Ladies and gentlemen, welcome to the Q1 2020 Fulgent Genetics Earnings Conference Call. At this time, all participants are on a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. If anyone should require assistance during the conference, please press star zero on your touch tone telephone. As a reminder, this call is being recorded. I would now like to hand the conference over to your host today, Ms. Nicole Borsje with Investor Relations. Please go ahead.
Great, thanks. Good afternoon and welcome to the Fulgent Genetics first quarter 2020 financial results conference call. On the call today, we have Ming Hsieh, Chief Executive Officer, Paul Kim, Chief Financial 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 our current views and assumptions, which may prove to be incorrect.
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 events, including the company's actual future results, may be materially different in 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 these forward-looking statements contained in the company's filings with the Securities and Exchange Commission, including the previously filed 10-K for the full year 2019, which is 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 presented these 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 first quarter of 2020 for more information, including the description of how the company calculates non-GAAP earnings and earnings per share, and a reconciliation of these financial metrics to income and income per share, the most directly comparable GAAP financial measures. With that, I'd now like to turn the call over to Ming. Ming?
Thank you, Nicole. Good afternoon, thank you for joining our call today to discuss our first quarter 2020 results. I will review the highlights from our first quarter before handing over to our Chief Commercial Officer, Brandon Perthuis, to provide updates on our go-to-market strategy. Finally, Paul will discuss our financial results and our outlook in detail. While we had a good start to the year, the global proliferation of the novel coronavirus has had a meaningful impact on our business, both in terms of demands of our core testing business as well as on our operations. Specifically, due to early decisive action we took to recover our company to address the large market need for testing solutions amid this pandemic.
As we discussed briefly on our last earnings call, we were quickly to pivot our resources to focus on development and the launch of testing solutions for COVID-19 in the first quarter. First, I will provide a quick update on our results for the first quarter. Revenue was in line with our expectations for the first quarter, growing 44% year-over-year to $7.8 million. Billable tests increased 75% year-over-year to 13,163. Our ASP was $589, essentially flat with what we saw in Q4. Cost per test increased 18% from Q4. Non-GAAP gross margins in the first quarter was 51%, up approximately 300 basis points from the first quarter last year, down approximately eight percentage points sequentially.
The sequential decline in gross margin was due to both tax mix along with investment and expenses related to roll out of our COVID-19 tests. Adjusted EBITDA loss was $506,000 in the first quarter. Before I get into the impact of COVID-19, I want to spend a few minutes discussing what we saw across our core business. You can imagine, we saw a significant slowdown in test volume activity beginning in March. States began to institute shelter-in-place mandates, the non-essential testing for traditional genetic testing materially decreased. During January and February, our oncology, reproductive health, and pediatric business continued to drive the majority of the earning we saw. Our customer base continued to diversify as we added more core customers and saw strength across all segments of our business before experiencing a slowdown in March.
As you all know, the coronavirus has caused significant disruption in our everyday life, which has impacted businesses around the world in various ways. I would like to discuss the virus has impacted our business operations, as well as how we plan to capture shares in the market for COVID-19 testing solutions to drive incremental revenue. First, from the operations standpoint, our lab in Temple City continue to operate and process samples under strict health and safety precautions. Due to our lab offering virus screening products for COVID-19, it qualifies as essential business under California's shelter-in-place mandates, we have been able to operate normally without any disruption. In fact, we expanded our lab capacity during this crisis and invested in resources to achieve biosafety certifications required to handle COVID-19 tests.
Because of this investment, we are able to offer end-to-end tests for COVID-19, which is largely appealing to our customers. Outside the lab, our employees have been operating remotely, coming into the office on as an needed basis with minimum disruption. We are thankful to our employees, both in the lab and at home, who have continued to support our operations around the clock during these challenging times. From a product development standpoint, we have been working on a number of different initiatives since the virus began to spread in February. Our goal has been to develop quick, quality tests that are readily available and accessible to both healthcare providers and individuals to help alleviate the shortage we have seen in testing capacities in the overall market. We announced and launched two distinct tests for COVID-19.
One of our tests is based on RT-PCR technology, which is the most common approach for COVID-19 tests in the market today. Launched in early April, this test offers the most rapid turnaround time, given their more limited targeting of two distinct regions with the COVID-19. In March, we also launched a test based on the next generation sequencing technology, which used a more comprehensive laboratory and computation method to detect the virus that cause COVID-19. While the complexity of this NGS test based on results in a longer turnaround time, we believe this test can be utilized to collect data which can be used by research institutes to learn more about the nature of the virus, and potentially in the development of vaccine or treatment options.
