Business context and reporting period
Fulgent Genetics, Inc. filed this Form 10-K for the fiscal year ended December 31, 2020. The company provides genetic testing and, beginning in March 2020, COVID-19 diagnostic testing. Annual results were transformed by COVID-19 testing demand; fourth-quarter figures below are unaudited quarterly data included in the filing.
Financial results and key metrics
| Metric | FY 2020 | FY 2019 |
|---|---|---|
| Revenue | $421.7 million | $32.5 million |
| Gross profit / gross margin | $331.9 million / 78.7% | $18.4 million / 56.6% |
| Operating income (loss) | $290.2 million | ($0.4 million) |
| Net income (loss) | $214.3 million | ($0.4 million) |
| Net income (loss) per diluted share | $8.91 | ($0.02) |
| Cash from operating activities | $140.6 million | $5.5 million |
Revenue rose 1,196%, driven primarily by COVID-19 testing. The company delivered 4.409 million billable tests versus 59,000 in 2019. Average revenue per test fell to $96 from $555, while reported cost per test fell to $20 from $241, reflecting a substantially different test and customer mix and scale efficiencies.
Fourth-quarter 2020 revenue was $295.0 million, operating income was $225.9 million, and net income was $166.3 million. Fourth-quarter gross profit was $243.2 million, or approximately 82.4% of revenue.
At year-end, cash and cash equivalents were $87.4 million and marketable securities totaled $344.4 million. Current assets were $523.6 million and current liabilities were $130.1 million. Accounts receivable increased to $183.9 million from $6.6 million. The company reported a $15.0 million margin loan, secured by marketable debt securities; the custodian may issue a margin call. Stockholders’ equity was $569.4 million. No dividends are anticipated in the foreseeable future.
Material changes versus the prior comparable period
- Insurance revenue increased to $257.6 million from $0.7 million; institutional revenue was $163.1 million versus $31.3 million. The filing attributes the overall growth mainly to COVID-19 testing.
- Two affiliated customers, Los Angeles County and San Bernardino County, represented 28% and 10% of 2020 revenue, respectively. One customer accounted for 28% in 2019.
- Operating expenses increased 121% to $41.7 million, including higher research and development, selling and marketing, and general and administrative costs.
- Operating cash flow increased substantially, but receivables rose by $178.5 million during the year, primarily due to collection timing.
- The company raised $246.2 million net from common-stock offerings in 2020. Shares outstanding increased to 28.178 million from 21.483 million at year-end 2019.
Outlook, commentary, risks and unusual items
- Management provided no quantified revenue or earnings guidance. It said existing cash, marketable securities and anticipated operating cash flows should cover expected requirements for at least 12 months.
- Management described COVID-19 testing demand as robust at filing time but cautioned that its duration is uncertain and could decline as vaccination expands. The company also reported that pandemic-related disruption had reduced demand for traditional genetic tests.
- COVID-19 RT-PCR testing and the at-home service had FDA Emergency Use Authorizations limited to SARS-CoV-2 detection. The filing notes regulatory uncertainty around laboratory-developed tests and the continued authorization of COVID-19 testing.
- Key risks include reliance on a few major customers, reimbursement and collection uncertainty, pricing pressure, rapid changes in COVID-19 demand, and dependence on limited or sole suppliers, including Illumina for sequencing systems and related reagents.
- The company recorded $4.4 million of impairment losses on equity-method investments: its 30% FF Gene Biotech interest and 25% BostonMolecules interest. It also reported $488,000 of equity-method losses.
- Investment in capacity included opening a Houston laboratory and purchasing California property for $15.4 million. Capital spending on fixed assets was $35.1 million; non-cancelable purchase obligations totaled $27.6 million at year-end.
Important facts for investors to verify
- Whether the exceptional COVID-19 test volume and margins can persist, and how quickly genetic-testing activity recovers.
- Collection quality and aging of the $183.9 million receivable balance, including exposure to third-party payors and large customers.
- Revenue concentration and the continuation, volume and economics of major customer arrangements, which generally lack committed order volumes.
- The extent of future dilution from equity issuance; the November 2020 distribution agreement authorized up to $175 million of additional sales, and the company disclosed approximately $31 million of gross proceeds from post-year-end sales.
- Terms and collateral exposure of the margin loan, including the lender’s margin-call rights, and the liquidity and risk profile of the marketable securities portfolio.
- Future performance and remaining contribution obligations for FF Gene Biotech, and the implications of the full impairment of the BostonMolecules investment.