FLGT - Fulgent Genetics

[foodles]

So on Nov 12th plumtree posted about Fulgent Genetics as a potential watchlist company on the board (post #73511):

https://discussion.fool.com/watchlist-candidate-fulgent-genetics…

I remember reading the post but didn’t look into the company at the time. Since then the Fool has had a couple writeups about them on the free side, but the one on Dec 17th got my attention as it had a nice “clickbaity” title stating to buy them instead of Snowflake, and the numbers they posted did get me to start looking further at the company (since I hadn’t bought SNOW because of the extreme valuation):

https://www.fool.com/investing/2020/12/17/forget-snowflake-3…

Fulgent Genetics is in the diagnostics/healthcare industry, and prior to 9 months ago, specialized in genetic testing and diagnostics, mostly for rare cancers, diseases and other genetic conditions. They were a very small company that did $22M in rev in '18, and $31M rev in '19. Their focus (and fortune!) changed in 2020 with the onset of the Coronavirus pandemic. They were able to pivot and start selling/providing various Covid-19 testing options and proved they were able to scale those new abilities as well as Zoom was able to scale their operations, no small feat!

Here are their numbers from the last couple years, very easy to see the explosion of revenues and earnings starting mid 2020 as they began ramping up their Covid testing solutions.

	Revs (Millions)						
	Q1	Q2	Q3	Q4	Total Revs	Growth
2018	$5	$5	$6	$6	   $22	
2019	$5	$8     $10	$8	   $31	          45%
2020	$8     $17    $102    **$173(est)   $300(guide)    855%**

	Revs   Seq Rev Growth   YOY Rev Growth
1Q19	 $5	  -10%	            15%
2Q19	 $8	   48%	            60%
3Q19	$10	   25%	            67%
4Q19	 $8	  -20%	            33%
1Q20	 $8	    0%	            48%
2Q20	$17	  113%	           113%
3Q20   $102	  500%	           920%
**4Q20   $173(est)   69%	          2063%**

	Non-GAAP EPS			
	Q1	Q2	Q3	Q4       Total EPS
2018   (.06)   (.01)    .00   (.02)      (.09)
2019   (.06)    .06     .14    .04        .18
2020   (.03)    .17    2.08	         2.22(first 9 mths)

Prior to the Q3 earnings call on 11/9, their 2020 rev estimate was for $135M. During the call, when they announced $102M in revenue, they also increased their 2020 estimate to $235M, implying a $108M Q4, along the lines of their just reported Q3.

Here is the Q3 release, lots of good stuff in it:

https://ir.fulgentgenetics.com/news-releases/news-release-de…

But 2 weeks later, they again increased their 2020 estimate to $300M, implying a $173M Q4 (which they will probably beat).

Press release for the 2020 increase:

https://ir.fulgentgenetics.com/news-releases/news-release-de…

The reason given for this additional 28% increase, on top of the 74% increase they just gave 2 weeks earlier during their Q3 call was, “…due to accelerating demand for its COVID-19 testing solutions…since our Q3 earnings call on November 9th, we have seen accelerating demand for our COVID-19 tests and are raising our full year revenue guidance to reflect this significant increase…As COVID-19 cases continue to rise across the country, we expect to see increasing demand for testing…”

And how about testing volume? In 2019 (before Covid) they ran an average of 15,000 billable tests/qtr.

In 2020…

1Q20      13,000 tests      74% increase YOY
2Q20     180,000 tests    1000% increase YOY - **triple all of 2019 tests in one quarter!**
3Q20   1,000,000 tests    4800% increase YOY - **16-17X all of 2019 tests in one quarter!!**

And keep in mind that when they raised guidance, they said they have seen significant accelerating demand since their Q3 call, so how many tests will they do in Q4? 1.5M? 2M? More? They state that since opening their new Houston lab, they now have the capacity to run 60K tests/day, and could increase that to 80K/day if needed.