In addition, the NGS base test is not limited by the need for reagents, which has been difficult to source due to the overwhelming market demand. In addition to the two tests we have launched for healthcare providers, we also have been working on an at-home test kit for COVID-19 through our consumer initiative genetic testing platform, Picture Genetics. Brandon will talk more about this momentarily. I am very pleased with our ability to develop and launch this test in such a short amount of time, given the resources required and the relative size of our organization.
Over the years, we have talked a lot about our flexible technology platform and how to enable us to offer one of the broadest genetic test menus in the market. Our ability to develop this test for COVID-19 is a testament to the fact that our technology is truly differentiated, and the platform we have built has enabled us to pivot quickly to offer a wide range of testing solutions with a minimum incremental overhead. Paul will discuss the financial impact of COVID-19 in more detail. On a high level, the investment we made in this quarter in developing tests for COVID-19 resulted in incremental spending of approximately $1 million. In addition, it cost our business, including the procurement of supplies, which is still difficult to source.
We are confident that we will see a strong return on this investment, which will be beneficial to our business in the long term. While the circumstances around COVID-19 are unfortunate, and our heart goes to those who have been impacted, we believe our response to the need for the testing has demonstrated how Fulgent platform and technology is truly differentiated from the others in the market. We'll look ahead to the rest of this year. We'll continue to focus on offering accessible testing solutions for COVID-19 products without losing focus on our core business opportunities, which we hope will pick up as we continue to believe that the long-term need for genetic testing. On the flip side, we also believe our capacity will be greater and addressable market to be larger than before this pandemic.
With that, I would like to turn the call over to Brandon Perthuis to provide an update on our go-to-market initiative, including insight on the demand we are seeing for our COVID-19 test. Brandon?
Thanks, Ming. As Ming mentioned, our hearts go out to everyone who has been impacted by the COVID-19 pandemic, and we hope to all emerge from this stronger than we were before. I would like to take a few minutes to discuss our core business and our new test for COVID-19, which are uniquely meeting the needs of various organizations. During the quarter, we made testing for our core business more accessible with online ordering for our rare disease, oncology, and reproductive health clients. By adding these capabilities to our fully operational laboratory, we continue to deliver high-quality results to customers with no negative impact on turnaround time. sequencing as a service had a strong quarter and continues to be a growth area for our company as we expand our reach with biopharma and contract research organizations.
During this difficult time, we remain committed to delivering the same high-quality services that our customers have come to expect from Fulgent. Turning to COVID-19, as Ming mentioned, we launched two tests for COVID-19, NGS and RT-PCR. We have seen demand from hospital systems, clinics, large corporations, and other healthcare providers for clinical testing via RT-PCR. In addition, we are seeing interest for our next generation sequencing test as researchers turn to sequencing the genome of SARS-CoV-2. Many of these organizations are new clients to Fulgent, and it's likely these newly formed relationships will expand to other services we provide in the future. Operationally, we have added an additional shift at our laboratory and are now fully operational seven days a week. This has increased our capacity for COVID-19 testing, and we are now processing thousands of tests per day.
We continue to see a significant need for our services, but perhaps more importantly, we continue to receive outstanding feedback from our clients. Our turnaround time on COVID-19 tests has averaged less than 24 hours, which has been critical to our success, as we have received feedback that many labs are taking two to three days to deliver results, with some labs taking as long as five to seven days. The custom portal we built for COVID-19 makes results accessible to healthcare providers across a variety of platforms and makes it easy for them to differentiate between detected, not detected, or indeterminate results. This portal has also helped with the necessary reporting as mandated by local and state organizations. Healthcare providers have been extremely pleased with this new portal and our overall service.
One notable example of a new customer relationship stemming from our COVID-19 testing solutions is with a nationwide network of specialty care clinics. This customer is leveraging our COVID-19 testing solutions across its more than 2,000 locations to screen patients who need to be seen at these clinics for other chronic care. Our rapid turnaround time and the ease of our platform are the primary reasons we won this business over others we competed against. Moving forward, our commercial team continues to be focused on making our COVID-19 test readily available to patients, and we expect to see continued demand as the need for testing associated with reopening the country is likely to be elevated for some period of time. In addition to serving hospitals and clinics with our COVID-19 test, we recently submitted an emergency use authorization to the FDA for our at-home COVID-19 test, Picture by Fulgent.
