Good day and welcome to the Fourth Quarter 2021 Fulgent Genetics Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Nicole Borsje with Investor Relations. Please go ahead.

Thank you. Good afternoon and welcome to the Fulgent Genetics, fourth quarter 2021 financial results conference call. On the call today are Ming Hsieh, Chief Executive Officer; Paul Kim, Chief Financial Officer; Dr. Larry Weiss, Chief Medical Officer; and Brandon Perthuis, Chief Commercial Officer. The company's press release discussing its financial results is available in the Investor Relations section of the company's website, fulgentgenetics.com. An audio replay of this call will be available shortly after the call concludes. Please visit the Investor Relations section of the company's website to access the audio replay. Management's prepared remarks and answers to your questions on today's call will contain forward-looking statements. These forward-looking statements represent management's estimates based on current views and assumptions, which may prove to be incorrect. As a result, matters discussed in any forward-looking statements are subject to risks, uncertainties, and changes in circumstances that may cause actual results to differ from those described in the forward-looking statements. The company assumes no obligation to update any of the forward-looking statements it may make today to reflect actual results or changes in expectations. Listeners should not rely on any forward-looking statements as predictions of future events, and should listen to management's remarks today with the understanding that actual results, including the Company's actual future results may be materially different and what is described in or implied by these forward-looking statements. Please review the more detailed discussions related to these forward-looking statements, including the discussions of some risk factors that may cause actual results to differ from those described in these forward-looking statements contained in the company's filings with the Securities and Exchange Commission, including the previously filed 10-K for the year ended December 31, 2021, which is available in the company's Investor Relations website. Management's prepared remarks, including discussions of earnings and earnings per share, contain financial measures not prepared in accordance with Accounting Principles Generally Accepted in the United States or GAAP. Management has presented this non-GAAP financial measures because it believes they may be useful to investors for various reasons, but they should not be viewed as a substitute for, or superior to, the company's financial results prepared in accordance with GAAP. Please see the company's press release discussing its financial results for the fourth quarter of 2021 for more information, including the description of how the company calculates non-GAAP income and earnings per share, and a reconciliation of these financial measures to income and income per share to most directly comparable GAAP measures. With that, I'd now like to turn the call over to Ming.

Thank you. Good afternoon, and thank you for joining our call today to discuss our fourth quarter 2021 results. We started the year on a very strong note, with continued growth in core revenue and a re-acceleration in our core and COVID revenue. I will cover some of the highlights from the year and the fourth quarter before turning the call to our Chief Commercial Officer, Brandon Perthuis, to discuss products and ongoing market updates, and Paul will discuss our financial results and outlook in detail. Looking at our fourth quarter results, they exceeded our guidance in both core and COVID revenue. Revenue totaled $252 million, compared to $295 million in the fourth quarter last year, and up 10% compared to the third quarter of 2021. We delivered approximately 2.5 million tests in the quarter, up 13% compared to the third quarter of 2021 and though down from 3.2 million in the fourth quarter last year. Paul will cover the breakdown between our core and COVID business in more detail in a moment. But on the highlight, our core business grew 234% year-over-year to $41 million. Strength in our core business was driven by momentum across key areas including CSI, our joint venture in China, and contributions from our NGS COVID contracts with the CDC. We continue to drive strong profitability, generating $3.34 per share in GAAP EPS and $77.1 million in operating cash flow in the quarter. The first quarter capped the year with tremendous growth for Fulgent. We finished the year with just shy of $1 billion in revenue, up 135% year-over-year, and generated $16.38 per share in GAAP EPS and $538.6 million in operating cash flow. 2021 was truly a tremendous year for our business, but we will always stay focused on our genetic business at our core. We now have a very wide pathway of opportunities to grow and expand our business into new and exciting areas of genomics leverage. The large cash position we have built over the last two years will ensure that we remain active in our COVID-19 test business as demand shifts quickly, but our long-term vision for the company has never been more exciting with the exclusive opportunities we are evaluating and executing on in the broader genomic testing market. The acquisition of CSI, Fulgent's first significant acquisition, has become a bright spot for our business. We still have a very early stage of integrating and scaling the operations and the capabilities of CSI, but we feel very good about the early progress we have seen and the future opportunity. Our investment in Helio Health has also shown good progress with the official launch of the Helio Liver, which is now commercially available in the US exclusively through Fulgent Genetics. We are very early in our partnership with Helio Health and have additional development and commercialization opportunities for other diseases with Helio in the future. We also announced an exciting strategic investment and partnership with Spectral Genomics today. We believe Spectral is taking a novel and innovative approach to seek FISH technology, and we look forward to adding their capability to our platform to further expand our portfolio of genomic testing solutions. Brandon will evaluate a little more on the progress of this initiative in a moment. As we look ahead, we are maintaining focus on two areas to drive growth. The first is integrating and scaling our existing partnership with acquisitions. And the second is pursuing additional M&A opportunities. We have a significant amount of dry powder at our disposal and plan to broaden our acquisitions and partnership initiatives in a more aggressive future. When it comes to acquisitions, we remain disciplined in our approach and seek tangible ROI while driving real synergies, all while being efficient with capital deployment. We have been very successful in executing our M&A strategy this year, with our acquisition of CSI, Helio, and the partnership with Spatial Genomics fitting well within our M&A philosophy. We're very proud of what we have accomplished in 2021. Our strategy to expand and grow our core business is playing off nicely as our organizations perform well. We believe there is a meaningful opportunity to expand into different areas in genomic testing and to build partnerships that establish us as the go-to one-stop-shop for genomic testing needs for the future. Throughout the COVID pandemic, we have proven our ability to scale our operation and infrastructure while supporting our customers through fluctuating demands. We are ideally suited to replicate this model in our core genomic testing business. We are really just getting started on this long-term opportunity in the growing market for genomic testing. The future is bright for Fulgent. We have a great team in place and have momentum on our side as we head into 2022 and the end of the year. Now, I'll turn over the call to Brandon Perthuis, our Chief Commercial Officer.

