NEW YORK – Fulgent Genetics this week outlined a broad strategy for becoming a "one-stop shop" for oncology testing post-COVID fueled by recent acquisitions, investments, and new hires.
After the close of the market Monday, Temple City, California-based Fulgent reported its second quarter revenues had skyrocketed to $153 million from approximately $17 million a year ago, due primarily to approximately $128 million in COVID-19 testing in the quarter.
Fulgent has recently begun deploying and reinvesting these COVID-related gains, announcing also on Monday that it has acquired cancer testing lab CSI Laboratories for up to $60 million in cash, and is investing $20 million to commercialize liquid biopsy assays in partnership with Helio Health. In May, it also invested $19 million to take a controlling interest in FF Gene Biotech, a joint venture in China.
Nevertheless, Fulgent's shares on the Nasdaq fell nearly 10 percent on Tuesday on a significant revenue miss that the firm attributed to a sharper-than-expected Q2 drop in COVID testing.
On a call with investors following the release of the quarterly earnings, Fulgent CEO Ming Hsieh and other executives offered a detailed outline of the firm's future directions.
"We believe our response to the COVID-19 pandemic has demonstrated our ability to scale and execute with a high level of precision and excellence, and we hope to translate these capabilities into other areas of genomic testing with our core business," Hsieh said.
Overall, Fulgent lowered its COVID-19 testing revenue guidance for the full year to $690 million from $730 million, while still taking into account that the Delta variant appears to be leading to increased test volumes and that "governmental agencies and schools are seeking more regular testing amid a more uncertain environment," CFO Paul Kim noted.
"This reduction of $40 million is essentially due to our Q2 shortfall and we believe testing volumes in Q3 and Q4 are still on track to meet the expectations we set last quarter," Kim also said.
The firm's core business was formerly referred to as the NGS business by Fulgent. It now includes the firm's NGS testing services, its COVID-19 NGS surveillance testing performed pursuant to an agreement with the US Centers for Disease Control and Prevention, and the new CSI Labs business, which incorporates various testing modalities and services.
The total CDC contract is worth up to $47 million and the firm has a capacity to run up to 10,000 SARS-CoV-2 NGS tests per day, but demand is likely to decrease going forward, Kim said, and Fulgent lowered CDC-related revenue guidance from $30 million to $15 million.
However, Fulgent expects this taper to be more than offset by demand for other testing services in its core business.
Specifically, the firm now anticipates $80 million in non-COVID NGS testing in 2021, up from a previous projection of $70 million, as well as $15 million from the CSI Labs business, for a total of $110 million in annual core revenues.
Fulgent claims to have a "new approach to NGS" testing involving proprietary probes and chemistries, novel comparison and suppression algorithms, and comprehensive analytics powered by artificial intelligence and machine learning.
The firm noted in a slide presentation accompanying the earnings release that this so-called "technology platform" enables a broad test menu — including more than 18,400 single-gene tests and 900 panels, as well as whole genome and exome testing — and that this flexibility allows for custom tests for any genes or conditions. Fulgent's revenues from its preset panels have grown 350 percent since its IPO in 2016, the firm said.
All this in turn allows Fulgent to offer a better cost structure relative to competitors, the firm said, with an average cost of goods sold per test of $23, and this structure is sustainable because of lab efficiencies, automation, and scale.
The firm's COVID testing business is somewhat separate from its core business, capitalizing on its PCR capabilities and incorporating drive-thru sample collection and at-home collection through its consumer-focused Picture Genetics business. Notably, Fulgent said it won a competitive bid to supply the New York City school district with testing for the fall semester, and it is also developing a 30-target respiratory pathogen test.
However, it is the core business the firm is hoping to grow in the "post-COVID" future, and the acquisition of CSI Labs will potentially allow the firm to become a 'one-stop shop' for oncology, executives quipped.
"CSI has operations in Georgia and Florida and will add approximately 400 unique tests to our already expansive NGS test menu," Hsieh said on the call.
In addition, CSI has "very strong relationships on the reimbursement front," which Hsieh said opens up Fulgent's menu to cover more patients across the US.
Fulgent brought on Larry Weiss as chief medical officer in May, and he will now spearhead the integration of the CSI business. Weiss, a former pathologist and laboratory director, previously served as CMO at NeoGenomics.
The CSI Lab acquisition brings additional pathology services in flow cytometry, cytogenetic analysis, fluorescence in situ hybridization, immunohistochemistry, hematopathology and surgical pathology consultations, as well as expertise in molecular genetics and NGS, Weiss said. CSI also has access to specimens that will help the West Coast lab start up, he also said.
Fulgent plans to use the CSI model and expertise to also build an oncology testing lab on the West Coast and establish a national footprint for the CSI business, as well as to transition CSI to digital pathology.
Brandon Perthuis, Fulgent's chief commercial officer, said on the call that CSI's "menu, turnaround time, quality, and medical professionals combined with Fulgent's technology platform, operational excellence, and presence in Houston and Los Angeles, is poised to make a disruptive impact in this market which historically has been dominated by only a few companies."
Furthermore, the CSI acquisition gives Fulgent new momentum on the reimbursement front, Perthuis said.
"We now can more effectively sell into those accounts that require insurance billing, be it hospitals, private clinics, OB-GYNs, maternal fetal medicine, neurologists, and many other subspecialties," he said, adding, "Our existing sales team now has many more clients to call on, and as we onboard new sales team members, they will be able to sell without the limitation of minimal insurance contracts."
Weiss noted that Fulgent has expertise in germline testing, and he expects the firm to quickly expand to incorporate somatic mutation testing, as well.
In addition, the firm's $20 million Helio investment will enable the firm to access the liquid biopsy space.
Hsieh noted that while Helio expects to first commercialize its HelioLiver test in China, Fulgent will have exclusive rights to commercialize it in North America.
For other testing in the China market, Fulgent Genetics will provide laboratory services to Helio, which is in the process of finalizing its China approval process for its liver cancer test.
"In addition to liver cancer, Fulgent and Helio will develop early cancer screening for other cancers including using Helio's methylation-based technologies to further expand our capabilities in liquid biopsy and oncology testing," Perthuis also said.
Combining these two investments could give Fulgent Genetics "pretty broad coverage in the cancer diagnostics space, from the early cancer detection market to germline, solid tumor, [and] minimum disease monitoring" spaces as well, Hsieh said, adding that this is an $80 billion market globally.
The firm will also continue to address the rare disease market and others that were its focus when it completed its IPO, but "we want to be a major player in the cancer diagnostic market," Hsieh said.
Regarding the China JV, Kim noted that the firm booked $2 million of top-line genetic testing revenues from China as a result of the consolidation, and it expects between $5 million to $10 million of additional business from the China market in the second half of the year.
Hsieh, meanwhile, said that the firm sees China as a competitive, growing, and challenging market, with a lot of opportunity, and that it has added newly recruited executives to the JV who, in part, will handle the firm's relationships with Helio's operations in China.
Going forward, Fulgent plans to make "bold" and "aggressive" M&A moves with its remaining COVID capital, according to Perthuis, and not be solely focused on oncology.
In a note to investors, Kevin DeGeeter at Oppenheimer noted that Fulgent "articulated a clear strategy for reinvesting COVID-19 profits in acquiring a comprehensive oncology menu, expanded payor expertise, and expansion in China," and said that investors should look to accumulate Fulgent shares on price weakness. Oppenheimer also raised its price target on the company's stock from $118 to $141 per share.
However, in late afternoon trading Tuesday, Fulgent shares on the Nasdaq remained down approximately 11 percent to $98.07.