As a reminder, Picture Genetics is our consumer-initiated platform which we launched in 2019. These COVID-19 test kits would be offered through our Picture Genetics website and would be available to individuals who screen as eligible through an online portal. Individuals would receive results back within a matter of days. We believe our at-home test can play a major role in fighting this virus. Conducting the test collection at home conserves valuable time and PPE resources that clinicians would otherwise require to perform these tests on patients. The price for this service will include bi-directional shipping and a telehealth component. Many patients will be able to file this to their health insurance, which should reimburse for most of the cost of the test, according to the new CMS fee schedule for high throughput COVID-19 testing.
We are in the early stages of our go-to-market strategy for this service, but we intend to dedicate significant resources to letting consumers know this test is available. Given the uncertainty around FDA response, we cannot offer much more insight into the impact of this at-home test at the moment, but we will communicate any notable update as appropriate. Though the progress we made as a company related to COVID-19 has been considerable, we also look forward to our non-COVID-19 business picking back up as lockdowns across the country slowly begin to be lifted. I'll now turn the call over to Paul to provide the details on our financial performance in the first quarter, as well as provide an update on our outlook. Paul?
Thank you, Brandon. First quarter revenues totaled $7.8 million, an increase of 44% compared to the first quarter of 2019. Our U.S. business remains the most significant driver of our momentum. Revenue from the U.S. grew 56% year-over-year in the first quarter, representing 73% of revenues during the quarter. As Ming indicated, our business continued to diversify. We did not, during this quarter, have a single customer who comprised more than 10% of revenue. Billable tests in the quarter totaled 13,163, growing 75% organically over Q1 of last year. The vast amount of this volume was from our core business and unrelated to COVID-19, although we did start to see some of this volume come in at the very last week of the quarter. Subsequent to March 31st, the COVID volume has been tremendous.
Our ASP in the first quarter was $589, essentially flat with the fourth quarter. Cost per test for the quarter was $308 on a GAAP basis and $291 excluding equity-based compensation of $231,000. Our non-GAAP gross margin improved approximately 300 basis points year-over-year to 51%, but declined approximately eight percentage points sequentially. There were two primary reasons for the increase in cost per test and lower gross margin this quarter. First was the higher cost of procuring reagents and supplies and kits related to the mix of tests, including specifically the COVID-19 test. The second was the increased personnel costs related to the expansion of our lab capabilities, also to address the demand for COVID-19 offerings. Now turning to operating expenses.
As Ming indicated, we made significant investments in the development of tests for COVID-19, which amounted to approximately $1 million in total costs across all areas, including COGS of our business. We saw non-GAAP operating margin decline approximately 19 percentage points sequentially to negative 13%. These incremental expenses were distributed across our cost of revenues, R&D, sales and marketing, as well as G&A, with a somewhat outportioned size to R&D and COGS. Our GAAP operating expenses were $5.6 million for the first quarter, up from $5.2 million in the fourth quarter. Non-GAAP operating expenses totaled $4.9 million, up from $4.4 million last quarter. We believe that we'll see a strong ROI from the investments we made in our COVID-19 test offerings almost immediately. We believe these investments are extremely beneficial to our business in the longer term.
Adjusted EBITDA loss for the first quarter was $506,000, compared to $712,000 in the first quarter of 2019. On a non-GAAP basis and excluding equity-based compensation expense, loss for the quarter was $749,000, or $0.03 per share, based on 21.6 million weighted average common shares outstanding. Turning over to the balance sheet, we remain very comfortable with our current cash and liquidity position. We ended the first quarter with $70.6 million in cash and marketable securities with no debt. As indicated in our press release, we generated cash flow from operations in the quarter of $1.4 million. Moving on to our outlook.
Given the uncertainty we're seeing in the broader market, including the slowdown in demand for our core testing business, coupled with the volatility associated with test volumes for COVID-19, we feel that it is prudent to withdraw the full year 2020 outlook as we previously provided.
However, as it relates to the second quarter, we expect revenues to be flat to slightly down compared with the first quarter. There are a few variables we're taking into account when evaluating our overall guidance, including our guidance for Q2, including how much revenue we could generate from sales of our COVID-19 tests, balanced with the weakness we're currently seeing in the traditional genetic testings market. While we have already seen very healthy demand for our COVID-19 test offerings, it has only been about a month since our launch. In addition, pricing on these tests is lower than what we usually see from our core test offerings, causing a drag to our ASP. Having all that said, the volume is ramping exponentially and the reception to our tests have been overwhelming since our launch in April.
