Hello and welcome to the Fulgent Genetics Q2 2024 Conference Call and Webcast. A question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the conference over to Melanie Solomon, Investor Relations.

Thank you, Kevin. Good morning and welcome to the Fulgent second quarter of 2024 financial results conference call. On the call today are Ming Hsieh, Chief Executive Officer; Paul Kim, Chief Financial Officer; and Brandon Perthuis, Chief Commercial Officer. The company's press release discussing the financial results is available on the Investor Relations section of the company's website. A replay of this call will be available shortly after the call concludes on the Investor Relations section of the company's website. 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 those forward-looking statements. The company assumes no obligation to update any of the forward-looking statements that 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 look to management's remarks today with the understanding that actual events, including the company's actual future results, may be materially different than 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 of the risk factors that may cause results to differ from those described in those 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, 2023, and subsequently filed reports, which are available on 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 prepared these non-GAAP financial measures because it believes they may be useful to investors for various reasons, but these measures 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 second quarter of 2024 for more information, including the description of how the company calculates non-GAAP income or loss, earnings or loss per share, non-GAAP gross profit, non-GAAP gross margin, non-GAAP operating profit or loss and margin, and adjusted EBITDA, and a reconciliation of these financial measures to income or loss, earnings or loss per share and operating margin, the most directly comparable GAAP financial measures. With that, I'd now like to turn the call over to Ming.

Thank you, Melanie. Good morning and thank you for joining our call today. I will start with some comments on the second quarter and our two business lines. Then Brandon will review our product and go-to-market updates for our laboratory service business in the second quarter, and Paul will conclude with the financial and outlook before we take your questions. We are pleased with our results in the second quarter with $71 million of total revenue. We recognized $841,000 of revenue on previously built COVID-19 tests. Excluding COVID-19 revenue, second quarter core revenue of $70.2 million was driven by momentum in precision diagnosis, particularly reproductive health and oncology. We were pleased with the growth in all three areas of our laboratory service business this quarter, and we've seen good momentum ahead as we continue to invest in reproductive health testing and see the benefit of those investments. We have reached a very important milestone in consolidating the labs acquired as a part of the informed diagnosis transaction. With our new 96,000 square foot lab facility in Coppell, Texas, we believe we'll have an opportunity to triple our capacity, fueling the potential future growth and expansion. Brandon will talk more about this. In our therapeutic development business, we presented Phase 1 clinical data using our lead therapeutic development candidate FID-007 to treat head and neck cancer at the American Society for Clinical Oncology annual meeting in June 2024. Of 11 head and neck squamous cell carcinoma patients available, with weekly dose levels ranging from 50 milligrams per square meter to 160 milligrams per square meter, 45% had a partial response, and 27% had stable disease. Three out of five HNSCC patients with a partial response had previously been treated with taxanes, and the duration of follow-up ranged around four months. No high-grade neuropathy has been noted. FID-007 demonstrated preliminary evidence of anti-tumor activity in heavily pretreated HNSCC patients across different primary tumor sites, with an overall response rate of 45%. As a result, we initiated a Phase 2 clinical trial of FID-007 in combination with the succinimide in patients with HNSCC in January 2024, with enrollment beginning in the second quarter. So far we have enrolled the first three patients in this trial, and we expect to enroll approximately 40 patients in various sites, with enrollment expected to complete in early 2026. We currently estimate total patient clinical trial costs for the Phase 2 to be around $10 million. We continue to advance our second drug candidate, FID-022, a nanoencapsulated SN38 in pre-clinical studies toward an investigational new drug application by the end of this year. While FID-022 has shown superior efficacy compared to Irinotecan in various xenograft models including colon, bile duct, ovarian, and pancreatic cancers in our preclinical study, no significant unexpected toxicity was observed in both rat and monkey GLP toxicity studies. Additionally, we have made significant advancements in the development of our antibody-drug conjugate using our novel patterned linker and payload platform technology. Our ADC has shown better efficacy overall over different tumors with a broad range of targeted antigen expression levels than some of the best ADC benchmarks on the market in the pre-clinical studies. Meanwhile, ADC with novel targets using our platform technology are also being prepared with the goal of generating leading candidates for clinical trials. As a reminder, all our drug candidates were formulated with our novel nanoencapsulation technology, which includes over 30 issued active patents and active patent applications and targets 30 platforms designed to improve therapeutic windows and pharmacokinetics profiles for both new and existing cancer drugs. Overall, we believe we have a solid strategy with both our core laboratory services business and our therapeutic development business. We are seeing momentum in our core business, which we believe will continue to grow, strengthening our business model and fueling our therapeutic initiatives. We continue to maintain a strong balance sheet to execute our strategy. I would like to thank our employees, partners, and stakeholders for your hard work and loyalty in a very successful second quarter for our business. We look forward to continued growth in the second half of 2024. I will now turn the call over to Brandon Perthuis, our Chief Commercial Officer, to talk more about our laboratory service business results during the second quarter.