Yes, vaccines are being deployed (thank goodness), but cases are still exploding in the US and the vaccines will not help that situation for months. I think Covid testing will be a part of our lives for a long time. Yes, FLGT revenue will come down in time, but by how much, and how long till that happens are totally unknown right now. And even when the Covid tailwind starts to wane, they had this to say on the Q3 call, "While the majority of our testing volume this quarter comprised of COVID-19 tests, our core genetic testing business rebounded nicely and grew 57% sequentially from the second quarter.
Also from the 3Q call, We also demonstrated great leverage in the quarter as we continued to scale, improving gross margin and generating non-GAAP earnings of $2.08 per share in the quarter.

Q3 Gross margin - 74%
Q3 Operating margin - 62%
Q3 Net margin - 46%

And how about valuation? After Q4, if they hit their $300M guide, at today’s $51 price, P/S would be around 4. And P/E would be around 12. No, they’re not a SaaS business, they actually have a product that they sell and process to make money, but that product is in super high demand at the moment, and unlike PTON, they’re able to actually meet the demand! I don’t think they deserve a SaaS multiple, as this is obviously a special time for them (like it’s been for Zoom), but they’re going to have a boatload of cash at the end of this run, and have significantly more business than they ever did pre Covid, and management has demonstrated they were able to pivot and take advantage of this opportunity so I’m willing to give them a chance with some of my investment funds. I’ve opened up a 2% position (taken from ZM) at $44 and $50 so far.

A couple other recent news releases…LA County (current Covid epicenter of the world) home test pilot:

https://covid19.lacounty.gov/covid19-news/la-county-launches…

A contract with the NYC Department of Education and NYC Health + Hospitals through the 2021 school year:

https://ir.fulgentgenetics.com/news-releases/news-release-de…

Fulgent will provide COVID-19 testing for thousands of students and employees at many K-12 schools in New York City on a daily basis. That’s a lot of tests!

This investment will not be for everyone, very different than the typical investments here, but they are definitely hypergrowth at this time (and may be after Covid, too). Do your own DD, I’m just some guy on Saul’s board who thinks FLGT deserves a small position. Would love to hear others’ opinions.

[jdc115]

Yes, FLGT revenue will come down in time, but by how much, and how long till that happens are totally unknown right now.

The testing is a side show and a distraction to their long term real business. It has driven some impressive numbers but unless their genetic business really takes off, it seems like betting on a short term commodity business driven by Covid. I have them on a watch list to watch how their genetic business develops

[jclaypool]

Yes, FLGT revenue will come down in time, but by how much, and how long till that happens are totally unknown right now.

The testing is a side show and a distraction to their long term real business. It has driven some impressive numbers but unless their genetic business really takes off, it seems like betting on a short term commodity business driven by Covid. I have them on a watch list to watch how their genetic business develops

According to the Company Profile provided by my broker Charles Schwab (emphasis my own):

“Fulgent Genetics, Inc. is a technology company. The Company offers genetic testing to provide physicians with clinically actionable diagnostic information to improve quality of patient care… The Company’s gene probes are specifically engineered to generate genetic data that is optimized for its software, which enables to rapidly incorporate new genes into its test menu, develop new panels of disease-specific tests and customize tests for its customers.”

Testing is their show. It would seem that they are delivering precisely what they say they can, testing customized for its customer, both rapidly and to scale. Granted, the demand for this specific test is going to wane over time, but the story that can now be told to potential customers is that they have the tools and capacity to provide solutions. There will be two things to look at going forward, the portion of business related to COVID testing and the growth in all other testing.

Land and expand?

FLGT is now a 5.4% holding in my portfolio.

[jdc115]

Testing is their show. It would seem that they are delivering precisely what they say they can, testing customized for its customer, both rapidly and to scale.

Testing is their show.