To keep up with the enormous volume, we're hiring employees throughout all departments of our company. We're also maintaining positive growth margins on these tests, which should expand further as we scale. It is too early to gauge what the incremental revenue contribution would be, and we're not in a position to be able to offer revenue guidance for full year 2020, given the very short history of these dynamics. While the start to our year was unlike anything we could have planned, the opportunity for us is promising as we look to provide testing solutions for COVID-19 amid these uncertain and unprecedented times. We feel that our technology platform and our differentiated approach to genetic testing, combined with our strong capital structure and business discipline, have positioned us well to sustain and grow our business.
We also believe that our capabilities as an organization will be stronger now that we can address larger screening markets on top of genetic testing. Thank you again for joining our call today. Operator, you can open it up for questions.
Ladies and gentlemen, if you have a question at this time, please press star, then the number one key on your touch tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Our first question comes from the line of Erin Wright with Credit Suisse. Please go ahead.
Great, thanks. Can you speak to the nature and magnitude of the volume dynamics that you were seeing, particularly at the end of March for the core business or the non-COVID-19 business? Obviously, some of the COVID-19 testing is helping to offset that. I guess, I'm trying to think about how we should think about any sort of recovery and sort of the magnitude of that trajectory over the course of March and into April. Thanks.
Sure. Hi, Erin. This is Paul. I think that a lot of people have seen that for traditional laboratory testing, including genetic testing, that the drop off from the traditional business related to the environment of COVID-19 has been anywhere from, say, 25% to 30% down to 50% for some businesses. I would say ours is on the lighter side rather than a scenario such like 50%.
Okay. That's helpful. How should we think about some of the volume coming back? Like how quickly can some of the volume realistically come back given the test mix dynamics that you're seeing?
Sure. Brandon, do you want to address that one?
Yeah, sure. Hey, Erin. Brandon here. It's a great question. I think it's difficult for us to answer that. I mean, we're certainly seeing the country begin to reopen. We're seeing some of these stay-at-home orders be lifted. We expect there to be a backlog of patients that will need access to testing. The drop off in volume doesn't mean less patients that need to be tested. It just means these patients didn't have access to testing. As these hospitals reopen for other than emergency care and critical surgeries, as people get access to their clinics and to their physicians, we expect the patients that were not tested during this time will still need the types of products and services we have.
The timing of that obviously is hard to predict, and it depends on how fast we can open the country back up.
Certainly, we think that there will be a bit of digestion on this backlog as time moves on.
Okay, great. Then on the specialty care clinic, can you speak to how big that win is for you? Does that relationship span the entire offering? Or how can you expand sort of that relationship? It sounds like a good win for you. Thanks.
Brandon, do you want to address that one?
Yeah, sure. Thanks, Erin. Brandon again. It was absolutely a significant win for our company. It was competitive. We won the business based on our turnaround time, our service, our portal, the things that make a difference when it comes to these tests. Currently, it is exclusive to COVID-19 testing, but I think this relationship has a lot of potential to expand into other services Fulgent provides.
Okay, great. Just one more. You said revenue in the second quarter to be flat to slightly down. Does that assume a continuation of the trends you're currently seeing or any sort of improvement? It does include both your COVID-19 testing capabilities and offering as well as the dynamics you're seeing across the core testing market. Thanks.
Erin, this is Paul. We also want to be prudent about guiding to any kind of a number, because, I think, we're one of the few companies that are actually speaking about this immediate quarter. I think the difficulty for us in trying to gauge where Q2 might come in isn't the standing part of our genetic testing business. We actually feel very good about that, and there is a backlog, as Brandon has mentioned. Nor is it related to our optimism and what we're seeing in terms of demand and volumes, related to COVID-19. I think it's just a short period of time that we've had. As we indicated, we launched one test towards the second half of March, the other one on April 9th.
It's really been about a month, a little less than a month for the RT-PCR test since our launch. The growth, and the reception that we've had just within three to four weeks, has been overwhelming and it's been growing exponentially. Trying to assess what the volatility and the trajectories would be, within the short period of time that we have been offering the COVID test, it's difficult to try and project that into any kind of prudent guidance, even if we're talking about the second quarter.
