At first sight, the Q4 results of Fulgent Genetics (FLGT) are fantastic, with a wide beat on a resurgence of Covid testing and a whopping 234% growth in their core NGS testing revenue. There are numerous take-aways for investors:

• Covid testing, while decreasing, is still raking in cash.
• Apart from cash, the company derives multiple additional benefits from their Covid testing.
• The company has used a fraction of the cash to acquire and partner with several interesting companies.
• Their NGS business continued to growth at a triple digit rate despite the pandemic, but going forward the guidance is remarkably soft.
• Both Covid and NGS growth are coming down and both gross margin and operational margins are descending from their lofty levels.
• Guidance, especially on the NGS side could be a little conservative, and there is always the possibility of another flare-up in the pandemic.

Benefits from Covid testing

• Showcase their operational capabilities (Q4CC):

we have shown to the street our ability to execute with precision and efficiency of scaling up a business from $30 million pre-COVID to close to a $1 billion within two years

• Establish numerous relationships

Take for instance the $43M CDC genomic surveillance contracts (Q4CC):

We compete with all the institutions, top end institutions, nonprofit organizations, hospitals, and the genetic testing company. We won the competition. Not only we won that completion, we delivered our results. So with our own technology, we designed this multiplex PCR to help CDC to detect the pandemic variations… Now we reach the end by March that the contract will be recompete again…

Should they win, we assume guidance will be increased, although the program might be less substantial than that of last year.

• Increase brand recognition
• Generate tons of cash ($935M and counting, see below)

The company also developed a home antibody test, helping people guide when they should get boosters. The Omicron wave came and went with 7-day average rising from 85K on December 1 to nearly 400K by the end of December.

This actually challenged operations, especially with Picture test kits for home. The company was forced to pause ordering for pitcher test kits for a couple of weeks.

Acquisitions and partnerships

The company made some clever acquisitions using a fraction of the cash flow bonanza to greatly expand their TAM:

Fulgent acquired CSI and made strategic investments in the other companies:

CSI

• This is opening up the somatic genetic testing market, which is expected to grow to $16.8B by 2030.
• The company will open their oncology lab in Q2 in California.
• CSI is also focusing on reducing turnaround time in all its testing, as a number of competitors have worse turnaround times, opening up an opportunity to take market share.
• There will be an expansion of the sales team to cover the 15 states that CSI wasn’t covering.
• Fulgent has almost completed the integration of CSI.

Helio Health

Helio developed HelioLiver, a liquid biopsy test for HCC (hepatocellular carcinoma), which is much more sensitive (76%, compared to alternatives like ultrasound at 47%) in Stage 1 and Stage 2 of the disease where survival rates are much higher but because of a lack of sensitive tests, it is rarely diagnosed this early.

The sensitivity comes out of their ENCORE clinical trial and the company is also embarking on a 1500 patient CLiMB study (Q4CC):

which is a prospective clinical trial comparing HelioLiver ultrasound in a real-world prospective study.

1100 of the patients have already been enrolled. The company will also hire additional people as this is a new market for Fulgent.

FF Gene Biotech

They didn’t provide an update on the CC.

Spatial Genomics

This is the latest partnership which Fulgent entered on the day of the Q4CC. Spatial Genomic’s main asset is seqFISH, which is a revolutionary technology that merges imaging with molecular barcoding (Q4CC):

determine cell types, dates and relationships by detecting and identifying dozens to 10s of 1000s of biomolecule, while preserving intact single-cell and facial tissue organization. seqFISH, allows researchers to identify novel cell types, map genomic organization, and nuclear architecture and analyze cell trajectories. seqFISH, enables combined approaches for direct multiomics analysis using RNA seqFISH for transcriptomics, DNA seqFISH for genomic organization and nuclear architecture and sequential immunofluorescence for Proteomics. Areas of technology can be used include neuroscience, developmental biology, oncology and immunology.

This opens up a new field of genomic sequencing for Fulgent, that of spatial genomics, becoming commercially available for biopharma late this year with clinical applications a little further out. Spatial Genomics has its own instrument which Fulgent will commercialize.

NGS business

While growth in their NGS business was huge. Excluding the impact of the revenue from the CDC, Q4 core revenue totaled $28.2M, an increase of 134% y/y.

Taking out the COVID NGS testing for the entirety of the year ($30M), the revenues for the core NGS business was approximately $93 million. Here is how that developed (including the Covid NGS business from the CDC):

However, NGS (excluding Covid NGS business from the CDC, which will be subsumed under Covid test business from Q1 onwards) is only guided at $120M for FY2022, a rather meek 28% increase.

Guidance

• expect COVID revenues for the full year to be at least $480 million with more than 45% of the revenue expected in Q1
• We recognize that NGS COVID testing has similar volatility as PCR testing and including these tests within our COVID revenues gives a better indication of the true performance of our core non-COVID business.

Margins

Gross margin will gradually decline and that onset has already started, from the Q4CC:

So as we kind of shore that up towards the end of the year, there were some reserves and some write off that we had to take within our inventory balances that impacted that.

Total GAAP operating expenses were $38.7M, up from $25.1M in Q3. Non-GAAP operating expenses total $34M, up from $20.9M in Q3. Non-GAAP operating margin is down 1000bp from Q3 our investments in people and business integrations.

Longer-term, these margins will decline as they are of course at almost absurdly high levels on the basis of their Covid test bonanza. Some other metrics:

• ASP $103 down from $105 in Q3.
• Cost per test for the quarter was $25, up a little from Q3 as a result of shoring up reserves and writing-off some excess inventory.

Cash

The company continues its cash bonanza (with Q4 figures not yet in the graph):

There was a further $77.1M in operational cash flow in Q4, $538.6M for the year. The company has now amassed a staggering $935M in cash and spend $81.9M on participations and an acquisition.

Valuation

Valuation is of course complicated because of the uncertain trajectory of the highly lucrative Covid testing revenue. For this year, that’s still guided at $480M, further adding to an already overflowing cash reserve, but the trajectory beyond 2022 is highly uncertain.

In previous exercises we used to value the company ex Covid revenue and ex cash. With roughly 30M shares outstanding, the market cap is roughly $1.9B with EV at under $1B.

With $120M of NGS business revenue expected for 2022, the shares trade at 8x EV, which one can consider fully valued. However, this year is still producing very substantial ($480M) revenues from Covid testing, $223M of which in Q1 alone and this is unlikely to go to zero next year, so the valuation multiple is lower, possibly considerably lower.

The cash pile-up is also likely to continue, albeit on a much slower pace and the company is likely to add to its M&A which they are really doing in a careful and meticulous way.

Conclusion

We’re still bullish on the shares, but the marked slowdown in the growth of their core NGS business has made us a little less bullish as the long-term growth of their NGS business trumps the short-term Covid revenue in valuating the shares.

We have no doubt that Fulgent is a terrific company with $935M in cash and plus what seems to be very useful acquisitions and participations so longer-term it’s still a buy.