Not just any testing but genetic testing … in order to generate genetic data. But I don’t believe they are doing a genetic test on the virus but a standard PCR test to get a positive or negative result. GH could have done the same but seemed to have just limited using their resources to testing their employees and not pivot to be a full scale Covid tester.

Unless they plan to go into general testing and move away from genetic testing that is suppose to provide physicians with clinical actionable diagnostic information, I see this as a temporary shift. Similar to manufacturing companies that made respirators because they had manufacturing capabilities.

[foodles]

I can claim nothing but complete LUCK with the timing of this, but as of early this morning Fulgent Genetics stock price has increased 50% in the last 5 trading days, so my small 2% position I took is closer to 3%, and I will probably be increasing that to 4% today (I realize it could easily drop 30% or more back to where it was 5 days ago or lower at any time, but sure nice to get some of these at times). With the new tax year, I trimmed about half of my MDB holding as I feel it’s price has gotten ahead of itself for it’s growth rate, but I continue to hold a 3% position as I like it long term. Also sold part of my remaining NFLX holding and will sell more if it runs up into the earnings report later this month (as it sometimes does), and will exit that position completely sometime after the report (my last holdout from a previous investing style and one of my biggest winners ever, up 50X). But enough on portfolio management…

I admit FLGT may not be a long term investment, and it is one of very few short to (maybe) medium term investments I’ve ever made (with varying success). But I also don’t consider it “trading” as I do plan to hold it at least 6 months (and potentially longer) depending on the next couple earnings reports. The explosive growth here in the last 6 months, and for the next 6 months, and then potential core business growth beyond that, has not been priced into this stock yet (IMO, others may not agree).

You can read the first post in this thread for more details, but basically the business does genetic testing and quickly pivoted to provide various Covid testing capabilities in the last 6 months, and that business has absolutely exploded (testing volume up 5000%, just being able to scale that quickly and very profitably is incredibly impressive). Even with vaccines, Covid testing is going to continue at very high rates for months, and at significant volumes for potentially a year or more. I live in SoCal, hospitals are filled over capacity with Covid patients, and the situation continues to get worse by the day and probably won’t see the darkest days for another month or more. FLGT is doing what they can to provide help/support for this situation.

2018 revs  $22M
2019 revs  $31M
2020 revs **$300M(est)** (Q1-$8M, Q2-$17M, Q3-$102M, **(est)Q4-$173M**)

And along with all the new Covid test business, they stated on the Q3 call that their core business has been helped by the increase in customers and their new awareness of FLGT’s testing capabilities outside of Covid, so much so that that core business increased 57% sequentially from Q3 over Q2. The grain of salt here is they said their core business had decreased in Q2 because of Covid, and with no broken out numbers to back up the 57% sequential number, we still don’t know how large that core business has become.

This is still a very small company with only a $1.5B market cap, but it looks to me like that can increase substantially over the short to medium term. I feel the risk/reward is in my favor.

[chemfool2]

Hi Foodles,

Genetics and proteomics are just at the very start of their development. Companies like Fulgent Genetics and CRISPR Therapeutics are foundational. I mean that as being foundational…like Microsoft was in writing DOS…or maybe something something earlier and maybe more profound (like machine language). The amount of development that is possible, starting from our current understanding of genetics, biology and the microbiome, is well beyond my imagination. I literally can’t express (since I’m not capable of imagining) how big and manifold the markets will be in the future.

So investing in companies like FLGT and CRSP is both a gamble and a great opportunity. You are getting in, literally, at the ground floor.

With Saul’s method, and also with Motley Fool’s (thanks to BOTH for providing a structure that is both intelligent and practical!!), there is a well defined set of criteria for selecting which companies to buy, and when to sell should the story change. Saul’s approach works beautifully with SAAS companies because there is a kind of continuity to results. You grow lots of customers to whom to sell the best product you can create. With luck those products are the best of category…and that leadership results in an execution that goes and goes.

