Fulgent Genetics, Inc. — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; this is an annual report, not a standalone Q4 earnings release. Filed February 28, 2024. Fulgent operates laboratory services and a pre-revenue therapeutic development business focused on oncology.
Financial performance
| Metric | FY2023 | FY2022 |
|---|---|---|
| Revenue | $289.2 million | $619.0 million |
| Gross profit / gross margin | $104.5 million / 36.1% | $366.9 million / 59.3% |
| Operating income (loss) | $(195.5) million | $178.5 million |
| Net income (loss) attributable to Fulgent | $(167.8) million; $(5.63) per diluted share | $143.4 million; $4.63 per diluted share |
| Net cash from operating activities | $27.0 million | $253.5 million |
- Revenue mix: Precision diagnostics $132.0 million (+41%); anatomic pathology $104.7 million (+40%); COVID-19 testing $27.2 million (−94%); BioPharma services $25.4 million (+96%). Therapeutic development had no revenue.
- Expenses and unusual items: Operating expenses were $300.0 million, including a $120.2 million goodwill impairment. R&D was $41.4 million (+43%), including $11.7 million for therapeutic development. Interest and other income, net, was $21.4 million.
- Liquidity: Cash, cash equivalents and marketable securities totaled $847.7 million at year-end, versus $852.9 million in 2022. Current assets were $507.8 million and current liabilities $73.0 million.
- Debt: Notes payable totaled about $4.2 million at year-end, including $775,000 due in March 2024 and a $3.4 million installment loan. The $15.0 million investment margin loan was repaid in 2023.
- Other cash flows: Investing activities provided $38.9 million, largely reflecting net marketable-security maturities and sales; financing activities used $47.8 million, including $25.1 million of share repurchases. Capital expenditures were $22.2 million.
Material changes versus FY2022
- Revenue fell 53%, chiefly because COVID-19 testing revenue declined by $410.4 million. The company stopped COVID-19 testing operations at the end of Q1 2023 and does not expect material future COVID-19 testing revenue.
- Non-COVID laboratory and BioPharma revenue increased, but the reported year-on-year growth in precision diagnostics and anatomic pathology partly reflects four additional months of Inform Diagnostics revenue in 2023; Inform was acquired in April 2022.
- Gross margin fell to 36.1% from 59.3%, primarily because COVID-19 testing, which had higher margins, declined and Inform contributed a full year of costs.
- Operating cash flow decreased to $27.0 million from $253.5 million as COVID-related customer receipts and cash earnings declined.
- Fulgent recorded a full goodwill impairment for laboratory services, driven by a sustained decline in share price and market capitalization. Therapeutic-development goodwill and in-process R&D were not impaired, but their fair values exceeded carrying values by only about 15% and 11%, respectively.
- The company established a $15.9 million valuation allowance on deferred tax assets; the 2023 effective tax rate was −0.69%.
Outlook, risks and contingencies
- Management said existing cash, equivalents and short-term marketable securities should cover anticipated requirements for at least 12 months. It expects higher operating expenses and cash use as it invests in laboratory growth and drug development; it expects R&D costs to rise with later-stage trials.
- Fulgent selected 125 mg/m² as the recommended Phase 2 dose for FID-007, a nanoencapsulated paclitaxel candidate. It expected to begin a randomized Phase 2 study in recurrent or metastatic head and neck cancer in Q2 2024, and expected to file an IND for FID-022 by year-end 2024. These are forward-looking expectations, not reported outcomes.
- FID-007 Phase 1/1b results were preliminary: among 36 evaluable patients, the filing reports partial responses in 7 (19%) and stable disease in 13 (36%). The filing notes safety events, including rash, blood-cell count decreases and febrile neutropenia; larger trials are needed to assess efficacy and safety.
- The company is subject to an HRSA audit of COVID-19 uninsured-program reimbursements. It recorded approximately $548.9 million in HRSA reimbursements for 2020–2022 and says it cannot reasonably estimate a potential loss or range of loss; repayment exposure may be material.
- A DOJ Civil Investigative Demand concerns allegations involving medically unnecessary testing, billing and remuneration; the SEC is conducting a non-public investigation that appears related to the CID and 2018–2020 reporting. Fulgent says it is cooperating and cannot predict timing or outcome. A separate voluntary disclosure process has a recorded $6.9 million liability; actual exposure could be lower or materially higher.
- The FDA proposed phasing out enforcement discretion for laboratory-developed tests. The rule’s finalization, timing and legal challenges were uncertain as of the filing, and additional regulation could require clearances or approvals, raise costs or interrupt test offerings.
- Other key risks include reimbursement and collections, customer concentration (one customer was 12% of 2023 revenue), competition and pricing, dependence on Illumina for sequencing equipment and reagents, privacy/cybersecurity, and the early-stage and uncertain nature of drug development.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective as of year-end.
Investor verification priorities
- Track the HRSA audit, including any proposed repayment, methodology and potential extrapolation of results.
- Monitor developments and disclosures concerning the DOJ and SEC investigations and the $6.9 million voluntary-disclosure estimate.
- Separate underlying laboratory-services trends from the wind-down of COVID-19 testing and the acquisition-related comparison effect; assess margins and operating cash generation.
- Verify progress, trial enrollment, safety and data quality for FID-007, and timing and funding for planned FID-022 development.
- Review reimbursement, receivables and customer concentration, plus any material changes to liquidity, marketable-security values, debt or share repurchases.