Watchlist Candidate - Fulgent Genetics

Hi Everyone,

I wanted to wait until hearing more about their core genetics business progress and longterm optionality from this week’s earnings before bringing to your attention but think that this company checks all the boxes. Per ABM Bear’s November 10th post, “you need to earn the interest of the board”. Disclaimer - most of my understanding of the company is qualitative so the quantitative aspects and numbers breakdown is going to be shallow compared to the deep dives performed by other members of the community here.

Fulgent Genetics. The company is a software company as much as it is biotech. They offer genetic sequencing services: SaaS, Sequencing as a Software. Same acronyms SaaS although they’re not a pureplay software company. But their software and technology underpinning are major differentiators amongst their competitors.

End to end product and services.

  • Sticky longterm value proposition with proprietary software which reportedly integrates with client’s existing infrastructure.
  • Software and technology embedded with machine learning allowing for massive scalability (non-techie / non-medical understanding)
  • Genetic counselors paired with DTC (direct to consumer) testings for their Picture subsidiary. Helps address the confusion that result from misunderstandings and implications of tests. (Addresses some of the industry controversies)
  • Intense focus on low pricing without erosion to margins. (their operating leverage seems to be actually increasing as their prices decrease).
  • Broadest menu of genetic testing. 19K+
  • Other labs subcontract out some of their work to Fulgent. Subbing out from competitors I think is always a good sign of competence.
  • Record scaling up during pandemic attributed to their software and technology platform.

Recent 57% sequential growth QoQ for their core genetics business during the pandemic(!) even with the limited patient visits. Organic growth through synergistic leveraging customer relationships during COVID19. We have to back out some numbers for a more conservative estimate which will be further explained below but even with very conservative assumptions, they’re a smaller sub $1B growth company that has positive earnings. Their balance sheet is healthy with almost no debt and lots of cash. When compared with other genetic testing companies, it’s even more impressive. Mostly attributable to a financial conservative and prudent and yet experienced management team with an aggressive sales team with the technology and numbers to back it up.

Founder, chairman and CEO with his core management team members have decades of experience running a previous fingerprint technology company and they’re with him here including the CFO, researchers and data scientists per their previous comments. I forget if their chief commercial officer has been with them since then but he seems like he knows what he’s doing.

SHU from Seeking Alpha does a much better job than I can with the quantitative breakdown. Posted below with his permission. Listed in descending order for folks to form an opinion through the timeline from 2019 for in-depth analyses and also so readers can come up with their own estimates on revenue estimates going forward.……………

Also, non-paid article from free section of TMF couple days ago.…

Q3 earnings call (breaks down further misunderstandings of RT-PCR testing) Not sure if requires membership to access.…

The past couple months have been painful given the wild selloffs but I think it’s also presented itself as buying opportunities due to the misunderstanding the company’s core proposition. Understandably so because the tailwind picked up during the pandemic has been overwhelming. But I believe it’s also a testament to their scalability for which the chairperson analogized to their experience at their previous company Cogent when there was a critical need for identification technology. (This company is a personal high conviction holding. I’ve been steadily adding from the teens earlier this year up to ATH 50 and have been adding on the way down as it crashed into the upper 20s and then continued adding in the 30s.)

Sidebar on Cogent, the founder sold the company to 3M for $943M with approximately $430M of net cash in the bank per google search on business wire. I forget which year but paraphrasing my understanding of Warren Buffet in one of his shareholder meetings regarding selling of securities, that buying low and selling high isn’t his objective or intended outcome. Rather, that when he sells and the price of the stock increases, it further validates his selection of good companies that continue rewarding its shareholders. I bring that up because when 3M later divested their assets, one of which included the Cogent platform, they sold it for $850M. Of course, you’d have to back out the value of the other software and platforms for which information we’re not privy to, but that sale most likely did not include the $430M of cash. Furthermore, it doesn’t account for the revenue generated during the life of the asset during that time. The approximate resale ROI for 3M I believe is another vote of confidence to the company founder and management’s technological prowess.

Again, the current management team’s experience directly translates:
A) Many years of experience winning large federal and state contracts with Cogent. Winning large state, city, hospitals and companies with Fulgent.
B) Scaling up during unprecedented times at Cogent and now with Fulgent.

There’s been a lot of confusion regarding covid19 testing, myself definitely included. I don’t have a medical nor a technology background so I tried my best to sort through the various publications to help form a more informed opinion. As a normal, regular Joe, the Q3 earnings call made sense and seemed consistent with some of the other information found on google. In regards to its longterm impact on the revenue and numbers of Fulgent, even in unreasonably ultra conservative estimates, incorrectly presuming no covid testing past 2021:
A) The company will have hundreds of millions of cash on hand at end of this year and also next year. Total current assets $195M as of Sept 30. (More information on impressive collections process from newly formed insurance pipeline in Q3CC)
B) Be able to leverage relationships with large clients for their core genetic testing business as they’ve proven they’re able to evident in Q3 results and Q4 forecast
C) Though less tangible but would have accumulated large amounts of data in their databases for future leverage

Per Q3CC, they’ve invested in another antigen testing company last quarter and discussed possibility of future acquisition.

My own but limited contribution would be my general familiarity with procurement and RFPs (request for proposals). Less tangible but overall, the way that the company talks about their sales strategy and value proposition demonstrates to what I believe is their deep expertise and understanding of RFPs.

And finally, they seem to view their customers and shareholders as longterm partners.

I’m hoping most found the above informative.

-Super long FLGT