With testing and therapeutics the situation is very different (today…definitely NOT in the future). Today we are creating broad tests, drugs, therapies and once approved selling them. Without passing that gate your TAM is zero. Because we are profoundly ignorant (please insert here a compelling plea for more NIH and NSF funding!!) there is no way to know in advance the efficacy or safety of any given solution. So it’s hit or miss. Hit a couple home runs and you win the game. Small ball doesn’t really exist in this area.

That’s what makes it very hard to know what will or will not work. BioNTech/Pfizer and Moderna just produced the first mRNA vaccines ever. EVER! They did so 4x faster than the previously fastest vaccine development (measles). They have the capability to design and produce new variants nearly as quickly as SARS-CoV-2 will mutate. This is an incredible, amazing and powerful new approach. What else will it be good for? We’ll find out…and likely be grateful as a result.

My point is: it’s impossible to predict today what products will ever make the market and so it’s hard to apply rational approaches, such as are discussed in this forum, when evaluating the prospects of companies like Fulgent Genetics. Will their products hit or miss? You aren’t evaluating an already successful product.

At the same time…they have already accomplished a lot and so have been proven to be competent in a new world. Fulgent is attempting utilize AI to evaluate their accreted test data in hopes of developing new products and improving the efficacy of existing products. Perhaps being first in, and gathering those early data, will prove decisive.

I decided Monday to start a small position in CRSP on a subjective basis. FLGT is another smart choice with great recent success to with which to bolster their future.

It’s well worth studying, and learning about companies in these areas. I do think that their success is much less predictable than that of the favorite SAAS companies we discuss. Early, early days. There are real fortunes to be made. I don’t know by whom though.

You can’t argue with the success of CSPR and FLGT to date. The future?

Larry

[plumtree]

Ditto Foodles - I share your enthusiasm for this company and thanks a bunch for the comprehensive breakdown.

I do however differ on Fulgent’s longterm prospects based on a mix of personal anecdote and some speculation loosely grounded on available information. It’s so subjective I’m hesitant to expand upon them, concerned of cluttering the board, but feel compelled by laws of reciprocity to try to add value by chiming in.

I believe that the first consideration is the magnitude of the presented opportunity to “land and expand” for their non-covid19 core genetic testing. The second is the significance of the insurance reimbursement pipeline and relationships. Both are similar in that, though the company’s ability to demonstrate their value this year is not a sufficient condition guaranteeing future core business growth, it’s definitely a necessary one. Years of sales pipeline development were instantly shaved from the business development cycle due to the pandemic.

By demonstrating to FDA their qualifications once, Fulgent received immediate access and opportunity to bid nationwide. They submit their pricing and win contracts. Their resume now boasts an impressive portfolio unimaginable to build out in less than a year. They’ve successfully demonstrated their abilities and proven their value. With their foot in the door, they’ve got their in. What creates the extra stickiness is their low pricing and their platform. Based on my understanding, they’re profitable even though they undercut their competitors because of their operational efficiencies and technology.

Others may be much more experienced but what usually makes the bidding process so difficult for government contracts, local, state and federal, are the references required. Normally, start with small cities, then perform for a number of years successfully. Repeat several times and increase the number of accounts while retaining current contracts to be able to bid on larger cities and counties. Even with high retention rates, it can take years to build a portfolio to qualify for major contracts. By then, most of your competitors are seasoned larger entities that and all things are held relatively equal through the qualifying filter process at that point. It’s presumed that everyone in the room know what they’re doing and they belong there. The specific format may differ but variations of point scoring and category weighting. With all competitors scoring equally well in each criterion, it then comes down to pricing and guarantees. Two possible extreme outcomes in order for award could be to operate strategically at a loss to gain market share or offer a superior service or product that convincingly offsets higher pricing. Negating price consideration would be an incredible feat. Likely result somewhere in between. And then process of commoditization begins starting with erosion of margins until the cycle resets due to disappearance of able and qualified bidders willing to accept the work. I imagine that no one knows this better than the current management having navigated for decades previously with Cogent. Fulgent competes with low pricing. They outbid their competitors with low pricing. But they’re sustainably profitable with the current model. It would be reasonable to expect similar repeatability based on their current results with adjustments varying by degree of confidence.