Thanks, Ming. As a reminder, our laboratory service business includes precision diagnostics, anatomic pathology, and biopharma services. These three represent our core revenue streams and do not include COVID-19 testing. We had another very strong quarter led by precision diagnostics, with all three areas showing strength. This is the first time we have seen all three areas post quarter-over-quarter growth since 2022. In the past few quarters, we have experienced some headwinds in anatomic pathology and biopharma services, but we are seeing the investments we made in those areas begin to pay off. I'll talk more about each of those momentarily. Circling back to precision diagnostics, it was up $5.7 million, or 15% quarter-over-quarter, and $11.2 million or 35% year-over-year. This tremendous strength has been led by reproductive health testing, including Beacon expanded carrier screening. Beacon continues to be a bright spot for Fulgent. We have significant market share, established strong B2B relationships, and continue to have a sales pipeline that gives us confidence in continued growth. The laboratory continues to perform exceptionally well, even with the record volume we are seeing. On average, our turnaround time has been 11 days, which is fantastic and a true testament to the power of our technology platform. To scale this rapidly and continue to provide a quick turnaround time is no trivial task. We've also been able to give our clients the flexibility to custom tailor the gene panel to their specifications. In addition, our strong engineering capabilities have allowed us to rapidly interface with client-side EMRs, allowing for orders and reports to be delivered electronically. Beacon will continue to be a focus for Fulgent as we now find ourselves as one of the leading providers of expanded carrier screening services. Staying on reproductive health, last quarter we announced the launch of a non-invasive prenatal test, or NIPT, for the first time, a test we have branded NOVA. NOVA is the first NIPT to include common aneuploidies, microdeletions, and monogenic conditions caused by de novo point mutations. We continue to make good progress with our go-to-market strategy and anticipate seeing additional progress in the coming quarters. As we have mentioned, we expect volume to be low for some time as we bring this novel test to market. However, we believe over time clinicians will see the value of this new NIPT methodology. I wanted to provide a quick update on our oncology portfolio. We recently gained MolDX approval for our liquid biopsy assay for high-stage solid tumors, complementing our previously approved solid tumor tissue and heme NGS assays. Our liquid biopsy offering is a comprehensive test that includes over 500 genes, which detects tumor mutation burden, microsatellite instability, indels, and copy number alterations in addition to single nucleotide variants. The coverage rate is approximately $2,840 and is retroactive back to September 2023. This is just one more piece of the puzzle, helping to complete a near one-stop shop for oncologists. Over time, the focus will be to continue to build out the commercial team and capture market share, leaning on this one-stop shop offering and excellent quality, Q&S rates, and turnaround time. Turning to anatomic pathology, we are pleased to see this area return to growth, albeit small. Anatomic pathology has seen multiple quarters of headwinds related to our integration of the acquisition of informed diagnostics and some macro factors, but we now see this area stabilized. More importantly, the sales team is closing meaningful new accounts and the pipeline is strong. This is a result of a revamped go-to-market strategy and improved sales team, as well as continued laboratory performance as it relates to quality and turnaround time. Also during the quarter, we relocated the operation to our newly purchased building at Coppell, Texas, and consolidated our New York laboratory. This was not trivial yet executed very well, and I want to give a special thanks to all the team members who worked so hard on this. We believe this investment will provide long-term advantages related to capacity, efficiency, and cost. Biopharma services also returned to growth in the second quarter. As we have mentioned in previous calls, we continue to expand our technical capabilities, allowing us to address a larger market. We have invested an additional sales headcount in this area and are building a robust sales funnel. This market continues to expand as biopharma lines move on multi-omics studies for their drug development and we believe we are in a good position to continue to partner on these studies. Nonetheless, this is an area where we still expect results to vary from period to period due to the nature of the project and a lengthy sales cycle. There were some questions around the new FDA regulations on lab-developed tests at the time of our last call, and we have gained some clarification, although many questions remain. At a high level, we interpret the new regulations as a potentially positive catalyst for Fulgent. Many of our tests are New York State approved, and we have over 20,000 tests launched on our menu before the May 6, 2024 publication date, which is the operative date for the purposes of the currently marketed test enforcement discretion policy. As long as they are not modified, it appears these tests will likely only need to meet device regulatory requirements that become applicable at Stage 1, Stage 2, and Stage 3 of the FDA's phase-out timeline, and we don't presently expect material disruptions to our service offerings. Stage 1 includes FDA medical device reporting, which will require laboratories to report certain device-related adverse events and product problems to the FDA within a specific timeframe. Stage 1 also requires labs to maintain compliant files for each test they offer and to report any corrections or removals to the agency. Stage 2 requires each laboratory to be registered with the FDA and to list their commercial tests with the agency. It also phases in device labeling requirements and certain other compliance rules. Stage 3 applies certain other quality system regulations to laboratories and their tests, with the specific requirements depending in large part on whether a currently marketed test is approved by New York State or not. These new regulations may make it more difficult for new labs to open or for new tests to be launched at existing laboratories, potentially creating a competitive moat for our company. However, there is a federal lawsuit pending against the FDA, which argues that the agency did not have the authority to announce the LDT final rule. The plaintiffs in that case are seeking to vacate the FDA's issuance of the final rule. The outcome of that lawsuit is highly uncertain, and it may change the legal and regulatory landscape for clinical laboratories. Accordingly, this is all very new and much could change. Ultimately, the effect of these regulations may not be as we currently expect. So we will continue to monitor the FDA's implementation of these new regulations and the ongoing litigation that is attempting to invalidate the final rule. In closing, we are very pleased with our progress so far this year and optimistic about the upcoming quarters. We believe with our large diverse product offering and a powerful technology platform, we are primed to continue to build on our success.

