% increase in diagnostic yield. And in the diagnostic dilemma world, that is massive. That's a huge number. A lot of these clinicians that are seeing these patients, their mission is to solve the case to give the family an answer and also be able to counsel on reproductive risk in the future. If we can solve more cases with RNA, that's going to win us more business. Our turnaround time has been excellent. The quality has been excellent. We have the contracts now. So -- I mean, in terms of probably the biggest differentiator is going to be the RNA right now, followed by our turnaround time.

Okay. Got it. And what kind of other menus that you wanted to sell in 2026? You touched on women's health, rare disease. Anything else that you wanted to add to the portfolio?

There's always something, right? There's always something. Our portfolio at this point is big. I think we offer over 20,000 unique tests across all different subspecialties. I don't think there's one sort of big thing that stands out that we need to launch in 2026. I think 2026 is more continued commercial execution, growing out the sales team, gaining more market share in rare disease and reproductive health. Even in the Biopharma Services, the capabilities have expanded so much in the last year or 2, multi-omics, launching proteomics and single cell and spatial, all on relatively modest R&D spend, if I might say so. So nothing really stands out in terms of what we need to execute on our plan for 2026. I think it's just going to be blocking and tackling and good sales team execution.

How big is the sales force right now? And then where do you want it to grow to?

I think all in all done, if you include sales, marketing, I think managed care is in there globally. We have a few international as well. I think we're just shy of 80, just shy of 80. I don't know that we have an ideal number yet in our minds on how big it needs to be. We believe it to be subscale. We believe as we continue to hire good salespeople, we're starting to see those returns. I think we're being really opportunistic. When the right talent presents itself, when the right territory is looking right for us, like we think we can make an impact in that territory. So it's more sort of opportunistic hiring than having a plan like we need to hire 100 people. That's not really our MO right now, putting the right talent in the right territories. And so far, again, the sales team has been productive. And I think next year, that's going to be the same plan.

Is that 80 for total company or just for precision?

That's the total company. That would include Anatomic Pathology; include AP; Precision Diagnostics, all areas of Precision Diagnostics. As you can imagine, some of these call points are different, vastly different perhaps. So that would include the oncology team, the women's health team, the rare disease team and marketing as well would be all in.

Got it. Cool. And then you talked about Biopharma Services, great quarter. People are concerning about the R&D spend from the pharma companies, you saw all the headlines. But how do you think about the pipeline so far?

Yes. I mean we haven't seen much of an impact there, but our base is relatively low. I mean Biopharma Services for us, we started a couple or a few years ago. When we launched it, it was only next-generation sequencing. So that actually limited our addressable market because so much of biopharma now wants multi-omics. So when we realized NGS wasn't enough, that's when we went on a mission to launch all these new platforms. So now the addressable market is much bigger. So Biopharma Services is very transactional. So biopharma company would put out an RFP looking for certain technologies. If you have those technologies, you can bid on it. If you don't, you're not in the process. So now that we have all of these, we're able to bid on a lot more of these programs, and we're winning a lot of them. And some of these are really big, strong, long-term biopharma partners. But because our base is relatively low, relatively new to us, we see this movement kind of up and down. We've been calling it lumpy, just the nature of the business. I think if you zoom out, it's up and to the right. It's growing. It's looking good, but you're still going to see quarter-to-quarter variability until we hit a more steady state. In terms of the pipeline, I think the team is doing a great job building out the pipeline. And these can be long sales cycles as they go through a multi-month RFP process and then a multi-month sample procurement process, and then we get to do our work. And we don't often get the bill for the project until the project is complete. So once we complete the project, we bill for the project. So I think to kind of level out the lumpiness, just continue to build that pipeline, get more scale, and then it will be a little bit easier to sort of forecast and project.

Okay. Got it. I wanted to go back to your Precision Diagnostics, forgot to ask one more question on the Foundation Medicine partnership that you guys have. Where we are right now? And should we think about any big revenue contribution in '26 or maybe beyond?

