Fulgent Genetics, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited results are compared with the corresponding 2020 periods. Fulgent provides genetic testing and, since 2020, COVID-19 testing; in 2021 it expanded into cancer diagnostics and China through acquisitions and a controlling interest in FF Gene Biotech.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $227.9 million | $101.7 million | $740.9 million | $126.7 million |
| Gross profit | $184.4 million | $75.5 million | $587.5 million | $88.7 million |
| Gross margin | 80.9% | 74.2% | 79.3% | 70.0% |
| Operating income | $159.3 million | $63.5 million | $525.1 million | $64.2 million |
| Net income attributable to Fulgent | $122.5 million | $46.6 million | $403.0 million | $48.0 million |
| Diluted EPS | $3.93 | $1.98 | $13.04 | $2.07 |
- Revenue grew 124% in Q3 and 485% year to date, primarily due to increased COVID-19 testing demand and test volumes. Billable tests rose 110% in Q3 to 2.2 million and 511% year to date to 7.5 million.
- Average revenue per billable test was $105 in Q3 versus $98 a year earlier; year-to-date it was $99 versus $103. Management attributed the year-to-date decline to test and customer mix and pricing competition.
- Cost per billable test fell to $20 from $25 in Q3 and to $20 from $31 year to date. Management cited scale efficiencies. Operating expenses increased, including acquisition-related costs, higher staffing and credit-loss provisions.
Cash flow, liquidity and debt
- At September 30, 2021, cash and cash equivalents were $214.9 million and marketable securities were $662.4 million, compared with $87.4 million and $344.4 million, respectively, at December 31, 2020. A separate $20.0 million long-term redeemable preferred-stock investment was also held.
- For the first nine months, operating cash flow was $461.5 million, investing cash flow was negative $406.3 million, and financing cash flow was positive $72.3 million. Investing included $61.9 million for acquisitions and $17.8 million for fixed assets, alongside substantial net purchases of marketable securities.
- Total liabilities were $160.2 million; stockholders’ equity was $1.044 billion. Borrowings included a $15.1 million margin loan secured by securities, callable by the custodian, and $5.9 million of notes payable due in December 2022 at 4.97% interest.
- Management stated existing cash, short-term securities and expected operating cash flows should meet anticipated cash needs for at least 12 months, while noting future financing may be needed if assumptions prove wrong.
Material changes, outlook and risks
- Fulgent acquired a 72% controlling interest in FF Gene Biotech in May and acquired cancer-testing laboratory CSI in August. The acquisitions added $48.7 million of goodwill and $36.7 million of net acquired intangible assets. CSI consideration included $8.5 million of contingent consideration, with a contractual range of zero to $10.0 million.
- The FF Gene transaction generated a $3.7 million remeasurement gain on Fulgent’s previously held interest. Acquisition-related amortization began in 2021. The acquired businesses contributed $11.7 million in revenue and an aggregate $1.0 million operating loss since acquisition.
- No specific revenue or earnings guidance was provided. Management said COVID-19 testing drove significant growth and had not negatively affected results or liquidity through September 30. It cautioned that pandemic demand may eventually decline and is uncertain, including due to variants and vaccination trends.
- Key risks include dependence on COVID-19-related demand, customer concentration (two customers represented 31% and 11% of Q3 revenue; one represented 26% year to date), price competition, reimbursement and collection uncertainty, credit losses, regulatory changes affecting laboratory tests and COVID-19 EUAs, and reliance on suppliers and skilled staff.
- Other notable exposures include $13.8 million of non-cancelable purchase obligations and a $20.0 million Helio Health preferred-stock investment valued using Level 3 inputs. Management reported no material legal proceedings and stated disclosure controls were effective as of September 30, 2021.
Most important facts for investors to verify
- How much revenue and operating cash flow depends on COVID-19 testing, and how results would change if demand or pricing declines.
- Whether major customers continue ordering and pay on time, and whether the elevated credit-loss provision signals worsening collections.
- Whether acquired CSI and FF Gene Biotech meet performance expectations, including CSI’s earnings condition and integration costs.
- The composition, liquidity, valuation sensitivity and collateral encumbrance of the investment portfolio, including the margin loan and Helio Health investment.
- Whether growth in core genetic and cancer testing can offset pandemic-related revenue volatility while maintaining margins.