Thank you, Brandon. Revenue in the second quarter of 2024 totaled $71 million, compared to $67.9 million in the second quarter of 2023. $841,000 came from COVID-19 testing in Q2, which was not part of our guidance. Revenue from our core business totaled $70.2 million. GAAP gross margin was 37%, and on a non-GAAP basis was 40%. Gross margins continue to improve year-over-year, showing the benefit of our continued efficiencies and streamlining of our business. Total GAAP operating expenses were $45.4 million for the second quarter, compared to $43.9 million in the first quarter of 2024, primarily related to higher R&D spend. Non-GAAP operating expenses totaled $33.8 million, compared to $32.4 million in the first quarter of 2024. Non-GAAP operating margins increased approximately 5 percentage points sequentially to minus 7.4%, primarily due to higher revenue and gross margin in Q2. Adjusted EBITDA loss for the second quarter was $727,000 compared to a loss of $2.7 million in the second quarter of 2023. On a non-GAAP basis and excluding stock-based compensation expenses and intangible asset amortization, income for the quarter was $4.7 million, or a positive $0.15 per share based on a $30 million weighted average fully diluted shares outstanding. Turning to the balance sheet, we ended the second quarter with approximately $838 million in cash, cash equivalents, and marketable securities. Cash used in the period included investment and building improvements in lab equipment for our Coppell lab, which Brandon mentioned. We relocated our Texas lab in the second quarter. Now moving on to our guidance. We're reiterating our revenue outlook for 2024 with minimal revenues from COVID-19 testing expected. We're guiding to core revenues, which is total laboratory services revenue for the company without COVID-19 testing revenue. We continue to expect total core revenue to be approximately $280 million for 2024, representing core growth of 7% year-over-year. There are no revenues from our therapeutics development business anticipated in our 2024 guidance. Turning to expected margins for 2024, excluding COVID-19 revenue and stock-based compensation, we expect non-GAAP gross margins to continue to be around the high 30% range that we saw in Q2 and reach our target of 40% by the end of the year. We expect to see slightly lower non-GAAP operating margins in the quarters ahead as we further invest resources to grow our business, with an operating margin of approximately minus 16% for the year. We remain focused on managing our spend and continue to believe that our foundational technology platform supports a strong margin profile longer term. We continue to expect associated cash burn for our therapeutics development business to be about $15 million to $17 million this year, which is contemplated in our EPS and cash guidance. Based on the lower spend we achieved in the first half of the year and a more favorable tax rate forecast for the full year, we're lowering our expected GAAP EPS loss to approximately $1.95 per share, excluding any one-time charges using a 30 million average share count. Utilizing a non-GAAP tax provision, with an average share count of 30 million, we're lowering our expected full-year 2024 net non-GAAP loss to approximately $0.30 per share for shareholders, excluding stock-based compensation, amortization of intangible assets, and any one-time charges. Finally, our cash position remains strong, excluding any stock purchases or other expenditures outside the ordinary course, which could include M&A or real property purchases. We would anticipate ending 2024 with approximately $800 million of cash, cash equivalents, and investments in marketable securities. Overall, we see strength in our core business, which has grown organically, and through strategic acquisitions and see good momentum ahead.