Well, we hope so. We hope so. We're really proud to partner with Foundation Medicine. We think they're a market leader in their space. They have a big piece of the puzzle with their tumor profiling and their FoundationOne test. But as the NCCN guidelines have been updated to emphasize more of the need for germline or hereditary testing, they didn't have that piece of the puzzle. So we decided to partner up. We do a great job with germline testing. I would say it's gone a little slower than we all like, but I think that's just the nature of working with a big company and a big business. I think no pun intended, but they're building a nice foundation. They're building a nice foundation for the partnership. So I think they wanted to make sure that as it scaled, we could deliver on our promises, right? Our turnaround time, our integrations, the ordering, the reporting, I didn't want to get over our skis too much. So 2025 was a "slow year" for us, but I think the pieces are in place for 2026 to be much better.

Have you started to see the volume coming?

We have. It's not as big as we'd like, never is, never is, but we are starting to see the momentum. And look, they have a world-class sales organization. I think they're a world-class company. I think Foundation Medicine and Roche are doing a great job. And I think this partnership together is the best way to deliver cancer testing with somatic and germline together.

Okay. Great. So maybe a final thing on the whole business. I know you're not ready to give outlook, but can you talk about like what's the puts and takes for '26?

I think our overall capabilities are much stronger, and it continues to get stronger. I think Fulgent will continue to make balanced and rational business decisions. I think the possibility of M&A is definitely in the picture. We haven't done one in a while, but we have done several since the COVID era. And I think the key takeaway, what that is, we made those acquisitions work. The numbers and the metrics that we talked about today, these are all organic figures and organic improvements. We raised our outlook twice. And these financial metrics, they just continue to get better for the business. I think the other thing is on the therapeutics development, we are in Phase II with 007. We're in Phase I with 022. The pipeline and the science, it continues to build. And the key takeaway there is, first and foremost, the validity of our platform and the science and the data. But having said all of that, we made it not impact our financials that much, meaning that our overall spending has been very, very efficient. I think in 2026, the spending for the therapeutics development will continue to increase. It might potentially double our spending for this year, maybe something a little bit less. But even if it doubles off a figure that might be, say, between $20 million to $25 million of total cash spend, which is the projected spending for 2025, it's certainly, right, not a material part of our cash balance. And I think the other good thing is the laboratory services business, that is non-GAAP profitable already. So with the continued growth in the top line and the betterment -- the continuous betterment of the financial metrics, I think our overall cash balance should be still very, very healthy. When we gave our latest outlook, we projected the cash balance to be approximately $800 million at the end of 2025, and that surpassed our original expectations. And that includes doing stock buybacks, some stock buyback. We bought some ancillary kind of assets to better our business. We invested in capital. We've been hit with inflation for labor costs, just like all organizations. And even with all of that, the cash forecast is better than what we originally anticipated, and it's even better than what we anticipated during the middle of the year. So I think the key takeaway is even with the penetration and the expansion of our business, with both of the businesses, we are very financially responsible.

Great. A lot to follow up on that one. But maybe first on the pharma business. So the 007 is going to be presented at ASCO in 2026, right? So what other catalysts that we should watch for after that? Are you going to see more partnership coming up? Or -- there was a go and no-go decision to make on another indication. How should we think about that?

So Brandon and I can talk, and we will talk about the therapeutics development business. But we have our limitations, right? I mean the person that can give you the true insight is Ming. And he's not here. He had to be somewhere else. But we will address your basic questions. So the key catalyst is going to be the completion of Phase II and entering Phase III. I think it's -- that's probably not a surprise to people that are very familiar with the biotech area. I think Phase III is the key study where people really take a close look at the science as well as the approach for drugs. And that is going to start happening in 2026 for 007. And for 007, that is a very lucrative area because the market that we are initially targeting is the head and neck. And there have been some transactions and news, right, in the biotech sector for that. We know that the compound, right, has been proven. The delivery platform and the science all point to betterment than what we originally hoped. So you have that as one of the key catalysts, 007 going from Phase II to Phase III. I think the other thing, which will support, right, our approach and the platform is going to be 022, which targets the various cancers around the organs, whether it be colon, liver, pancreas, bile duct and lung as well. And that Phase I study has begun. And I think the other key takeaway is the better the science is and the better -- the deeper that you get into various drugs, it's easier for you to launch, right, additional therapies within that platform. So we think that 2026 is going to be a very exciting year for the company.

Great. And then I just wanted to double confirm. So you're probably going to be double the cash burn for the business, roughly like $50 million in 2026, but we're able to kind of like using the profitability that come out from the lab [indiscernible].