Thank you, Ming. Our fourth quarter brought yet another unexpected COVID-19 surge and perhaps more so than previous surges, tested our systems, technology, and operation. These massive swings in testing demand presented significant operational challenges. However, we have proven we can be nimble enough to adapt in real time. While it is incredibly difficult to predict where COVID-19 goes from here, we can say clients all over the United States know and trust Fulgent will be here to help. While the pandemic has challenged us all in many ways, it has been an opportunity for Fulgent to step up and forge deep, strong relationships with many organizations across the US, and we hope to build on these relationships with additional partnership opportunities in the future. In addition to these commercial relationships, we have increased brand recognition and awareness of our consumer-initiated platform, Pitcher, with hundreds of thousands of patients and consumers who have used the platform for COVID-19 testing. Starting with an update on our HelioLiver liquid biopsy test for hepatocellular carcinoma. HelioLiver is a multi-analyte blood test that utilizes both cell-free DNA methylation patterns and protein tumor markers to detect early stage HCC with high accuracy. HelioLiver has the potential to reduce morbidity and mortality in HCC patients, as there are more curative treatment options when the cancer is found in early stage. A highly sensitive blood test can drive patient adherence to surveillance programs and provides a more convenient and cost-effective way to detect HCC. We were excited to launch the test clinically in the fourth quarter. We first announced our investment in Helio Health in April, and just eight months later, we were able to complete the technology transfer, the CLIA validation, and commercial launch. Also during the quarter, Fulgent and Helio Health presented data at the Liver Meeting in a late-breaking presentation. Data presented showed HelioLiver to have a sensitivity of 76% in early stage HCC and 85% in overall HCC, demonstrating superior performance over alpha-fetoprotein alone in the galette model. It also showed significantly better sensitivity than ultrasound, which is considered standard-of-care today. Published data suggests ultrasound has an early-stage sensitivity of around 47%, much lower than the 76% we presented. As part of the launch, we needed to hire a specialized sales team since the call points are a new market for Fulgent. While HelioLiver is an oncology test, it is ordered upstream of the oncologist by hepatologists and gastroenterologists. We now have a foundational sales team and regional managers in place. The data presented thus far has been part of our ENCORE clinical trial, which was a case-controlled study. However, we are making significant progress with our CLiMB study, which is a prospective clinical trial comparing HelioLiver to ultrasound in a real-world prospective study. The size of this study is 1,500 patients, of which 1,100 have been enrolled. We aim to complete patient recruitment in the third quarter of this year. We are excited to bring this novel test to market and change the way HCC is diagnosed and monitored. We will continue to update the investment community as we make progress with HelioLiver. Starting now with the progress in CSI. During the fourth quarter, we continued to focus on the expansion of the sales team to support company growth goals. Three new sales representatives were hired to focus on hospital pathologist base sales, and their onboarding was successfully completed. Additional positions are expected to be filled in the first quarter with hires who have extensive experience in hospital-based sales. With the projected opening of our new oncology-based lab in El Monte, California in the second quarter, we will further expand our sales team with the addition of our sales leader and additional sales representatives. This team will focus on oncologist-based sales in the western markets initially, with the potential to expand into new markets as the laboratory ramps up. Adding new sales representatives, coupled with the expansion of in-network contracting, has opened up 15 states that legacy CSI did not have a sales presence in. All legacy and new sales team members are operating on our existing CRM platform for tracking and