Fulgent Genetics, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
Fulgent provides genetic testing and COVID-19 testing services. The company attributed its sharp first-half growth primarily to high demand for COVID-19 tests. It delivered 1.56 million billable tests in Q2 and 5.33 million in the first half, versus 181,000 and 194,000 in the respective 2020 periods.
Financial highlights
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Revenue | $153.6 | $17.3 | $513.0 | $25.0 |
| Gross profit / margin | $117.8 / 76.7% | $9.5 / 55.3% | $403.1 / 78.6% | $13.2 / 52.9% |
| Operating income | $98.9 | $2.6 | $365.8 | $0.7 |
| Net income attributable to Fulgent | $79.8 | $3.3 | $280.5 | $1.4 |
| Diluted EPS | $2.59 | $0.14 | $9.10 | $0.06 |
Revenue rose 790% in Q2 and 1,951% in the first half year over year. Management cited higher test volumes as the primary driver, partly offset by lower average test prices in the first half. Average price per billable test was $99 in Q2 and $96 for the first half, compared with $96 and $129 in 2020; corresponding costs per test declined to $23 and $21 from $43 and $61.
- Revenue mix: Q2 revenue was $103.6 million institutional, $49.5 million insurance, and $0.5 million patient-pay. First-half revenue was $255.2 million institutional, $257.1 million insurance, and $0.8 million patient-pay.
- Cash flow: First-half operating cash flow was $309.3 million, versus cash used of $3.0 million in 2020. Investing cash outflow was $371.5 million, primarily purchases of marketable securities, fixed assets, and the FF Gene Biotech acquisition. Financing provided $75.2 million, primarily from equity issuance.
- Liquidity: At June 30, cash and cash equivalents were $100.5 million and marketable securities were $676.6 million, or $777.0 million combined. Current assets were $566.7 million and current liabilities $121.5 million.
- Debt and obligations: The company had a $15.1 million margin loan secured by securities, callable by the custodian, at an interest rate below 1% at quarter-end; and $5.9 million of notes payable due December 2022 at 4.97%. It also disclosed $7.6 million of non-cancelable purchase obligations.
Material changes versus the prior comparable period
- Gross margin increased substantially, which the company attributed to higher volume, lower cost per test, and economies of scale.
- Operating expenses increased: Q2 total operating expenses were $18.9 million versus $6.9 million, including higher research, selling and marketing, and administrative costs. The company also recorded increased credit-loss provisions.
- Two customers represented 20% and 16% of Q2 revenue; for the first half, two customers represented 24% and 11%. One customer accounted for 13% of receivables at June 30.
- In May, Fulgent obtained a 72% controlling interest in FF Gene Biotech, recording $23.1 million of goodwill, $6.8 million of net acquired intangibles, and a $3.7 million remeasurement gain on its previously held interest.
- The company issued approximately 961,000 shares under its equity distribution agreement during the first half, generating $58.2 million in net proceeds.
Outlook, commentary, risks, and unusual items
- Management said existing cash, cash equivalents, short-term securities, and expected operating cash flow should meet anticipated requirements for at least 12 months. It also cautioned that demand, collections, pricing, and cash flow may fluctuate, and additional financing could be needed.
- No specific revenue or earnings guidance was provided. Management emphasized uncertainty in future COVID-19 demand and acknowledged that the COVID-19 business is expected eventually to decline as prevalence decreases.
- Key risks include reliance on COVID-19-related demand, price competition and test-mix changes, concentrated customers, reimbursement and collections exposure, dependence on limited suppliers, laboratory capacity and staffing, regulatory requirements for laboratory-developed tests and COVID-19 emergency authorizations, and privacy/cybersecurity risks.
- In July, the company invested $20.0 million in Helio Health for a minority interest and stated it sought access to liquid-biopsy technology and specified commercial rights. In August, it acquired Cytometry Specialists for $50.0 million cash, with up to $10.0 million in potential milestone payments; these were subsequent events, not included in June 30 balances.
- The company adopted the expected-credit-loss accounting standard in January 2021, reducing opening retained earnings by $0.9 million before a $0.2 million tax effect. Management reported effective disclosure controls at June 30 and no material legal proceedings.
Important facts for investors to verify
- How much of revenue, margin, and cash generation depends on COVID-19 testing, and how demand and pricing are trending after the reporting date.
- Customer concentration, the collectability of receivables, and the adequacy of the allowance for credit losses, which increased during the first half.
- The liquidity and investment risks in the securities portfolio, including the $420.4 million pledged as margin-loan collateral and the custodian’s right to issue a margin call.
- Whether the FF Gene Biotech acquisition, Helio Health investment, and CSI acquisition deliver expected strategic and financial benefits, and the final purchase accounting for acquisitions.
- Potential dilution from the equity distribution program and future financing needs, alongside management’s 12-month liquidity assessment.