For investors of Temple City-based Fulgent Genetics Inc., the wind down from the Covid-induced high has finally come – and it’s meant very rough times so far this year.
The genetic and diagnostic testing company has seen its share price drop more than 60% from about $100 a share at the end of last year to $37.36 on Oct. 10 – a plunge roughly double the size of the 31% drop in the broader Nasdaq exchange over the same stretch.
The culprit: a steep drop in Covid-19 testing revenue as the acute phase of the pandemic has eased. Testing volume dropped nearly 20% in the second quarter to 1.3 million compared to the same quarter last year – nearly all of that due to less demand for Covid-19 tests.
And while Fulgent executives have been implementing a diversification strategy, growth in non-Covid testing revenue – including its pre-Covid testing lines and new cancer-screening tests – has not kept pace in dollar terms with this decline.
“One big line of business has been decelerating rapidly, while another line of business is accelerating, but not as rapidly,” said David Nierengarten, managing director of equity research specializing in health care for downtown-based Wedbush Securities Inc. “For investors, figuring out where these trend lines meet is tough to guess, which creates uncertainty.”
Combine this uncertainty with what Nierengarten termed a year-long meltdown in biotech and life sciences stocks, and the result is the plunge in Fulgent stock.
Rapid Rise
For Fulgent investors, this is the flip side of the company’s extremely rapid growth since the pandemic began. In 2019, before the SARS-CoV-2 virus hit the U.S., Fulgent was a small genetic-testing company with about $30 million in annual revenue. The company had just unveiled a home-based testing line and was hoping for steady growth. And investors were only beginning to take note of the company, sending the share price above the $15 threshold for the first time ever in November 2019.
But then the pandemic hit, and by May 2020 Fulgent pivoted to Covid testing, winning huge-volume test contracts with public agencies such as Los Angeles County and the New York City public school system. To handle the surge in test volume, Fulgent opened a second testing lab in Houston in late summer 2020 and also purchased other testing labs.
With these new and additional labs processing hundreds of thousands of tests per quarter, billable test volume skyrocketed from just under 60,000 in 2019 to nearly 10 million in 2021. And Fulgent’s 2021 revenue soared to $992 million, a 30-fold increase over 2019.
Fulgent found itself with lots of cash on hand – by early this year the cash pile had grown to more than $900 million. The company has used some of this cash to purchase other testing companies and labs. One of the more recent acquisitions came in April with the purchase of Irving, Texas-based Inform Diagnostics Inc. from New York private equity firm Avista Capital Partners for $170 million in cash.
That purchase was one of the key cornerstones of Fulgent’s post-Covid strategy, according to Brandon Perthuis, the company’s chief commercial officer.
Perthuis said the purchase enables Fulgent to market neurogenetics test kits to the former’s client base – the first of several “cross-selling opportunities.”
Fulgent earlier this year also launched an oncology division offering a suite of specialty testing products.
Rising Test Costs
But there’s a catch to all these new tests, one that may be turning off some investors in the short run. These tests bring with them higher costs, which in turn means lower operating margins than what investors have grown accustomed to in recent quarters.
Fulgent’s chief financial officer, Paul Kim, spelled some of this out during the second-quarter earnings teleconference call.
Kim noted that the processing and analysis cost per test in the second quarter was $45, nearly double the $24 cost in the first quarter, “due to largely shifting mix away from Covid testing to more of our core testing, including testing from Inform Diagnostics.”
He added that the cost per test in the company’s core, non-Covid testing portfolio generally runs above $200.
And this has a direct bearing on margins. Because of the incredibly low cost per Covid test, Fulgent’s gross operating margin soared to about 75% last year, which yielded lots of extra cash. Even with the Inform Diagnostics purchase, Fulgent still has approximately $930 million in cash and equivalents on hand, a very strong position considering that just three years ago Fulgent’s revenue was only $30 million.
But now, Kim said, gross margins are returning to the pre-pandemic norm of about 50%.
Uncertain Outlook
Looking forward, analyst Nierengarten said a key unknown is where billable Covid testing volume will ultimately settle out for Fulgent as the coronavirus pandemic moves from the acute phase to a more endemic status with periodic surges. That could determine how low revenue will go until the growing non-Covid revenue kicks in, he said.
“That’s why no matter how clearly the post-Covid strategy is communicated, there’s still a lot of guesswork for investors,” he said.
But another analyst said investors are not fully considering how much Fulgent’s large cash stockpile will help the company get through this transition.
“We think investors underestimate how strong of a position Fulgent is in with now more than $900 million in cash,” David Westenberg, senior research analyst with Minneapolis, Minnesota-based Piper Sandler & Co., said in an August research note.
