Before the coronavirus pandemic, investors would've been forgiven for overlooking Fulgent Genetics (FLGT).
For 2019 the business delivered only $32 million of revenue and an operating result showing a loss but near breakeven. The genetic-testing company entered 2020 with just $28 million in cash on the balance sheet.
But when the pandemic struck, the business quickly pivoted – and it worked out marvelously.
Fulgent Genetics dedicated resources and spare capacity to coronavirus testing, which helped it secure lucrative government contracts.
The Temple City, Calif., company reported $385 million from pandemic testing efforts in 2020 and another $870 million in 2021.
The pandemic may be fading as vaccines and less-lethal virus strains emerge, but Fulgent still expects to generate $480 million from coronavirus testing in 2022.
Now, ...
The financial boost was never going to last forever and it'll fade even more in 2023.
But Fulgent Genetics wisely positioned itself to benefit from the public-health crisis and pad the balance sheet.
Can it turn those riches into more durable gains for the core genetic-testing segment?
Growing Core Revenue Won't Be Easy
Fading revenue from coronavirus testing will refocus investors on core revenue. It's no slam dunk.
Initial full-year 2022 revenue guidance called for $120 million of core revenue, which would have been a 2.4% decline from 2021 revenue of $123 million for the segment.
Although Fulgent Genetics now expects core revenue to eclipse $185 million for the year, almost all the increase can be attributed to a February 2022 acquisition. That's not a bad thing. After all, the business has an excess of cash and cash flow from coronavirus testing that can be put to more productive uses, including M&A.
But it also exposes the difficulty of growing genetic-testing revenue in the current environment.
Standing Out on a Key Metric
The competitive landscape hammers home that point. Many peers have announced strategic overhauls, reduced guidance, or both.
- Invitae (NVTA) initially expected full-year 2022 revenue of $640 million. It now expects sales of $520 million.
- Both Invitae and Sema4 (SMFR) have laid off at least 30% of their employees this year.
- 23andMe (ME) expects full-year fiscal 2023 revenue of $270 million at the midpoint, a less than 1% drop from fiscal 2022 revenue of $272 million.
Fulgent Genetics stands out on one key metric: gross margin.
The business resisted the growth-at-all-costs business model that has trapped peers in recent years and instead focused on operating efficiency. In 2019, the last full year before the pandemic, the business delivered a gross margin of 56.6% -- well ahead of peers at the time.
The 2022 operating environment is much more challenging. Fulgent Genetics reported gross margin of 52% for Q2, which included $45 million of core revenue and $80 million in higher-margin coronavirus-testing revenue.
The silver lining is that peers are lagging even this figure. 23andMe delivered gross margin of 39.5% in first-half 2022, while Invitae's figure sank to 20% and Sema4 coughed up a gross margin of negative 26% in the same period.
Growth Tailwinds
In the face of narrowing margins across the sector, Fulgent Genetics has a few tailwinds supporting its post-pandemic push.
The business is diving into growth opportunities with a much healthier balance sheet than that of peers. That could help the business capture market share from retreating rivals in hereditary cancer screening, liquid biopsy, and reproductive health markets.
Nonetheless, gains will still be hard to come by. The markets Fulgent targets are mostly commoditized by now, which suggests margin pressures are likely to continue. That could pose a problem for the core genetic testing business, which is still dwarfed by Invitae, Sema4, and 23andMe.
Fulgent has healthier margins than those in the competitive landscape, but it may lack the scale required to fully take advantage of weakness from peers.
For now, investors should take a wait-and-see approach to the commoditized genetic-testing landscape, including Fulgent.
Hereditary cancer screening is hardly novel in 2022, while more lucrative markets such as liquid biopsy are likely to be dominated by larger peers.
Fulgent Genetics is better positioned than many, but at least for now, that's not saying much.