Certainly, we'll now be conducting a question-and-answer session. Our first question is coming from David Westenberg from Piper Sandler. Your line is now live.

Hi. Thank you for taking the question and great job in the quarter. I think this one would be for Paul. I know it's really obvious right now that your cash management has been fairly terrific over the course of all your different acquisitions. With an $800 million cash balance and your proven cash discipline, is there any thought to capital allocation going back to M&A strategy? Or do you think you have maybe too many irons in the fire right now with all the different businesses and moving into more oncology tests and reproductive health and all the clinical trials coming up?

I think our cash balance is certainly sufficient to do the things that we want to do to address a wider market that we can with our capabilities. When we take a look at the efficiencies in our business, we see it combined overall with the companies that we have purchased over the last couple of years. As you remember, in 2022, our core revenues were approximately $181 million. In 2023, the core revenues were $262 million. In 2024, as of today's call, we're reiterating $280 million of our core revenues. When we look at our overall business, the momentum for our core has been very good. But I think the improvement we see in our overall operations, particularly our gross margins, is what we are very excited about. If you look at the gross margins for the business, excluding COVID, the gross margins, excluding stock-based compensation in the first quarter of 2023 was approximately 28%. Within six quarters for Q2 of 2024, even if you take out COVID, our gross margins are 39.4%. That is over 11 percentage points of improvement we have seen in gross margin. Our operating expenses have been more favorable than we anticipated. Some of that was due to better collection experience that we had within our regular business, as well as COVID. But yes, you are correct. The overall efficiencies in our business and cash management have been better than we have anticipated.

Okay, great.

Maybe, David, if I just…

I'm sorry. I'm sorry.

Sorry, David. It's Brandon. I just want to address the point. No, we don't have too many irons in the fire, to answer your question. However, we're going to be very careful with our acquisitions going forward. The management team consistently evaluates opportunities for M&A. We've done two M&As thus far, and both have worked quite well, which is not always the case with companies. If we do a third or a fourth, we want to make sure it's something we can make work. But we don't have too many irons in the fire, and we continuously evaluate opportunities.

Great. Thank you, Brandon. Just in terms of the reproductive health business, that’s a growing opportunity there. Can you talk about some of the differentiation that you have in the NIPT test? We talked about this in the EMO a couple of weeks ago, but I think it's pretty important to reiterate this. And if there are any guideline expectations, obviously not in the guide, but what's the latest there? And would you indeed benefit from both expanded carrier screening, ACOG recommendation and in addition microdeletions, particularly '22 Q, if that comes out. And just in terms of timelines for when that could come out. Thank you.

