Fulgent Genetics, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited results; dollar amounts below are in millions unless noted. Fulgent provides COVID-19 testing, molecular diagnostics, and genetic testing. Results include Inform Diagnostics from its acquisition date, April 26, 2022.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $105.7 | $227.9 | $551.3 | $740.9 |
| Gross profit / margin | $46.1 / 43.6% | $184.4 / 80.9% | $353.9 / 64.2% | $587.5 / 79.3% |
| Operating income | $0.4 | $159.3 | $215.1 | $525.1 |
| Net income attributable to Fulgent | $1.7 | $122.5 | $167.2 | $403.0 |
| Diluted EPS | $0.06 | $3.93 | $5.38 | $13.04 |
| Cash from operating activities | Not provided quarterly | Not provided quarterly | $220.3 | $461.5 |
Balance sheet, liquidity, and cash flow
- At September 30, 2022, cash and cash equivalents were $168.8 million and marketable securities were $749.2 million, for combined cash and securities of $918.0 million. Current assets were $696.6 million versus current liabilities of $102.5 million.
- Total assets were $1.406 billion; total liabilities were $124.4 million and stockholders’ equity was $1.281 billion.
- Debt included a $15.0 million margin borrowing secured by securities and approximately $8.8 million of notes payable. The margin loan rate was 3% at quarter-end and could change; the custodian may issue a margin call.
- Nine-month investing cash outflow was $168.7 million, including $137.8 million for Inform Diagnostics, $15.0 million for a private-company preferred stock investment, and $14.1 million in fixed-asset purchases. Financing cash outflow was $47.5 million, primarily reflecting $45.3 million of share repurchases.
- Management said existing cash, short-term securities, and expected operating cash flows should meet anticipated cash needs for at least 12 months, while noting that cash flows and needs could vary.
Changes and management commentary
- Revenue fell 54% in Q3 and 26% year to date, primarily because COVID-19 testing volume declined. Billable tests fell 56% in Q3 and 27% year to date; the HRSA COVID-19 Uninsured Program stopped accepting claims on March 22, 2022.
- Management stated that it expects COVID-19 testing demand to continue declining as the pandemic recedes, with future demand subject to uncertainty, including variants, vaccines, and customer preferences.
- Q3 cost of revenue rose 37% despite the revenue decline, reflecting Inform Diagnostics, higher personnel and depreciation costs, and test mix. Cost per billable test increased to $63 from $20; gross margin dropped to 43.6% from 80.9%.
- General and administrative expense more than doubled in Q3, including a $6.5 million provision for credit losses. The nine-month provision was $25.3 million; the receivables allowance was $35.4 million at September 30, compared with $11.2 million at year-end 2021.
- Inform Diagnostics contributed $53.9 million of revenue and an $11.2 million operating loss from acquisition through September 30. The acquisition increased goodwill and intangible assets; related amortization and acquisition costs also weighed on results.
- Fulgent repurchased 995,000 shares for $45.3 million during the first nine months under a $250 million authorization; $204.7 million remained available at September 30.
Risks, contingencies, and subsequent events
- The company disclosed a Department of Justice Civil Investigative Demand concerning allegations of medically unnecessary testing, improper billing, and remuneration potentially implicating the Anti-Kickback Statute and Stark Law. Fulgent said it is cooperating and does not presently expect a material adverse impact, but cannot predict the outcome or potential impact.
- A putative securities class action filed in September 2022 makes related allegations against the company and two executives. Fulgent denies the allegations; it could not estimate a possible loss or range at this stage.
- Marketable securities had $33.7 million of gross unrealized losses at quarter-end; the filing reported no credit losses recognized on those securities. The nine-month comprehensive income attributable to Fulgent was $142.4 million, including substantial securities and foreign-currency losses in other comprehensive income.
- On November 7, 2022, after quarter-end, Fulgent completed its acquisition of Fulgent Pharma Holdings for approximately $100 million, including cash and stock consideration, and assumed employee restricted stock units. The acquired therapeutic business is early-stage: FID-007 was its only candidate in clinical trials. The filing highlights clinical, regulatory, financing, and commercialization risks, including uncertainty around use of the FDA’s 505(b)(2) pathway.
- Management reported effective disclosure controls as of September 30, 2022. No material changes to internal control over financial reporting were reported for the quarter.
Important facts for investors to verify
- How quickly COVID-19 testing revenue declines, and whether genetic testing and Inform Diagnostics can offset that decline profitably.
- Receivables collectability and the adequacy of the credit-loss allowance, given the higher provision and allowance balance.
- Developments, potential financial exposure, and business or reputational effects from the DOJ investigation and related securities litigation.
- Fulgent Pharma’s acquisition terms and ongoing costs, clinical progress, regulatory pathway, and ability to produce commercial value.
- Market value and liquidity of the investment portfolio, including unrealized losses, and the collateral and margin-call terms on the $15.0 million borrowing.
- Whether operating cash generation can support acquisitions, investment, and repurchases amid falling COVID-19 testing demand; the filing provides no numerical revenue or earnings guidance.