logging of contacts and opportunities in our sales pipeline. CSI is also continuing to focus on turnaround time across all testing methodologies. Turnaround time is an important measure of performance, and our turnaround time has remained constant or even improved in some areas throughout the pandemic. We continue to see competitor laboratories with worsening turnaround times, which is causing frustration for their existing customers and opening new opportunities for CSI to gain market share that we hope to capitalize on in 2022. We announced today an equity investment in strategic partnerships with Spatial Genomics. Spatial Genomics' sequential fluorescence in situ hybridization (seqFISH) is a revolutionary technology that merges imaging with molecular barcoding. seqFISH can decode complex molecular identities and locations directly within single cells and intact tissue microenvironments. seqFISH enables highly multiplexed single-cell analysis of RNA, DNA, and proteins beyond the capabilities of other types of spatial analysis. seqFISH can determine cell types, dates, and relationships by detecting and identifying dozens to tens of thousands of biomolecules, while preserving intact single-cell and facial tissue organization. seqFISH can be used in areas such as neuroscience, developmental biology, oncology, and immunology. We are very excited about this brand new area for Fulgent and we look forward to layering on our expertise with clinical genomics to deliver what we believe to be a transformational product for our company. Switching to COVID-19, for much of the fourth quarter, we saw cases trending down as we recovered from the Delta wave. However, in early December, the United States was hit hard by the Omicron variant. This highly infectious variant drove tremendous demand for testing at a pace we hadn't seen before. On December 1, the seven-day average for cases in the US was approximately 85,000, and by the end of December, it rose to nearly 400,000. For the fourth quarter, we performed approximately 2.3 million COVID-19 tests, of which approximately 924,000 were in the month of December. While much of the demand was in symptomatic testing, we also saw our screening program increase the percentages of employees and students being tested. In the midst of this demand spike, we also rolled out a program with LA County offering our Picture kit directly to consumers at no cost to them. Into December, this unprecedented demand for COVID-19 testing challenged our capacity for the first time since the beginning of the pandemic, specifically with our Picture test kit. We were forced to pause ordering for Pitcher test kits for a couple of weeks, but we were quickly able to ramp-up production and fulfillment and get back on track. This capacity issue wasn't due to lab staffing shortages and didn't impact our commercial testing business. This was really a function of not being able to ship kits fast enough as we were receiving orders. We are optimistic that the meaningful role Pitcher has played in COVID-19 testing and the large user base we've amassed will lead to future opportunities as we transition to focusing on delivering genetic testing through Pitcher. Finally, on the NGS side, it was a robust quarter for NGS COVID-19 testing with the positivity rate being driven higher by the Omicron variant. We continue to be one of the top sequencing producers for the CDC genomic surveillance program, and we appreciate the opportunity to contribute to these important studies. As Ming mentioned, we plan to be aggressive with M&A to expand our business and reach new markets and technologies. While we are very excited about our investments in CSI, Helio Health, and spatial genomics, we're still just getting started. It is safe to say that the intense Omicron wave of the fourth quarter forced us to focus on our COVID-19 business more than M&A. However, it also provided us with additional capital to fuel our M&A strategy going forward. Over the course of 2022, we intend to diligently assess assets and deploy capital in areas that will fuel growth for Fulgent. Armed with technology, scale, multiple large addressable market capitals and a team from top to bottom dedicated to growing our business, we believe the Fulgent story is just getting started. I'll now turn the call over to our Chief Financial Officer, Paul Kim.

