All right. Good morning, everyone. I'm David Westenberg. I cover the life science tools and diagnostics here at Piper. Our next is a fireside chat with Fulgent. Joining me is CEO Ming Hsieh, CFO Paul Kim, and COO Brandon Perthuis. Let's just start off here with you're having a very nice year. I believe you beat revenues every single quarter and have been able to raise guidance every single year. What's kind of broke right in the right place this year?
Yeah, sure. Thank you for the question, David. Welcome, everyone. Yes, we have posted and beat our revenue guidance for the past several years. As a result of that, the laboratory services business is essentially break-even. The thing that we want to stress is what's actually driving those numbers. That has to do with their capabilities, launch of new tests, as well as customer traction. I'll turn it over to Brandon, who can color those items in for us.
Yeah, certainly. Thanks, Paul. Thanks for having us today. I think I want to point out that the last couple of years, with the growth that we've had, it's all been organic. It's been over two years since we've done any acquisition. So the numbers we've posted have been us executing on our strategy. We've expanded our sales team. We've expanded our capabilities. We've had contributions from the acquisitions we have done, which I think speaks well to how we've been able to integrate those assets and improve those assets. We break our business down into three business areas: precision diagnostics, anatomic pathology, and biopharma services. For this year, all three have performed very well. In precision diagnostics, our rare disease business is doing well. Our reproductive health business is doing incredibly well with expanded carrier screening.
I think a lot of things have gone right for us this year. It's been just I think the team's done an excellent job executing the plan and our go-to-market strategy.
Perfect.
I think this is for adding Paul and Brandon's comments. I think this will also be where patient dealing with the fundamentals, consistently working on the technology while also building our bottom line. You could see for the last few years, we consistently increased our gross margin profile and continually increased our efficiency. The R&D and technology played a major role for our growth.
Good. Can you talk about the long-term revenue growth target in the core genetic testing business? What are the specific segments that you expect to contribute to the growth in that core genetic testing business?
We have not given out any long-term guidance. I mean, certainly, we expect to outpace the market, so to speak. I mean, all three of our business areas are growing significantly. I think we have had double-digit growth for a few quarters in a row. Again, all organic growth. Now, a lot of that has been a result of our R&D investments and the product launches I have mentioned and some of the expansion in the sales team. It is kind of hard to pick out, over the next several years, a particular area that might outpace others. We have 22,000 tests on the menu at this point, broken down into a variety of different health care segments. I suppose if you held me to it, I would probably say reproductive health will continue to do incredibly well for us.
I think our beak in expanded carrier screening has made a great brand for itself in the marketplace and really become one of the go-to expanded carrier screens in terms of quality, the number of genes, the coverage, the content, and especially the turnaround time. I think reproductive health is going to continue to do well for us. The investments we've made in rare disease, I think with our new whole genome test, our new ultra-rapid whole genome test, bundling RNA transcriptomics with our whole genome and whole exome, I think our rare disease business is really primed to do well over the next couple of years.
I think an empirical evidence on how fast we've been able to organically grow the laboratory services business is if you take a look at our ending revenues before COVID. The ending revenues before COVID was approximately $30 million. During the COVID era, we made two laboratory services acquisitions. If you take a look at what we actually acquired and then add in the $30 million and compare that to the current guidance of $325 million, it's almost doubled. Within a span of several years, three, four years, we've been able to organically close to double the laboratory services revenues as a result of our capabilities and the things that we talked about. Yes, we believe that we've been able to grow faster than the market.
Good. Yeah, no, that's helpful. Historically speaking, Fulgent hasn't used a lot of cash. You talked about Brandon laid out investments in R&D and Salesforce. Again, you've been at cash flow break-even. How do you keep the costs so low in the lab service business?
Great question. I think you have to go back to how the company was founded, to be honest with you. I mean, we're a genetic testing laboratory that was founded by a bunch of engineers. And we've engineered every aspect of a genetic testing laboratory. My whole career of 25 years has been in genetic testing. So I've seen every way to do this. I've never seen a lab that's this highly engineered. Not to say we don't have plenty of geneticists and medical expertise, but the engineering that's behind the scenes at this company is spectacular. I mean, we focus on shaving off minutes here and there, shaving off seconds here and there. The amount of automation, robotics, and now AI is all playing big dividends for us.
