Fulgent Genetics, Inc. annual report, FY2019

Business context and reporting period

Fulgent Genetics, Inc. filed this Form 10-K for the fiscal year ended December 31, 2019. The company provides genetic testing services, primarily to hospitals and medical institutions, using its proprietary sequencing, analytics and laboratory platform. It delivered 58,573 billable tests in 2019, up 163% from 22,298 in 2018. It also launched its patient-initiated Picture Genetics offering in 2019.

Financial and operating performance

Revenue grew 52%, principally on higher test volume, while average revenue per billable test fell 42%, from $958 to $555, reflecting test and customer mix and lower prices amid competitive pressure. Cost per test declined 50%, from $480 to $241, helping lift gross margin. Research and development, selling and marketing, and general and administrative expenses rose 18%, 27% and 16%, respectively. Interest and other income was $0.8 million; the equity-method loss from the 30%-owned FF Gene Biotech joint venture was $0.8 million.

For Q4 2019, revenue was $8.4 million and net loss was $0.3 million, compared with Q3 2019 revenue of $10.3 million and net income of $1.5 million. Q4 operating loss was $0.4 million. Quarterly results varied materially; the filing cautions that quarterly performance is not indicative of future periods.

Liquidity, financing and debt

At year-end, current assets were $37.1 million and current liabilities $3.7 million. Cash plus marketable securities totaled approximately $70.2 million. Total liabilities were $6.0 million, including $2.7 million of operating lease liabilities; the balance sheet reports no borrowings or other financial debt. Operating cash flow improved to $5.5 million, while investing activities used $29.0 million, primarily reflecting purchases of marketable securities. Financing activities provided $28.8 million, primarily from equity offerings.

In 2019, the company raised approximately $27.6 million net in an underwritten share offering and $1.0 million net through its at-the-market program. Shares outstanding increased from 18.2 million at year-end 2018 to 21.5 million at year-end 2019. Management said existing cash, operating cash flows and equity proceeds were expected to fund anticipated needs for at least 12 months; this is not a specific earnings or revenue forecast.

Material changes, outlook and risks

• The company narrowed its annual net loss substantially but remained loss-making for the year; management reported profitable second and third quarters, followed by a Q4 loss.
• Pricing and revenue per test declined despite strong volume growth. Management noted that competition and payer cost controls could add further pressure to prices and margins.
• Customer concentration is significant: one customer, aggregating affiliates or commonly controlled entities, generated 28% of 2019 revenue, versus one customer at 13% in 2018. Sales are generally not covered by long-term purchase commitments.
• FF Gene Biotech, in which Fulgent owns 30%, recorded a 2019 net loss of $3.0 million. Fulgent recorded a $0.8 million equity-method loss and had approximately RMB 39.3 million (about $5.6 million) of equipment contributions remaining under its joint-venture commitment.
• Key risks include reliance on a single laboratory and Illumina as sole supplier of sequencers, uncertain reimbursement and collections, potential future FDA oversight of laboratory-developed tests, privacy and cybersecurity exposure, and regulatory and compliance obligations. The filing also identified the emerging coronavirus outbreak in China as an international business risk.
• Management reported effective disclosure controls and internal control over financial reporting at December 31, 2019. The auditor issued an unqualified opinion on the financial statements; it did not audit or opine on internal control effectiveness.

Important facts for investors to verify

• Whether rapid test-volume growth can be sustained while average revenue per test and pricing remain under pressure.
• How much revenue and receivables depend on the largest customers, and whether collection experience remains consistent.
• Whether the company can achieve sustained operating profitability after increased sales, marketing, research and administrative spending.
• Liquidity deployment and the remaining equipment contribution commitment to FF Gene Biotech, including the joint venture’s losses and prospects.
• The impact of equity issuance and stock-based compensation on future dilution; and any subsequent changes in regulatory, reimbursement, supplier or international risks.