Q3CC (not presented in sequential order) - CFO Paul Kim: In addition to the momentum we had with our COVID test, our core genetic testing business, and sequencing-as-a-service business have remained strong. We have expanded our partnerships on the reimbursement front and are seeing high demand for tests across our Picture platform. Most of all, we’re seeing our customers appreciating the clear differentiation by the application of our technology platform. And based on the explosive demand we’re continuing to see from the market and the quality of our customer base, we believe the fourth quarter will cap what has been a transformative year for our company.

… CCO Brandon: Not only that, we have done it the hard way, building our business organically from the ground up. Before we get into our COVID-19 business, I would first like to highlight the strong quarter we had in our core genetic testing business. While we projected a slight decline in our core business due to the pandemic, it has rebounded much faster than we thought and grew 57% sequentially from a revenue standpoint. This has been in large part due to our ability to win new clients while maintaining relationships with existing clients, even as some of those clients experienced lower test volumes amid the pandemic.

Sorry, don’t know how to format but similar reasoning applies to insurance. I don’t have direct experience in this regard so I’m unable to extrapolate but rely on Ming’s statement below.

CEO Ming - Second point I want is on reimbursement. Historically, our customers have predominantly been cash-paying customers, with very little revenue coming through the reimbursement. Given our rapid expansion in new customers, combined with quarterly test volume which now exceed 1 million tests, this has accelerated the need of reimbursement agreement with insurance provider. We believe that having this reimbursement agreement in place will continue to drive business from the customers in a way that we haven’t seen prior to the pandemic.

Also to JDC’s point, I agree with your point about COVID19 being a commodity business. I do think though that there’s generally an underappreciation for the successful companies who excel at it. Even genetic testing may be commoditized in the future. I’d argue that Fulgent’s strategy is to disrupt the field through commoditization by offering industry leading menu offering and low pricing.

[Endoscopist]

“CEO Ming - Second point I want is on reimbursement. Historically, our customers have predominantly been cash-paying customers, with very little revenue coming through the reimbursement. Given our rapid expansion in new customers, combined with quarterly test volume which now exceed 1 million tests, this has accelerated the need of reimbursement agreement with insurance provider. We believe that having this reimbursement agreement in place will continue to drive business from the customers in a way that we haven’t seen prior to the pandemic.”

As a physician, I completely agree that this is a major issue. Majority of payers do not cover any of these genetic testing. Most patients are unfortunately unwilling to pay cash for these tests. Due to the economic impact of the pandemic, many states are seeing significantly increased number of medicaid patients and patients with higher deductible plans, which makes it even less likely that these genetic tests will get covered. The major argument from payers is that these genetic tests do not change outcome for the most part.

CEO Ming has a great track record of success but he is in his 60’s, which could be a slight concern to some.

[GDavenport]

Athena Diagnostics has the same issues. Payor do cover these tests, but the process is very arduous and the benefit is paltry. These tests are typically $400-$1200+++ and they are not listed in typical test schedules. For this reason, the only path to approval requires numerous forms, delays and approvals.

For the insurance staff who handle these “exceptions”, they have to go to the appendix of the appendices to guide patients through the process.

I researched this for my wife as we have had these types of non-standard tests several times in the last several years.

The insurance benefit? 4% of the total. This leaves the patient saddled with a big bill and a likelihood of long pay cycles and write-offs far in excess of more standard testing processes.

https://www.athenadiagnostics.com/

I bring all of this up because we do not know how long it will be until this type of testing becomes codified into the policies (they are not in the schedule). Until that happens, there will be no easy path to revenue for these tests, regardless of how effective they may be as a diagnostic tool. (and the Dr’s hands are tied).