When I say we're a company founded by engineers, all of our databases, our algorithms, our variant calling tools, our entire LIMS system, we built all that from the ground up. We don't have to lean on external vendors if we want a new feature. We don't have to lean on external vendors if we need to make an improvement. All those engineers sit next door to Ming in his office. We just knock on their door and say, we want to make this better. I think it's just a very highly engineered laboratory, and that's paying dividends as it relates to our cost structure.
Technology, the additional scale that we have in our process has worked very well in terms of that translating into our financials and more specifically the gross margins that Ming indicated. Like a couple of years ago, or seven or eight quarters ago, our gross margins were in the mid to high 20% range. In the last quarter, we posted gross margins in excess of 44%. I think the future looks potentially even brighter because we believe that we will continue to get additional plus scale, additional volumes organically with our capabilities. As Brandon and Ming, they have alluded to, we're not done with technology. There are newer technologies that we're working on right now that can further enhance our financial profile.
Yeah. You might notice, though, we received quite a bit of reimbursement from the digital pathology, the reimbursement. We used to use an outside vendor to process some of our images. Those processes gave us tremendous difficulty to add the technology insertion. That whole piece of technology, it took us about one year. Inside, we spent hundreds of millions of dollars to buy that technology. We did it in-house. We did spend quite a bit of money in R&D, but we are just efficient. Fortunately, we did not burn enough money.
Maybe you can talk about the opposite. I mean, on a go-forward basis, because you've been very disciplined over the number of years, you have accumulated a pretty big cash reserve. Can you talk about using that cash reserve, whether it be in M&A targets or R&D investments or, at this point, maybe even some share purchases? I guess that's a Paul, right?
Definitely, the strategic acquisition is all on the radar. We are working on it diligently in that area. You will see us spend money to expand into that territory by broadening our market approach, reach to expand our Salesforce and approach to the customers. You will see that we went through a lot of the companies, but you will see where we execute that strategy in terms of buyback and properly cover something.
Yeah. I mean, we've done all those things that you mentioned. We already bought back over $100 million of our stock today. We have room in the stock buyback. We made investments organically. We've also bought several companies with that cash. We have cash left. I think the good news is the laboratory services business, based on the fact that it's gone from a loss to a break-even, will probably generate cash here in the very short future. All these options are open to us. I think our point is to expand our footprint, be even a more relevant player out there in the genetic testings market. We are very, very inquisitive about acquisitions. We believe that we'll continue to be active right in that area.
I'll just add one thing. I mean, I think you see the balance sheet, and we have almost $800 million in cash. So it's like, oh, they haven't spent much. Well, we have spent. And we spent a lot on operations as well. And we built a state-of-the-art, beautiful laboratory in Coppell, Texas, just outside of Dallas from the ground up. It is fantastic. Really helps us with our efficiency and our capacity. In addition, building that allowed us to consolidate three laboratories that were spread across the country into one laboratory: cost structure improvement, efficiency improvement. Yes, we still have a lot of cash on the balance sheet, but I think we've done a really good job investing some of it. We still have plenty of runway to go.
Got it. We covered a lot about how you used the engineering background to make costs and be really efficient. Can you talk maybe about pressing some of the competitive advantages, whether that be accuracy, turnaround time, breadth of genes? What are some of these that you've done to sustain some of this market share gains that you've had?
Essentially all of the above. I believe we have the largest test menu in the genetic testing industry at this point, something like 22,000 different genetic tests. I mean, some of the advantages you've mentioned, turnaround time is hugely important, especially as it relates to reproductive health. Because in reproductive health, you either have a couple that's trying to get pregnant through an IVF service, or you have a couple who currently is pregnant. There's anxiety there. Turnaround time is important. We've done a really good job with carrier screening, no doubt. Our turnaround time averages about 8.8 days for carrier screening. Some of our competitors are twice that. Some are 3x that, right? That's a big selling point for us.
If you look at our rare disease, the amount of genes that we have available, the panels that we have available, far outpace a lot of our peers. In addition to the flexibility we offer our clients, I believe we're the only genetic testing laboratory. We can go onto our website, pull up our portal, and design a custom product on the fly. Anybody can go to our website, select any number of genes they want, any number of copy number variants, click order on the website, and before that sample hits the door the next day, that panel is ready to go. I mean, in a previous life in academia, it took me months to develop new panels. We do it on the fly.