Okay, great. That's helpful. Thank you.
Your next question is from the line of Steven Mah with Piper Sandler. Please go ahead.
Hey, guys. Hey, Ming. Hey, Paul, Brandon. How are you doing?
Hi, Steve.
Hey. Well, great. Thanks for taking the call and questions. One follow-on question to Erin, and then I'm going to ask some coronavirus questions. On the Q1, what run rate on volume were you tracking, without coronavirus impact? Just trying to get sort of an estimate on the potential backlog you guys have.
Yeah. If you take a look at the composition of $7.8 million that we achieved in the first quarter, the vast majority, more than the vast majority, I might even use the word virtually, of our revenues came from the orders that we received in back half of December, January and February. We saw the drop-off happen, starting in March, and then it precipitated to go lower. Giving you a little bit more information, after it went lower, it essentially leveled out during the month of April.
Okay. That's helpful. Moving on to coronavirus. I know you guys have said that its adoption rate is pretty substantial right now, and you guys are hiring to meet that demand. Maybe can you give us a little bit of color on your capacity for this COVID-19 testing? What is the split between the RT-PCR version and the NGS version?
Hi, Steve. This is Ming. I'll probably address the first part then let Brandon address the second part. In terms of the lab capacity, currently we are able to process up to 5,000 per day, and we're looking forward to expand to up to 10,000 at the end of the quarter. It really depends on the demand from the market. Currently, probably as you may know, there's a lot of shortages, in terms of the collection kits, reagent equipment. We're balancing those kind of demands now. As we've seen the demands kicking in, we're adding the capacity gradually. We do have the capability to adding up to that per day, 10,000 per day. We are also running the three shifts, to make sure we have been shifted some of our operations, for some of the personnel.
They are lacking in some of the traditional genetic business and convert them to run the COVID-19 related business in the RT-PCR and the NGS. In terms of NGS, really it is, in terms of speed, is much slower than the RT-PCR, also it costs a lot more. The benefit we have is from we're dealing with research institutions and the pharmas, they are very much looking forward to know more and deeper about this virus. I think this for in terms of the comparison, we see about a 10 to one ratio in terms of the test. For those tests, we see all the positives, or for some of the tests is inconclusive, we have NGS method for the confirmation.
Also give us a lot better to understand how does this virus develop or mutate. Brandon, you want to cover some more?
Sure, Ming. I think you did a good job there. Steven, thanks for the question. A vast majority of the clinical testing we're doing is RT-PCR, mostly because of turnaround time. As Ming mentioned, it's difficult to turn-
Right
NGS around faster than two or three days. We believe this test to adequately fight this virus needs to be delivered within 24 hours. The majority of our clinical testing is RT-PCR, but we are seeing requests and demands from organizations doing research that want to sequence the genome. We do see some requests for our NGS test as well. The NGS test could absolutely be used as a clinical test. Again, it's just a little bit slower, should we ever have any supply chain issues or any disruption, we would be able to reflex the NGS as necessary.
Right. Maybe a follow-up question. Yeah, it looks like the NGS version is more of a research use used for academic institution, academic labs, biopharma for vaccines, therapies, strain identification, mutation tracking. Is that revenue going to be put in the testing revenue, or should we consider that more as a sequencing as a service business?
It'll still be in testing revenue as an NGS test.
Okay
we would label it as an NGS test, just like our NGS test for genetic testing.
Okay. Got it. Yeah, my final COVID-19 question. The at-home test, should we think about that as just a home sampling device that gets sent back to you for testing? It's not an actually point-of-care device, right?
Brandon, do you want to take that?
Yes, Stephen, that's correct. It is an at-home collection. We would mail the kit to the patient's home. The CDC has authorized now some more simple collection that patients can do themselves. The mid-turbinate nasal swab is easy to self-administer, so the test would be collected at the patient's home, put in our kit, and then mailed to Fulgent, and the laboratory processing would happen at Fulgent. They would have results back within approximately 24 hours.
To add to Brandon's point, the last one, Steven, we are also evaluating several different technologies, which is considered as at-home test for the virus test, self-test, as well as the IgG, IgM serologic test.
Okay. All right. Thank you so much.
Thank you, Steve.
We have no further questions at this time.
Nicole, back to you.
Great. Thanks everyone for joining us on the call today, and feel free to reach out if you have any additional questions. Thanks.
Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and have a wonderful day. You may all disconnect.