Thanks, Brandon. Revenue in the fourth quarter totaled $252 million, compared to $295 million in the fourth quarter of 2020, while exceeding our guidance of approximately $189 million. Total tests in the quarter totaled 2.5 million, compared to 3.2 million in Q4 of last year. The decline was due to COVID testing dynamics during the fourth quarter as Brandon mentioned, the testing surge resulting from the Omicron variant starting December 1. Spikes in COVID testing will continue to be unpredictable in the future, and we remain a leader in the market with now more accuracy turnaround plans and hands-on service. Breaking down revenue a bit further, roughly $212 million came from COVID PCR testing, which exceeded our expectations. Revenue from our core business totaled $40.1 million, which exceeded our guidance of $32 million and grew 234% year-over-year. Just as a reminder, our core revenue includes our NGS business, contributions from our Chinese joint venture, and contributions from CSI. It also includes contributions from our CDC COVID NGS test agreement, which was again elevated due to increasing COVID positivity rates amid the Omicron variant outbreak. Going forward, we plan to provide core revenue guidance, which excludes NGS COVID testing from the CDC. If we exclude the impact of revenue from the CDC in the quarter, our Q4 core revenue totaled $28.2 million, an increase of 134% year-over-year, compared to Q4 of 2020. As the demand for COVID testing remains volatile and unpredictable, we continue to take a conservative stance on expected revenue from COVID testing. We remain focused on executing on our post-COVID growth opportunities, which includes expanding the reach of CSI’s capabilities, executing on additional investments and partnership opportunities such as spatial genomics, which Brandon discussed, working with Helio on our joint commercialization opportunities and the growing footprint of our China operations. Our ASP in the fourth quarter was $103, slightly lower than $105 in the third quarter. Earnings remain relatively stable over the past few quarters, fluctuating higher and lower with COVID testing activity and spikes. Cost per test for the quarter was $25, slightly higher than the third quarter due to shoring up reserves and the write-off of some excess inventory at year-end. Gross margin was 75.3%, down 710 basis points year-over-year and 560 basis points sequentially. Now turning to operating expenses. Total GAAP operating expenses were $38.7 million in the fourth quarter, up from $25.1 million in the third quarter. Non-GAAP operating expenses totaled $34 million, up from $20.9 million last quarter. Our operating expenses increased primarily due to ongoing investments in strategic headcount across our organization, fees, and services associated with heightened M&A activity and shoring up reserves at year-end. Our non-GAAP operating margin decreased 10 percentage points from the third quarter to 62.3%. Our expense structure remains very lean, enabling us to drive significant profitability from revenue outperformance. That being said, our investments in people and business integrations impacted our margin in the fourth quarter. Ultimately, we believe these investments will drive outsized future growth in our core business and remain pleased with the consistent operating leverage we're able to demonstrate even through M&A. EBITDA for the fourth quarter was $159.8 million, compared to $230 million in the fourth quarter of 2020, on a non-GAAP basis and excluding equity-based compensation expense and intangible asset amortization; income for the quarter was $108.7 million, or $3.48 per diluted share, based on 31.2 million weighted average shares. Turning to the balance sheet, we ended the fourth quarter with $935.5 million of cash and cash equivalents and marketable securities. We generated $77.1 million of cash from operations during the quarter, further adding to our cash balance. Overall, this year, we have invested more than $81.9 million in partnerships and strategic investments to expand our core genomic testing business. Adding these investments, we would have ended the year achieving our goal of reaching $1 billion in cash and cash equivalents. Now moving on to our outlook for 2022. Starting with COVID revenue. As we discussed, COVID revenue continues to be volatile due to many factors outside our control. We saw unprecedented demand for testing at the beginning of the first quarter as the Omicron variant spread, however, we're expecting the testing to return to more normalized levels as the surge dies down. With that, we expect COVID revenues for the full year to be at least $480 million, with more than 45% of the revenue expected in Q1. Going forward, our total COVID revenues will include revenues from both RT-PCR COVID testing as well as NGS COVID testing, which is conducted primarily through our CDC relationship. 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. While demand for COVID testing will remain hard to predict, we do believe we'll see a modest floor for testing demand for the foreseeable future. As COVID-19 becomes more endemic and regular testing programs remain in place. Moving on to our core revenue guidance, which now includes revenues from NGS testing, CSI, China JV, and Helio. We expect our core revenues will total approximately $120 million for 2022, representing a growth of 20% year-over-year on an apples-to-apples basis, excluding the COVID impact. With $480 million in COVID revenues and with $140 million in core revenue, we expect the total revenues will be approximately $600 million for the year. We expect there will be continued volatility with COVID testing, and we remain focused on executing our strategy to drive momentum in our core business. From a profitability standpoint, we remain focused on investing in our business to drive sustainable long-term growth. As we integrate acquisitions and ramp on new initiatives, we will see some fluctuations in our margins at incremental sale phases. That being said, our foundational technology platform supports a strong margin profile, and we will continue to manage our spending with discretion to drive operating leverage in the long term, as we have done in the past. For the full year 2022, utilizing a 27% effective tax rate and a share count of 32.9 million, we expect non-GAAP income of approximately $230 million, or $7 per share for our shareholders, excluding stock-based compensation. For the first full quarter of 2022 specifically, we expect total revenues of $245 million. This breaks down into core revenues of $22 million excluding NGS COVID test volumes, representing a growth of 39% year-over-year on an apples-to-apples basis, excluding current NGS testing, and we expect approximately $223 million in COVID testing, which includes approximately $10 million in revenue contribution from COVID NGS testing from the CDC. While we are forecasting a year-over-year decline in Q1 revenues, this is due to the dramatic drop-off we're expecting in COVID testing demand. Our updated guidance is posted in the slides on our Investor Relations website, which shows a detailed breakout of what I just discussed. We’re pleased with our ability to execute on our strategic initiatives this year to drive growth in our core business while capitalizing on cash generated from COVID testing. We’re well-positioned to respond to this momentum and grow into 2022 and beyond. Operator, now you can open it up for questions.

