Fulgent Genetics, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. The filing also provides unaudited quarterly results, including Q4 2022. Amounts are in U.S. dollars.
Business context
Fulgent operates clinical diagnostic testing businesses—including genetic, molecular diagnostic and anatomic pathology services—and a therapeutic development business focused on cancer drugs. Its strategy is to build an integrated precision-medicine business. In 2022, it acquired Inform Diagnostics, a pathology laboratory, and Fulgent Pharma, a clinical-stage therapeutics developer.
Key financial results
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Revenue | $619.0 million | $992.6 million | Down 38% |
| Gross profit / margin | $366.9 million / 59.3% | $777.1 million / 78.3% | Margin down 19.0 percentage points |
| Operating income | $178.5 million | $676.0 million | Down 74% |
| Net income attributable to Fulgent | $143.4 million | $507.4 million | Down 72% |
| Diluted EPS | $4.63 | $16.38 | Down |
| Operating cash flow | $253.5 million | $538.6 million | Down 53% |
The filing attributes the revenue decline primarily to fewer COVID-19 testing orders. Cost of revenue rose 17% despite lower revenue, reflecting acquisition-related staffing, overhead and depreciation costs, among other factors. General and administrative expense more than doubled to $111.1 million, including a $23.7 million increase in provision for credit losses related primarily to the cessation of HRSA program funding.
Q4 2022: Revenue was $67.7 million and gross profit was $13.0 million. The company reported an operating loss of $36.6 million and a net loss attributable to Fulgent of $23.8 million, or $0.80 per diluted share. This compares with Q4 2021 revenue of $251.7 million, operating income of $150.9 million and net income attributable to Fulgent of $104.3 million.
Liquidity, debt and capital allocation
Cash, cash equivalents and marketable securities totaled $852.9 million at year-end, versus $935.5 million a year earlier. Total assets were $1.386 billion and total liabilities were $116.2 million. Management said available cash and short-term marketable securities should cover anticipated requirements for at least 12 months.
Year-end borrowings included a $15.0 million margin loan, $5.2 million due to Xilong Scientific in March 2023, and $3.8 million under an installment loan. The margin loan is collateralized by securities and its rate was 4.59% at year-end. The company used $74.3 million to repurchase 1.81 million shares in 2022; approximately $175.7 million remained under its $250 million authorization.
Investing cash outflow was $261.3 million, including $172.7 million for business acquisitions. Financing cash outflow was $77.1 million, principally reflecting share repurchases. The filing reports $28.9 million of contractual obligations, primarily leases and purchase commitments.
Material changes, outlook and risks
- COVID-19 demand: Management did not expect substantial COVID-19 testing revenue in 2023 as demand declined. Revenue from HRSA-covered uninsured testing was $83.1 million in 2022, compared with $310.4 million in 2021; HRSA stopped accepting claims in March 2022, and collection of submitted claims remains a risk.
- Acquisitions: Inform Diagnostics contributed $83.6 million of revenue and a $17.0 million operating loss from acquisition through year-end. Fulgent Pharma contributed no revenue and an $816,000 operating loss over its post-acquisition period. FID-007 was in a Phase I trial; top-line data was expected in Q2 2023. Management described potential Phase II starts in late 2023 and 2024, subject to results.
- Customer concentration and reimbursement: Los Angeles County accounted for 19% of 2022 revenue, down from 26% in 2021. The company generally lacks long-term purchase commitments and faces reimbursement, pricing and collection uncertainty.
- Investigations and litigation: The company is responding to a Department of Justice civil investigative demand concerning alleged medically unnecessary testing, billing and Anti-Kickback/Stark Law issues. It also disclosed a related SEC investigation. Management said it did not presently expect a material adverse impact but could not predict outcomes. A shareholder class action was voluntarily dismissed without prejudice in February 2023, without payment by the company or insurers.
- Other risks: Diagnostic regulation, privacy and cybersecurity, dependence on key laboratory suppliers, acquisition integration, and the early-stage and regulatory risks of drug development are prominent exposures. The company disclosed prior security incidents at a subsidiary involving unauthorized access to protected health information and confidential information, which it said had not materially affected the business.
- Controls: Management and the auditor concluded internal control over financial reporting was effective as of year-end. However, the assessment excluded Inform Diagnostics and Fulgent Pharma, which represented 14% of revenue and 20% of total assets; integration was ongoing.
Most important facts for investors to verify
- Track the post-pandemic revenue base, diagnostic growth and margins as COVID-19 testing declines; distinguish HRSA-related claims from other insurance revenue.
- Review receivable collectability and the $32.6 million 2022 credit-loss provision, including any remaining HRSA exposure.
- Assess integration, operating performance and impairment assumptions for Inform Diagnostics and Fulgent Pharma, including the $64.6 million acquired in-process R&D asset.
- Monitor the DOJ and SEC investigations, potential consequences and any renewed shareholder litigation.
- Reconcile an apparent inconsistency in the filing’s overview: it describes $143.4 million as “income from operations,” while the detailed statements report $178.5 million of operating income and $143.4 million of net income attributable to Fulgent.