FLGT - Fulgent Genetics: Surviving The Covid Cliff

Summary

• Today, we revisit Fulgent Genetics. The company continues to manage through a huge drop off in Covid testing revenues as the pandemic ebbs.
• However, 'core' testing sales are seeing impressive growth and the company has a massive amount of cash on its balance sheet.
• An updated investment analysis around Fulgent Genetics follows in the paragraphs below.

Courage is the price that life exacts for granting peace .”? Amelia Earhart

We last looked at Fulgent Genetics ( FLGT ) early last summer. We noted at the time the company was navigating through a sharp drop off from Covid testing revenues but had some key things going for it over the longer term. We concluded that article with this recommendation on the stock.

I expect Fulgent to continue to use its cash hoard to make further strategic 'bolt-on' acquisitions in the quarters/years ahead as it builds out a comprehensive diagnostics platform. It is impossible to predict how fast Covid testing revenues will decline going forward. However, core revenues are growing smartly, and the company has a fortress balance sheet. With the stock looking like it is building a base here, I took a small 'watch item' holding in Fulgent this week using covered call orders as options in the name are both liquid and lucrative ."

Since it's been more than a half year since we're visiting Fulgent, it is time to ' circle back ' on the investment thesis around this diagnostic firm. An analysis follows below.

Company Overview

Fulgent Genetics, Inc. is based in Los Angeles. This diagnostic firm offers various Covid-19, molecular diagnostic, and genetic tests. The stock currently trades just above thirty three bucks a share and sports an approximate market capitalization of $1 billion.

Third Quarter Results

On November 7th, the company posted its third quarter numbers . Fulgent Genetics had a GAAP profit of six cents a share even as revenues slid just over 53% on a year-over-year basis to just north of $105 million. It is important to note that the revenue fall was entirely due to Covid testing sales falling off a cliff. This is hardly unique to Fulgent. This trend is being seen across the industry as the pandemic has ebbed along with testing for it. Labcorp ( LH ) just noted a 90% drop off in Covid testing revenues within its fourth quarter results .

'Core' or non Covid testing revenues more than doubled during the quarter from the same period a year ago to $56 million. The company had a positive adjusted EBITDA during the quarter of $19.7 million and cash from operations of $20.8 million.

Management guided fourth quarter sales to $60 million which was far under the consensus. Core revenue was guided to $52 million, which would be up 86% from 4Q2021. Management noted that the sequentially drop in core revenue in Q4 is due to ' The sequential decline is due in part to significant seasonality in their Inform Diagnostics business related to a drop in elective surgeries and procedures around the holiday season, as well as the delay in managed care contract roll up and the delayed adoption and reimbursement of HelioLiver '. For all of FY2022, management expects total revenue to be just over $610 million of which core sales will come in just over $175 million.

Analyst Commentary & Balance Sheet

Since third quarter results posted, both Credit Suisse ($50 price target) and Raymond James ($45 price target) have reissued Buy ratings on the stock. Piper Sandler downgraded the shares to a Neutral with a $40 price target.

Less than five percent of the outstanding float in the shares is currently held short. There has been no insider activity in stock so far in 2023. There were several small sales from numerous sales totaling just less than $200,000 in aggregate in the fourth quarter of last year.

The company ended the third quarter with just over $900 million in cash and marketable securities on its balance sheet against no long term debt. It should be noted that in early November, Fulgent Genetics reacquired Fulgent Pharma, an independent clinical-stage pharmaceutical firm, for ~$100 million in cash and stock.

Fulgent Pharma's main asset is called FID-007. This is a proprietary Nano encapsulated formulation of paclitaxel developed to improve overall solubility profile of paclitaxel. It is targeting head & neck cancer, which could potential just over a $2 billion target market opportunity. FID-007 is currently in early stage development. Fulgent Genetics plans to continue to develop FID-007 under the 505(b)(2) pathway. They also expect to begin Phase 2 and 3 trials in two to three additional target indications in the next one to two years, with data readouts over the next three to four years.

Fulgent Pharma and Fulgent Genetics were a part of Fulgent Therapeutics up until 2016 it should be noted. This was the latest in a series of small, strategic ' bolt on ' acquisitions Fulgent Genetics has made in recent years as it builds out its footprint in genetic and specialized oncology testing.

Verdict

The current analyst firm consensus has Fulgent losing some $5.60 a share in FY2022 as revenues fall nearly 40% to approximately $610 million. A further sales decline of just over 55% to $260 million is projected for FY2023, but losses per share are pegged to decline to just over two bucks a share.

Investors who look only at the topline numbers, might end up missing the boat on Fulgent Genetics. Yes, overall sales plunged in FY2022 and will do so again in FY2023. But this entirely due to Covid testing being drastically curtailed across the industry.

Sales from Fulgent's core testing divisions are growing impressively and the company should see overall sales growth return in FY2024. Equating for Fulgent's massive amount of cash, the company is selling at less than one times core revenues. More than cheap enough to continue to merit a small ' watch item ' holding as Fulgent continues to manage through the Covid testing cliff. A fresh set of data points will be out shortly as Fulgent reports fourth quarter results in the coming week.

People who insist on dividing the world into 'Us' and 'Them' never contemplate that they may be someone else's 'Them '.”? Ray A. Davis

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