Hey, guys, congratulations on the quarter. Maybe just a question on 2022 core guidance. I think if I adjust Q4, it's kind of 28.2 excluding the CDC, or you're guiding to 120 for the full year. I think off that 28 here we might have expected a more aggressive guide, so just kind of walk us through sequentially what else might have been in Q4 that we should be thinking about that's impacting that base core run rate going into 2022?

Sure. So, first and foremost, we did experience Omicron, both here in the US as well as internationally. Omicron is still out there and until we're fully back to business from those scenarios, and we believe that it's more prudent to be conservative in giving this guidance. The other point that I'll make is this is just the first guidance that we're giving, given the fact that it's February, and as we get additional comfort behind how the COVID environment is going to look, combined with getting additional comfort behind the synergistic aspects of some of the acquisitions we made, we believe that the $120 million conservative guidance is the right way to approach it at this point in time. We have been known to beat estimates in the past and that certainly is in the cards for the quarters to come.

And then the spatial genomics equity investment is very attractive and interesting. Can you just kind of maybe walk us through how that product may fit into the Fulgent portfolio from a commercial testing perspective in the future? And at least your assessment as to a timeline to when that technology might be viable from a commercial perspective in a Fulgent lab?

Hey, Kevin, it's Brandon. I'll tee it up and turn it over to Dr. Weiss here, but our biopharma business has become a meaningful portion of our revenue and more importantly, a meaningful focus for us. We think the spatial genomics technology is going to further open up opportunities for us in that market. When will it be commercially available for biopharma? We think sometime in 2022, maybe on the back end of 2022. Clinical applications are probably a bit further out, but we do see it becoming available to market to our biopharma clients sometime in 2022. We're incredibly excited about the investment we do believe it's a new frontier in molecular biology. We invested in spatial genomics based on their technology, incredibly impressive technology, their superior resolution, and their ability to have much higher multiplexing, the multi-omic facet of the technology. So, it's going to be an exciting year for Fulgent with a lot of applications in the future.

