NEW YORK (GenomeWeb) – As Fulgent Genetics looks to rebound from recent financial results that left analysts underwhelmed, the firm's executives said that they are starting to see stability in its business.
Fulgent operates a CLIA-certified and CAP-accredited molecular diagnostics laboratory in Los Angeles with a focus on genetic testing that provides physicians with clinically actionable diagnostic information. Among the services are full-gene sequencing with deletion/duplication analysis in single-gene tests; testing on pre-established, multigene, disease-specific panels; and testing on customized panels tailored to meet specific clinical needs.
"A lot of clinicians that we retain come to us because they want testing on a gene for which they can't get testing done elsewhere," according to Samuel Strom, Fulgent's lab director. "Then they realize that they are working with a high-quality lab and begin to order larger panels."
Fulgent Genetics specializes in offering testing to clinical and research customers for hereditary genetic conditions, with tests ranging from single gene, single mutation analysis to whole-exome sequencing and analysis, Strom said. He said that the company has "built out its expertise in the wet lab doing custom NGS capture and in the dry lab doing bioinformatics, and variant curation, annotation, and reporting."
Among its test services, the firm's Focus Cancer Panels target 29 genes associated with high and moderate risk for hereditary cancer syndromes and established clinical management guidelines for disease-causing variants. The firm's Comprehensive Cancer Panels cover 123 genes associated with potential risk for hereditary cancer syndromes. The panels include well-established cancer-related genes as well as candidate genes with newly discovered association with cancer, but that may have reduced or unclear risk, the firm said.
Revenues have steadily increased year-over-year, but the firm's top and bottom line results have fallen short of Wall Street analysts' expectations in recent quarters, resulting in at least one analyst to say last year that he could not be fully confident that Fulgent's management would turn things around.
In Q4 2017, investment bank Piper Jaffray downgraded Fulgent's stock to Neutral from Overweight after the genetic testing firm reported $4.3 million in revenues, below the bank's estimate of $5 million. Analyst William Quirk wrote in a research note at the time that "after a year of significant disappointment (on top of a limited track record as a public company), we have limited visibility into [a] turnaround and thus have diminished confidence in management."
Quirk noted that reimbursement coverage for specialty testing, including next-generation sequencing based tests, is imperative to drive improved gross margins and associated profitability, "but it can be a long and uncertain path."
In an interview, he added "As the firm's testing mix has partly shifted from volume heavily driven by hospital contracts to more testing that's being done with third-party reimbursement, that's obviously added some uncertainty and contributed to volatility in revenue performance."
Disappointing figures
Earlier this month, the firm announced revenues of $4.7 million for the first quarter of this year, down 11 percent year over year, as well as a net loss of $1.9 million, or $.11 per share, compared to net income of $232,000, or $.01 per share, in the prior-year period. On a non-GAAP basis, Fulgent's net loss per share for the recently completed quarter was $.06, missing the analysts' expectations of a $.04 loss.
After the release of the earnings, Quirk said in a separate research note that he believed the firm's downside is now limited given the cash on its balance sheet, but that he would like to see "reacceleration of the business before getting constructive on the stock." Fulgent exited Q1 2018 with $5.3 million in cash and cash equivalents and $33.5 million in investments in marketable securities.
The firm's revenue and earnings misses had to do partly with Fulgent shifting its China business from mostly direct selling to sales through a joint venture, which led to a split of China sales that had all previously been recorded by Fulgent, Quirk said.
In April 2017, Fulgent announced that it had formed a joint venture in China to offer genetic testing services in that country. The firm noted that it had formed the venture with Chinese firms Xilong Scientific and Fuzhou Jinqiang Investment Partnership to establish Fujian Fujun Gene Biotech.
Paul Kim, Fulgent's CFO, said on a Q1 earnings call that Asia revenue had declined in the quarter and represented less than 3 percent of its total revenue compared to 29 percent in Q1 2017. In general, he noted, the firm is early on its path toward "accelerating growth," but remains "confident" that its "technology advantage as well as expanding test menu and lab capabilities can continue to drive growth in the quarters ahead" and will demonstrate its viable business model.
On the firm's Q1 2018 earnings conference call, CEO Ming Hsieh added that the firm's "China JV is operating well, and we look forward to long-term business opportunities in that market."
He also said that the company was beginning to see stability in its business and had "begun to see momentum from our new initiatives, particularly our Beacon carrier screening test," which identifies people at risk for passing genetic disorders to their children. The test provides sequencing and deletion/duplication analysis for more than 330 genes, according to Fulgent.
Despite the firm's recent year-over-year revenue decline, the number of billable tests it delivered to customers grew 5 percent to 4,621 from the prior-year quarter.
"There's certainly a lot of potential here given some of their novel tests and the broad menu that they offer, so I am hopeful that they are reaching a stability point," Quirk said.
Fulgent noted on a presentation following the release of its Q1 earnings that it had secured reimbursement agreements and signed "several regional third-party contracts in the first quarter." No further details were disclosed.