I think if you look at just the near one-stop shop that we are in terms of being NGS, the quality, some of our proprietary algorithms, the number of tests, and turnaround time, it all adds up to a recipe for success.
Got it. What are some of the key innovations in your product launches that you anticipate launching over the next 12 to 24 months?
Some of those cards we're holding close to the chest. You have seen a lot recently in terms of us launching new products and services. We did launch a novel NIPT test we call NOVA, which looks at not only aneuploidy in copy number, such as microdeletions and microduplications, but also de novo point mutations. I think we're up to around 50 de novo point mutations. A very, very high-quality novel NIPT. Here in the last couple of months, we've launched a new whole genome sequencing test that's faster than what we've had before, better coverage than what we've had before, and also incorporates RNA sequencing into the whole genome. I believe we're the only company offering RNA with every genome. It's critically important clinically.
If you look at the peer-reviewed literature that's out there, by adding RNA to a whole genome, you can diagnose somewhere between 15% - 25% additional patients than just looking at the whole genome alone. It is a big value proposition when we sell is we can solve more cases with our technology. Very recently, we launched an ultra-rapid whole genome test, our first, which is around a 48-hour turnaround time for a whole genome, which is really important for the NICU. There has been plenty of healthcare economic data as well as just peer-reviewed literature about the importance of diagnosing patients early in the NICU, not just from a cost savings perspective, but also how often you can have medical management and improvement of those babies in the NICU.
We continue to push the envelope, I think, with our R&D and our product launches, certainly more in the pipeline. I think what we've done so far has been pretty impressive.
Got it. Maybe you could talk about some of that launch into the NICU and the rare disease market. I mean, you've been a rare disease company for a number of years, but I think NICU has been a fairly renewable market. Brandon, I know you have a background at Baylor. You came from Baylor. I mean, can you talk about the right to win in the NICU for Fulgent?
I think there's not a lot of people who do it, first off. It is not easy. It is actually incredibly difficult to get a clinical genome out in 48 hours. Everything has to be down to the minute. I think operational excellence goes a long way. We've so far delivered 100% accuracy on our promised turnaround time. That goes a long way. Essentially, if you're ordering a NICU genome, you're ordering because it's rapid. If you're not hitting your turnaround time, then that's a problem. Also, we talk about our proprietary algorithms, our databases, our alignment tools. I think we can present a more powerful package. In addition, I mentioned RNA. We can't do RNA in 48 hours. That's not technologically feasible today. Our clients can still add RNA to the rapid genome, the ultra-rapid genome.
We will give them a 48-hour report. If it's diagnostic, great. We've really helped this family and this hospital. If it's not diagnostic, they can reflex to RNA. That takes us about a week or two to give the RNA. I believe we're the only company that's bundling the RNA with the ultra-rapid genome to sort of cast the widest net possible when it comes to making these diagnoses for these rare diseases.
Got it. No, that's interesting. I want to move on to some of the therapeutic stuff. Ming, can you talk about the overall market for FID-007 and FID-022?
Yeah. Thank you, Dave. I know a lot of investors that are in the diagnosis area, not in the therapeutic area. We are very excited in terms of our drug development sector. Actually, we just published our data for the phase II data. We are very excited about the results. One of the key measurement factors is the progression-free survival time. That's one of the factors. Currently, the standard treatment for the phase II, line two treatment, second line treatment, it's about two months, 2.5 months. Our data shows we have, based on the low-dose trials, we have about nine months. The high dose is about 72.2 months. We significantly increased the progression-free survival time for the head and neck cancer treatment. Head and neck cancer, it is a multi-billion dollars market sector.
Initially, when we tried to push our FID-007 product, we were looking for the last stage treatment. Now, with the results we are seeing, we have the good chance to get into one of the leading drug candidates in terms of second line treatment for head and neck cancer. With the new FDA's approval for the pembrolizumab to be the maintenance therapy for the first line, after pembrolizumab's failure, we could be into the first line for the treatment for the after adjuvant treatment. We are very excited for that first indication alone. Of course, FID-007, we also can go look into the other indications, such as lung and breast cancers, many other cancers. That is the first drug. The second drug is FID-022.
This is the second drug. We did a reformulation of SN-38 drug, which no one has been able to make the nano-encapsulation before. This one has even much more broader applications than the first one. It could handle the colon cancer. It could handle the pancreatic cancer and the ovarian cancer. There are multiple cancers. We could solve the tumor cancer. The project has potentials. Currently, we are in the escalation trial. We finished the first dosing safely. Now moving to the second stage. We expect probably by mid next year, we should finish those escalation trials. The initial results are also very encouraging.