Well, as you know, next-generation sequencing has dominated at least the last five years of genomic testing. We think the next wave of interest is going to be within the area of spatial genomics. With this technology, it identifies, as Brandon said, dozens, tens of thousands of biomarker molecules while preserving the architecture. So, you can do this with single cells and in tissues. What biomarkers are you looking at? RNA for the transcriptome, DNA for looking at mutations and organization of the genome, as well as immunofluorescence for proteomics, so it's really the complete package. It's almost the Holy Grail, as we were just as excited for next-generation sequencing five to ten years ago. I think it will be a very powerful tool for drug discovery for pharma. As for clinical applications, it remains to be proved, but these always follow the discovery that goes on in pharma, and I have no doubt that there will be clinical applications, if not in the next year or so, at some point.

Thank you.

So, Kevin, you probably know my background as an intrapreneur. I'll be sitting on the Board with spatial genomics, working hand-in-hand with the team and trying to bring this product to market. So, I am very excited about this opportunity, and the professor Kai Long is still working at Caltech, which is just a few minutes away from our headquarters. So we are very excited about this opportunity and looking very much forward to bringing this innovation and the product to the market.

Thanks for taking my questions.

Thanks, Kevin.

And the next question comes from Sung Ji Nam of BTIG.

Hi. Thanks for taking the questions. Paul, could you break out – I know you broke it out for the fourth quarter. Could you break out what the COVID NGS testing was for the full year 2021?

Sure. The COVID NGS testing for the full year was approximately $30 million and if you take out the COVID NGS testing for the entirety of the year, the revenues for the core, excluding that amount, was approximately $93 million. And the initial guidance that we're giving for 2022 is $120 million.

Great, that's super helpful. And then for Helio Liver, obviously very exciting there with the launch and then also the ongoing prospective trial Clim, would you say kind of able to talk about what you know, the commercial strategy, as you've launched, as an LDT and then what the timeline might be for – I know you talked about the enrollment being completed by the third quarter, when this might, you know, the data might be available from the prospective trial and also your thoughts on whether this will be an IBD product down the road or just if you could talk about that?

Yes, certainly, it’s Brandon. So, we brought the product to market as an LDT. Most genomic tests are LDTs, so we started to see value long-term in taking the product to an FDA path, but that doesn't prevent us from going to market as an LDT. So I think we've executed at a high level regarding our go-to-market strategy. We believe hepatocellular carcinoma is an area that's underserved. The fact that you know, ultrasound diagnosis of hepatocellular carcinoma occurs so infrequently at early stages is just an unacceptable tool for monitoring this disease. We know the survivability of HCC is much, much higher in Stage 1 and Stage 2. However, it’s just not diagnosed frequently enough at Stage 1 and Stage 2; ultrasounds aren't sensitive enough, and we know that. There's a lot of variability among ultrasounds. So we've created a much better tool for clinicians to monitor and diagnose HCC. Like any test that's changing the way medicine is practiced, it's a marathon. But the feedback we've received from our key opinion leaders and our early adopters has been fantastic. A simple blood draw that is markedly better than the current standard of care has been a powerful message for our sales team to take to the market. We still have a lot of work to do ahead of us, make no mistake about it, you know, as we expect our CPT code to be published here in the near future, as we expect to wrap up our clinical study. But I think we are exactly where we want to be. As I mentioned earlier, the call point for this is hepatologists. So we had to go out and build that specialized sales team, but we were able to recruit some amazing talent. We can continue to build that team over time, so I think Helio Liver is going to be an important test going forward, and we really look forward to improving patient outcomes in the future.

One additional point is that ultrasound may not have the best compliance, but a simple blood draw. We expect to have better compliance.

Got you. Super helpful. And then just on the spatial genomics side, does that technology have its own proprietary instrument or instruments?

Sung Ji, yes, it does have its own instrument, so from the spatial genomics, they do plan to release this product this year. And Fulgent Genetics will have to commercialize it through our clinical structure related to spatial.

Got it. If I might be able to squeeze one more question, the antibody testing that you guys launched sounds obviously very interesting. I was curious how that's tracking whether there is demand for that.

Hi, Sung Ji. It’s Brandon. We do see demand. I think it's not yet fully implemented like we believe it should be. Obviously, testing is incredibly important. It has been since day one. But I think we're getting to a point where we need to think about what does an endemic state of this virus look like, and we believe monitoring your antibody levels is going to be an important aspect, whether that's through acquired immunity from infection or from vaccines. We believe antibody testing can help guide people on when they should get boosters. But globally speaking, we haven't seen the adoption yet, but perhaps it will come as we learn more about this virus and the best way to fight it moving forward.

