Hello, welcome to the Fulgent Genetics Q1 2023 earnings conference call and webcast. If anyone should require operator assistance, please press star zero on your telephone keypad. 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 call over to Melanie Solomon, Investor Relations. Please go ahead.
Thanks, Kevin. Good morning, and welcome to the Fulgent first quarter 2023 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, www.fulgent.com. 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 the forward-looking statement.
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 results, 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 these 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 31st, 2022, 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 presented these non-GAAP financial measures because it believes it 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 2023 for more information, including the description of how the company calculates non-GAAP income or loss, earnings or loss per share, and adjusted EBITDA, and a reconciliation of these financial measures to income or loss and earnings or loss per share, the most directly comparable GAAP financial measures. With that, I'd now like to turn the call over to Ming.
Thank you very much, Melanie. Good morning. Thank you for joining our call today. I will start with some comments on the quarter. Brandon will review our product and go-to-market updates from the first quarter. Paul will conclude with the financials and outlook before we take your call. We are pleased with our results in the first quarter, exceeding the revenue guidance we provided earlier this year on our last call. We also had $3 million in revenue from COVID-19 testing, bringing us to accumulated $2 billion in revenue from COVID-19 testing since 2020. More importantly, revenue from our core business outperformed our expectations. This was driven by strong results from our Pharma Services segment and the Precision Diagnostics segment, including launch of our expanded Beacon testing. We see continuing momentum for Beacon testing, as well as other reproductive health services.
According to a recent report from Frost & Sullivan, it is estimated that global prenatal testing market was over $8 billion in 2021, and is forecasted to grow to over $11 billion by 2026 at 7% CAGR. Of the $8 billion in 2021, 31% was carrier screening, or $2.5 billion. This is forecasted to grow to $3.2 billion by 2026. With the consolidation in the space, we now find our company as one of the top providers of carrier screening in the U.S., with a significant runway for growth. I want to make comments on Inform Diagnostics. As we have mentioned, the Inform Diagnostics business bolsters our capabilities in anatomic pathology and add significant revenue, though it has put some pressure on margins.
As we continue to integrate acquisition, our focus on implementing improved process to increase margin and continue to grow the top line with new client acquisitions. This will take some time. Long term, we believe the opportunity we have is the value of the thousands of customers we gain and the potential to expand the offering to them. However, we do see significant opportunity for cross-selling in the Precision Diagnostics market. Given the first quarter results, we are raising our full year guidance. To account for momentum we see with the reproductive health services this year and anticipated COVID-19 revenue. We believe we are moving to the right direction in terms of sales momentum. We expect to see this year as we grow our core business across Precision Diagnostics, Pharma Services, and Anatomic Pathology. Turning to our pharma business.
Fulgent Pharma has developed and processed a novel nano-encapsulation technology, which include over 40 patents and a targeted therapy platform designed to improve therapeutic windows and the pharmacokinetics profile for both new and existing cancer drugs. Our lead drug candidate, FID-007, has shown promising results for the treatment of numerous cancers, including head and neck, ampullary, and pancreatic, with reduced side effects. We will share data from the ongoing Phase Ia/Ib study at upcoming American Society of Clinical Oncology Annual Meeting in Chicago, June 2nd to 6. We look forward to share additional progress and a new initiative on the pharma businesses as we move throughout the year. I'd like to thank our employees and the shareholders for your loyalty during the past quarter. We look forward to the year ahead and the momentum we are creating with our combined business.
I'll turn the call over to Brandon Perthuis, our Chief Commercial Officer, to talk about our diagnostic business results during the quarter. Brandon?
Thanks, Ming. We had a solid first quarter. While we're seeing strength across the entire organization, the first quarter outperformance was led again by our offering for Pharma Services and reproductive health. I will cover these in detail momentarily. At a high level, first quarter sales were $62.7 million, an increase of 150% year-over-year and 14% sequentially. This does not include any COVID-19 testing. While a fraction of what it was a couple of quarters ago, we still do some COVID-19 testing. Revenue for COVID-19 testing totaled $3.4 million in the first quarter. We forecast COVID-19 testing to continue to decline. As a reminder, we're now giving additional color on the business by breaking it out into three categories. These include Precision Diagnostics, which is most of our clinical NGS business, Anatomic Pathology, and Pharma Services.
Starting with our reproductive health business, which would fall into Precision Diagnostics. We are seeing tremendous growth here. The marquee product for reproductive health is our Beacon Expanded Carrier Screening service. We addressed the features and benefits of this product in detail on the last call. As a reminder, Beacon is a suite of products that range from small panels of three to four genes all the way up to 787 genes, which is one of, if not the largest panels offered today. The first quarter saw triple digit percentage growth in Beacon. Clients are choosing Fulgent and Beacon based on our comprehensive and customizable panels, our detection rates, especially for those genes complicated by high sequence homology, as well as our turnaround time. In all areas of reproductive health, especially in the fertility clinics, turnaround time is critical.