Yes. I think $50 million is on the high side. If we were to estimate it now, it's probably somewhere between $35 million and $50 million on a cash basis. And we anticipate the laboratory services business to continue to be successful and expand. So that cash figure, it doesn't scare us. And then the other thing is the science should be -- and the yardsticks, right, and the catalyst should be much more evident, right, with that spending.

Got it. And then talking about the profitability on the lab, how much we can go further? What are -- do you have any cost-out program or maybe efficiency that can improve the gross margin?

Yes. So I'll kind of tee it up, and I'll turn it over to Brandon. That's a very good segue. So people are familiar with what we achieved during COVID. And I think the key takeaway with that isn't the test for COVID. It's not even really the numbers or even the financials. I think the key takeaway is, we know how to scale up a business in a successful way, and we're ready to do so. And I think that people see some of that, right, through the integration and the betterment that we made the financial metrics after we bought 2 companies during the COVID era. The revenues, we talked about our revenues, pre-COVID, we were a $30 million diagnostics company. Now we're $325 million. Yes, we bought a couple of companies, but the growth and the metrics that we've been talking about here for the last, I think, almost 2 years, they've all been organic. On the gross margins, getting back to your point, after the COVID falloff, our gross margins were somewhere in the mid- to high 20s, right? And in the last quarter, on a non-GAAP basis, we're at 44-point-something, right, between 44% and 45% gross margins. On a GAAP basis, I think it's like 1 point lower, something like that. And even, say, like 6 quarters ago, our targeted gross margin for the laboratory services, we want to get to something close to 40%. And then once we hit 40%, we're a little reserved. We want to make sure that we can stay there. While it seems like we are staying there, we kind of like are going past that. And that is through our process, through our ability to integrate through streamlining. But the utilization of technologies and future technologies really hasn't taken hold yet. And I think that I'll turn it over to Brandon, who can talk about our background in technology and the utilization of AI. I know that's kind of a catch-up, but there is a real tangible, right, near-term catalyst that can make our financial metrics, particularly gross margins better through the utilization of AI. And I'll turn it over to Brandon, who can color that in.

Yes. Just real quick, I know we're a little bit short on time. I mean we're proud of the success we've had with our gross margins. I mean it's a focus of the company. If we can continue to make the lab more efficient through automation, through robotics, liquid handling; if we can make our pathologists and our medical doctors across the entire company, including our NGS, sign-out the records more efficient, it's going to continue to get those gross margins to grind higher. So we haven't given any long-term forecast for gross margins, but the expectation is to continue to invest in these areas, and they will continue to grind higher.

Got it. We're about time. Final question on capital allocation. M&A side, what areas that you wanted to kind of like invest into, on the lab or still adding more assets on the therapeutic side? And then how should we think about the buyback?

Not on the therapeutic side. Therapeutic side, we have a very clear, right, path of getting better science and data, and we talked about the catalyst. On the laboratory services side, I'll turn it over to Brandon.

Yes. I mean, look, I think we're going to -- I think we forecast to end the year with $800 million in cash. So I mean, we certainly have some optionality there. We will continue to invest in sales and marketing. I think we will continue to invest in our operations. We've recently acquired some buildings. We built some new laboratories. We've consolidated the laboratories. We haven't talked too much about that, but through acquisitions, we went from 5 or 6 laboratories to 2 or 3 laboratories, centralizing everything, improving operations. And then the investment we're making in AI is going to continue to make us more efficient. Paul and I and Ming and everyone in the company, really all the senior executives, we do spend a lot of time looking for new M&A opportunities. The 2 we've done have worked very well for us. We're proud of the integrations we've done there. We believe there's other targets out there where we can do similar things, where we can take the Fulgent technology platform and put those in businesses to improve those businesses. So M&A is a top priority for us. But if we do another one, we want to make sure it's the right one and a high probability of success. And it's probably just a matter of time.

Okay. buyback?

We've done some buybacks.

We've done that, too. We didn't do any last quarter. I think the takeaway with capital allocation is we're not hamstrung, right? We can do all those things, and we can do them concurrently. And with the team that we have and the bench and the depth, right, and the capabilities that we have, we like where we sit. We think that we're worth more than what we're valued at. But in terms of our overall capabilities and what we can do, we like our positioning.

Okay. Great. Well, I think we're about time. So well, thank you so much for joining us.

Thank you.

Thank you.