In a Form 10-K filed with the US Securities and Exchange Commission in March, the firm said that it is "making efforts to diversify" its customer market, "including building relationships with research and other institutional customers, as well as a national clinical laboratory, regional medical networks, and various other organizations to facilitate access to physicians, practitioners, and other new customer groups, including certain US military and other government agencies."
The firm noted that it is pursuing relationships with payors, including Medicare, some state Medicaid programs, and commercial payors, to obtain coverage and reimbursement for its tests and to make them accessible to more individual physicians. The firm's existing customer base consists primarily of hospitals and medical institutions that are "frequent and high-volume users of genetic tests," according to Fulgent. The firm noted in its SEC document that it believes that its "ability to maintain, strengthen, and build this customer base could have a meaningful impact" on its potential for growth.
Through the end of 2017, the firm had sold its tests to about 750 customers.
Testing growth
In 2013, Fulgent launched its first commercial genetics tests with a focus on rare pediatric diseases. By the end of 2015, its tests covered more than 10,000 genes in about 170 panels. Currently, the firm's test menu includes about 18,000 single-gene tests and more than 850 panels that collectively test for around 7,700 genetic conditions. These include testing for various cancers, cardiovascular diseases, neurological disorders, and pediatric conditions, the firm said in an SEC document.
At the center of its technology capabilities is a proprietary platform that allows it to offer a broad and flexible test menu and to continually expand and improve on a proprietary genetic reference library, according to Fulgent. Its technology platform integrates data comparison and suppression algorithms, adaptive learning software, advanced genetic diagnostics tools, and integrated laboratory processes, the firm said in its SEC document. It noted that as a lab built around NGS-technology, it offers a range of sequencing platforms, including Illumina's NovaSeq, HiSeq X Ten, HiSeq 4000, NextSeq, and MiSeq systems.
Among its services, Fulgent offers an integrated genetic test service, chromosomal sequencing analysis (CSA), that uses next-generation sequencing to provide options for the evaluation of children with intellectual disability. CSA is an integrated reflex system that uses NGS data to meet professional guidelines for front line testing with a seamless transition to multigene panels and exome analysis, the firm said.
It noted that the analysis includes all clinically significant copy number variations in ClinGen. In addition to NGS, the service employs orthogonal methods, such as Sanger sequencing, qPCR, multiplex ligation-dependent probe amplification, and RT-PCR.
The firm's Beacon carrier screening tests search for pathogenic carrier mutations for over 320 conditions, including cystic fibrosis, fragile x, Duchenne muscular dystrophy, Hemoglobinopathies, and spinal muscular atrophy.
Fulgent's Newborn Genetic Analysis identifies DNA changes that could cause severe or life-altering symptoms in an infant. This analysis includes 255 genes and assesses more than 200 disorders, the firm said. It only tests for early-onset conditions where early detection, intervention, and management could prove essential for the infant's overall health and quality of life, the firm said.
The firm recently launched an Ataxia Repeat Expansion Analysis, a 15-gene panel that covers repeat expansion analysis for Ataxia-related genes. The firm said that it has also updated its NGS-only Ataxia panels. It provides three preset panels. early-onset ataxia, late-onset ataxia, and an all-inclusive ataxia NGS panel.
Achieving adoption
Hsieh founded Fulgent in 2011 after serving as CEO of Cogent, a biometric identification services and products company that he cofounded in 1990 and which 3M acquired in 2010. He began looking for opportunities to put his team's computer and software engineering expertise to use and became interested in therapeutics and genetics, Strom said. After Hsieh initially founded Fulgent Therapeutics, "he quickly realized the market opportunity in NGS testing," and changed its name to Fulgent Genetics, Strom said.
Within the genetic testing ecosystem, the company sees itself most closely competing with Invitae, GeneDx, and Prevention Genetics in the US, and Centogene in Europe, Strom said.
According to Fulgent, its tests fall within the definition of laboratory-developed tests, and so are not currently subject to the US Food and Drug Administration's enforcement of its medical device regulations. The firm told 360Dx that it has products in the pipeline for FDA approval, but it does not expect to release them "any time soon."
Applications of whole-genome sequencing offer future opportunities for the firm, Strom said. "We've done a lot of whole-genome sequencing for our research clients, and there's potential to test different types of mutations [on a clinical basis] that are either not possible or very challenging" by existing methods, he added.
Strom said that getting insurance reimbursement from payors is a slow process and among the primary challenges facing genetic testing companies. Counseling concerns about genetic testing is also curbing adoption, he said. "We want to make sure that people understand the tests that they are taking, but the challenge there is that the baseline knowledge of genetics in the community is not very strong, and most people have never had the experience of having to learn this before."
A recent survey bears out his point. Though people have greater access to genetic testing than ever, personalized medicine and genetics don't spring to most people's minds when they think of the latest advances in healthcare, the survey found. Importantly, awareness of personalized medicine is still low within the public and not necessarily improving.
Still, Strom noted, an enormous gap exists between the number of people who can benefit from genetic testing and the number of people currently getting tested. "It's thought that 10 percent of people that develop cancer have a strong hereditary risk," he said. "We can look at family history and identify people who are at very high risk, and that has been done with breast, ovarian, and other cancers, but the reality is that everyone with cancer should get a hereditary test."