Great. Thank you so much.

Thank you.

We can go to David Westenberg of Piper Sandler.

Hi. Thank you for the question, and congrats on the numbers. As we're dealing with the tail-end of the Omicron variant, can you talk about maybe some of the exits you're seeing from competitors that are refocusing on their existing business? And whether there is an opportunity to capture market share from some of them?

Yeah, I can take that one. Thanks for the question. Fulgent never stopped focusing on their existing business. So to the extent other companies have to refocus on it, too bad for them, I suppose. We've continued to focus on our base business, which has been healthy throughout the pandemic, and we were able to respond in a big way to the pandemic without losing that focus. As I mentioned earlier, at least on the oncology side, we have heard from the field that competitor labs are not performing as well as they should in the area of turnaround time, for example. So we do believe there is a window of opportunity for Fulgent to execute on the commercial side to gain market share from some of our competitors. We'll see how quickly they're able to pivot back to their focus. But we're certainly being aggressive on the commercial front, as you've seen with our hires. We're hoping those hires, coupled with this window of opportunity, will allow us to gain further market share.

I think backing what Brandon said, David, if you take a look at our business, even if you strip out NGS, we have grown our base business throughout this whole pandemic. From a strategic standpoint, that focus has never stopped; it's actually probably accelerated. The additional capital that we have been able to garner through the COVID experience has opened up a number of new opportunities we have announced last year, CSI being one of them. We have almost completed the integration now, and we’re at the synergistic stage of really capitalizing on incorporating that asset. So from a strategic focus perspective, it has been a mainstay throughout the COVID environment that we focused on expanding our core capabilities. If you take a look at where we stand from a capital structure perspective, the cash balance we have will allow for more key acquisitions. The valuations are becoming closer to real business prospects, which is advantageous for us. We have shown our ability to execute with precision and efficiency, going from $30 million pre-COVID to close to $1 billion within two years. Now with the M&A journey, we are ready to capitalize and get more active on that front. We are looking forward to showing the market that we can integrate assets and show synergies not just from an expense perspective but from the revenue side as well, all leading to our reach into wider and larger markets.

Yeah, I should add to David's question about our COVID response. In April last year, we announced our contracts with the CDC for $43 million. There are two phases, phase one and phase two. Not only did we execute the contract, we also delivered solid revenue last year. These were competitive bids against all top organizations, and we won the competition. We not only secured that contract; we also showed strong output. So with our technology, we designed this multiplex PCR to help the CDC detect pandemic variations, and it became a successful project. As we reach the end of March, the contract will be recompeted. We will compete in that space again, and we'll update the market on what the upcoming year will look like for the NGS services. We are very much looking forward to continuing our innovation in this space as we transition into a post-pandemic world. We're also excited about our new ventures in spatial genomics; we look forward to bringing new challenges and solutions to this market.

I appreciate all the insights. Let me ask one more question, and I apologize if I missed this earlier. I believe it requires a bit more focus. Regarding the gross margin, it appears to have decreased by nearly 600 basis points from Q3 to Q4, even though revenue increased. Additionally, compared to the low point in Q2, there is still a shortfall. You may have provided some commentary, but could you offer a more detailed explanation or a comprehensive analysis of why this decline occurred? It seems quite significant to me. Thank you.

Yeah. So the gross margins throughout the last year was almost running like a software company, close to 80%. I think the focus at our company throughout the COVID experience was to ensure that our customers were satisfied as much as possible, given the fact that utilizing our technology and operational platform, it was clear that our margins, whether they be gross or operating, would be at a high level. As we moved towards the end of the year, there were some reserves and some write-offs that we had to take within our inventory balances that impacted that. Going forward, since you’re asking about gross margins, we anticipate that they will eventually normalize and get a little closer to what the gross margins are for our traditional genetic testing business. So as we progress through 2022, if the COVID situation continues to stabilize, we anticipate that the gross margins will get slightly lower each quarter. The other thing to note is we are continuing to invest in our operations, as we have a larger-scale company, which also impacted the gross margin somewhat.

Appreciate it. Thank you very much.

There are no further questions. That now concludes the fourth quarter 2021 Fulgent Genetics earnings conference call. We thank you for your participation. You may now disconnect.