Yes. Thanks for the question. We are also hearing rumors of expanded ACOG guidelines going forward for expanded carrier screening. Certainly, that would benefit the industry. Clinically, we're there. If you look, especially on the infertility side, expanded carrier screening is standard-of-care. That is what doctors are ordering for their patients going through infertility treatments. So it would be great to see the guidelines become more aligned with practice today. Most of the biggest benefit there is that payers often fall in line with the guidelines. So we'll continue to monitor that. I know it's being worked on, and I think it will be positive for the industry regarding expanded carrier screening. In terms of our NIPT test, the main differentiator there is the ability to screen for de novo point mutations. Most NIPTs out there are screening for aneuploidies as well as microdeletions and microduplications, but they don't include de novo point mutations for these monogenic conditions. These monogenic conditions are quite serious as they cause severe disabilities and are relatively common when you group them together. So we think this novel approach over time could be something clinicians really see as added value when they think about picking an NIPT partner.

Great. And then just because I haven't asked one from Ming, I'll ask one for you. Just in terms of the head and neck opportunity, you said in the call that you have begun to start the enrollment. When would enrollment end? And then how long would the study be? Can you help us size the opportunity of head and neck cancer, particularly for FID-007? Thank you.

Okay, thank you, David. We are excited about the performance of our Phase I study of FID-007. We are doing the second phase trial for the second-line head and neck cancer patients, with expected enrollment to be in early 2026. Based on the results, we will probably move into the next phase III trial or if the results are impressive, which is around an above 50% response rate, it might have a chance to apply for the fast track of the FDA approval process. So giving that's the opportunity for head and neck cancer patients. Currently, the first-line treatment for head and neck cancer patients is immunotherapy using KEYTRUDA for treatment. Typically, the first-line treatment fails, and there is no standard second-line treatment. We see this opportunity and aim to get into this market for the second line, the treatment where there are over 50,000 patients of head and neck cancer in the U.S. alone. Globally, this number is much larger in terms of cancer patients. We are excited about the opportunity and do see tremendous potential for us to grow in that area. This is only for FID-007, and we are pushing for the next drug to enter the market with clinical studies in 2025.

Thank you, guys. That's it for me.

Okay, the next question is coming from Dan Leonard from UBS. Your line is now live.

Thank you. My first question, what changed on the expense side?

Yes. What changed on the expense side? You're talking about operating expenses. Is that correct?

Yes. That was the big change in your guidance. I'm curious what functionally happened there?

Yes. The biggest change we had was a lower G&A cost than what we anticipated, meaning that we were anticipating G&A expense for the second quarter to be approximately $25 million to $26 million. However, we had favorable collections from what we had previously reserved for, which reduced our expenses.

So it was a change on the reserve side, as opposed to headcount or anything like that?

That's right. I mean the headcount and our operating plan was about what we anticipated. But we had a reduction in G&A due to better collections. The reason we narrowed our EPS was due to that, and to a lesser extent, we had some tax benefits and credits come through the provision. But overall, we had better gross margins, as I indicated before; our revenues were slightly higher, and the efficiencies we have in running our business.

Understood. And then, Brandon, I appreciate the thorough discussion on the FDA regulation of LDTs. But you did flag the uncertainty there, and I'm curious how that uncertainty around the implementation of that regulation impacts how you manage your business.

Well, it's a good question. Thank you. For the most part, it doesn't impact us. We believe whichever way they decide to go, we're in a good position; especially benefiting from the tremendous size of our test menu. We have over 20,000 tests on our menu, which would predate the new regulations. In addition, most of our tests are New York State approved. Should they continue down their current path, we think we're in a good position. I mentioned on the call that it may create a bit of a moat around our business. If the lawsuit is successful and all this goes away, then we're back to where we were a few months ago running our business. So I think we're in a good position either way.

Appreciate that. And then just a final question. Curious how the market share picture is evolving since we last caught up. One of your big competitors was acquired, or at least the acquisition was finalized, and I'm curious if you've seen anything different in the market?