Yeah. I mean, maybe we could talk about the for diagnostic investors that are interested in Fulgent, maybe if you can give a quick recap on specific catalysts and kind of time frame for those specific catalysts that they can be aware of those. It sounds like late next year, we have phase II of FID-022.
We should. We definitely will move to the FID-007 to phase III trial.
Yeah. Phase III trial end of next year. Phase II trial wrapping up before too long.
Yeah. Yeah. Yeah. Which definitely will give the market a strong signal, the confidence. We're going to these key opinion leaders in the market for their endorsement to get into the market. The bottom line, we'll update the results for the phase II results. We provide the initial results in September, ESMO in September. We will update the investors for our results in ASCO next year, which will be the, yeah, we're looking for the breakthrough therapy presentation next year. Definitely, there's a lot of data will be come on next year.
In terms of monetizing these therapeutic assets, particularly FID-007, is phase III the right time to kind of partner this assay? Or do you want to predict this through? Or everything's on the table?
I think everything's on the table. Currently, if you take a look, most of the drug development companies, once they go develop drug, they do not have funding. They're looking for somewhere to find investors. They want to partner with the larger pharmas to provide them funding for the clinical trials. Our approach, actually, if you take a look, David, our therapeutic diagnosis business is starting to break even. Actually, we're starting to generate cash probably next year. We were looking initially to try to build a long-term model. We provide sustainable funding for the drug development. At a time when one of our drug approaches is get approved, that drug, the profit or gross margin will help us lift our diagnostics business.
I think last time you asked, when can we get like 80% of the gross margin again like what we did in the COVID? I told you, look, when my drugs get working, we can bring our gross margin back to 80%. Definitely, that's through the once our drugs get approved. What we're really looking for is people looking to say, we are doing a diagnostic company. We say, hey, we want to provide not only the diagnosis for the cancer, but we also want to cure the cancer. That's what we showed a good sign for us, maybe so far for the last few years based on our drug development platform.
Sure. I am going to switch back to diagnostics. There is increasing consolidation in the genetics market. How do you view Fulgent's position in an increasingly consolidating market?
I mean, I think it benefits Fulgent. I think we've, to some degree, been one of the consolidators. I think we intend to continue that. We've mentioned multiple times here our aggressiveness in M&A and the number of assets we're looking at. I think a consolidating market strengthens our position. We want to continue to consolidate the market as much as we can through M&A as well. If you look at the number of players in the, we'll say, rare disease space five years ago, there was a lot of academia labs back then. I mean, I was one of them at Baylor. Academic labs are not as big a player. You're really down to a handful, so to speak, of rare disease players.
I think what we've talked about in terms of our technology, our turnaround time, our algorithms, everything I've mentioned, I don't want to rehash everything. That gives us our competitive advantage in that marketplace. I think we're set up well to compete in a consolidated marketplace. We're very well capitalized to continue to do our own consolidation.
Got it. In just a minute left, I want to just maybe touch on some of the diagnostics catalysts to expect over the next couple of years. I mean, are there any key events to think about where investors really want to own Fulgent stock into that? I don't know, it could be anything from internal to product launches to ACOG to anything else that you're thinking about.
I think definitely look for us how do we continue to get involved in this age of AI. Currently, all our digital pathology AI transition is happening within the company to increase our efficiency and continue to give us a better throughput and the cost savings. That is one of the areas we will really try to push very hard and build technology internally. It is the fundamental we have to deal with. I think now you will see us play a major role during the AI area.
I do think there is an ACOG progress is happening at ACOG around expanded carrier screening. I know we've sort of everyone in the industry, as well as the investors, have been waiting on this expanded guideline for carrier screening. I mean, just reading the tea leaves, it seems like it's imminent. It seems like ACOG and ACMG and SMFM are all sort of working together on this. That is going to happen someday. I mean, the practice of medicine is already well ahead of the guidelines. Expanded carrier screening is becoming standard of care in real time. The guidelines are going to catch up soon. That will really give us some tailwinds as it relates to reimbursement adoption. I think that could be a nice catalyst that we hopefully see in 2026.
Yeah. Thank you for your time.
All right. Thank you.
Thank you, guys.