Yes, good question. A little bit, but not a lot. The competitor you mentioned was acquired, so there was minimal disruption to their business. I do think there was some, and we did pick up some market share, but it wasn't like the previous event where we picked up very significant market share in Reproductive Health testing. However, certainly, there was some instability there and some market shake-up, but not to a large degree.

Thank you. The next question is coming from Andrew Cooper from Raymond James. Your line is now live.

Hey, everybody. Thanks for the time. Maybe just first, I don't know if Brandon, maybe you're the right one to answer this. But just on NIPT, I mean, talk to us about sort of what's happening now in terms of starting to detail clinicians and kind of how you see that process playing out? When should we be thinking about potential ramp potential and further appreciation of some of the differentiation, given you said it is going to take some education to get there? So just would love your thoughts on what that pathway can look like.

Yes. Thank you, Andrew. I think it's going to take some time. This is the first novel NIPT product to hit the market in some time. So you're spot on. It is going to take significant physician and clinician education. I do think there is a powerful message behind it. The de novo point mutation for the monogenic conditions really does add a lot of clinical value, but it is going to require a lot of clinician education. Right now, we have a pretty small sales team focused on that area. So I would expect some more meaningful volume, probably not until 2025, as we really focus on the education part as well as doing some additional publication and validation studies and some expanded indications. So I'm thinking more of a meaningful volume in 2025.

Okay, helpful. Maybe shifting a little bit, just anatomic pathology. You talked about winning new accounts and some real positive things there. The business isn't necessarily growing materially though. So maybe just give us a sense, are these new account wins more recent? Or what's the moderating factor where maybe you're seeing some customers go out the door on the other side or some volume transition one way or the other to keep that business from growing a little bit better?

Yes. Well, look, it's been going the wrong direction for some time, which we've been working on. Some of that was macro factors, some of that was around contracted rates, reimbursement, and other situations. But either way, the business has been going the wrong way. We’ve addressed most of those. The biggest thing we’ve done is made sure we adhered to our turnaround time at the lab, which we've done. We maintained our turnaround time even moving during the move we did in the second quarter. We've also revamped the sales team. We restructured the sales team and comp plans to align with our corporate objectives. We've tackled this from different angles, and we are seeing it pay off. I know this quarter wasn't much growth, but it was some. We think the business has been stabilized, and when we look at the sales pipeline and the recent wins, the very recent wins, the sales team is finding bigger deals. So I think the back half of the year for anatomic pathology should continue to have some good momentum.

Perfect. That's super helpful. And then maybe for Paul, we've seen you guys active in terms of buybacks in some recent quarters. I'd love to hear your thoughts on that, given not executing on M&A, having a great cash balance and doing well from that cash management side of things, maybe how you think about potential deployment of that capital, whether for more repurchases again or elsewhere.

Yes. As you remember, we have a $250 million stock buyback program. To date, we bought back about $100 million, so there's $150 million left. We do see buyback as an option for the usage of our cash. There are times when we can buy and times when we can't buy. We've shown in the past that we deployed that cash in making two significant acquisitions, CSI and InformDx. The operational results show we have had tremendous success in integrating and creating value from those acquisitions, which are being reflected in our overall results. We believe the best way to return value to shareholders and an ROI is to continue to invest in this market and to expand our business.

I think Dan, adding the point that Paul mentioned, we are actively looking for targets for M&A. However, taking a look at what we did for those two transactions, Inform Diagnostics and CSI laboratory services, it's not just the money spent for the acquisition. It's also about the time and reinvestment to integrate those businesses. We've spent about close to $220 million to acquire those two businesses. We also invested more than $60 million in cash to integrate and streamline those businesses. We see those acquisitions as very strategic moves that enhance our capability to grow our Precision Diagnostics business. These results demonstrate our progress in becoming a major player in the Reproductive Health area. We continue to execute our strategy and are looking for opportunities for M&A as well as for our internal development, and that's how we will spend our cash.

Great, I'll stop there. Thanks again.

Thanks, Andrew.

Thank you. We've reached the end of our question-and-answer session. That concludes today's teleconference and webcast. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.