We are currently returning results within two weeks for over 90% of our patient samples. Those that take longer are usually because they require orthogonal confirmation. Even with triple-digit percentage growth, our laboratory hasn't missed a beat. We showed the power of the Fulgent platform with COVID-19 testing. We're now showing it again with Beacon. In addition to our organic wins, we have also entered into a long-term relationship with one of the largest national laboratories to partner up to expand access to carrier screening. This lab greatly increases our sales and contracts reach. This relationship is already resulting in a material amount of sales. Also in the first quarter, we joined the Access to Expanded Carrier Screening Coalition, or AECS. AECS is a multi-stakeholder coalition dedicated to ensuring all individuals of childbearing age and their partners have access to expanded carrier screening.
As part of the steering committee, initial efforts are to expand patient and client education of carrier screening, as well as work with commercial and governmental payers for continued coverage improvement. While Beacon is certainly an area of focus, our reproductive health services also include single gene tests, prenatal tests, preimplantation genetic testing for aneuploidy, cytogenetics, and more. We believe our suite of services, quality, and turnaround time make us a good choice for clinicians. Other areas of focus for our Precision Diagnostics division includes a revamped go-to-market strategy for pediatrics, including leveraging our insurance contracts, cross-selling our hereditary cancer test to our new Fulgent Oncology clients, and cross-selling neurogenetic next generation sequencing tests to our adult neurology clients, which we acquired through Inform Diagnostics. Switching over to our Pharma Services division.
Pharma Services had a record quarter, growing 306% year-over-year and 149% sequentially to $7.4 million. While this area of our business tends to be a bit lumpy, depending on the timing of the contracts, the momentum is clear. Over the last several quarters, we have continually expanded our capabilities to build an impressive multi-omics product offering covering both clinical and translational research. Most recently, we launched four new powerful and in-demand technologies for single-cell and spatial multi-omics. Notably, we became a certified and qualified service provider for Akoya's multiplex immunofluorescence spatial phenotyping and for the 10x Genomics single-cell and spatial gene expression platforms. Our portfolio now includes, among other things, whole genome, whole exome, RNA sequencing, proteomics, tumor profiling, epigenomics, liquid biopsy, single-cell sequencing, spatial biology, and a wide range of pathology offerings.
Our client list continues to grow, and as importantly, we feel we are driving deeper relationships with our clients, which now includes six of the top 10 pharma companies in the United States and three of the largest global CROs. We aim to continue to broaden our test menu for Pharma Services and increase our visibility with additional sales, headcount, and marketing efforts. The Fulgent Oncology launch continues to be a focus for our company. We announced last quarter that our Lumera Heme NGS, a state-of-the-art 670 gene profile for hematological malignancies, received MolDX approval with a robust coverage determination and a rate of $2,950. We are excited to announce today that our Lumera NGS Solid Tumor Profile has also received MolDX approval with a reimbursement rate of $3,288.
The Lumera NGS Solid Tumor Profile utilizes next-generation sequencing to cover 523 genes, including RNA sequencing of 55 genes, enabling a highly sensitive review of tumor genomics, fusions, and splice variants, all critical to precision care. Additionally, our Lumera NGS Solid Tumor Profile results tumor mutational burden and microsatellite instability, both critical components when assessing immunotherapy eligibility in several malignancies. Lumera NGS Solid Tumor Profile is a standout in the field as it relates to turnaround time and QNS ratio, which are crucial to patient care and play a central role in the deciding factors clinicians use to choose a testing laboratory. To put it in perspective, our current turnaround time is less than two weeks compared to the industry standard measure of three to six weeks. Perhaps most important is our current QNS rate, which stands at approximately 2%.
This differentiator demonstrates our ability to provide actionable results on very small tissue or neoplastic cell content when compared to the industry standard QNS ratio of approximately 25% on solid tumor tissue. Our proprietary extraction techniques, coupled with our expertise in the research and development space, have led us to commercialize a comprehensive genomic profile that can deliver more actionable results with less tissue availability, thus making the Lumera NGS Solid Tumor Profile a uniquely competitive option in the busy Precision Diagnostics space. While we are still early in the stages of launching and commercializing Fulgent Oncology, we believe we have taken the right steps to set us up for long-term success. We ended the fourth quarter call saying that we felt we had the wind in our sails entering the first quarter. I think we demonstrated that with a strong performance across all three business lines.
As we look ahead, we are enthusiastic about the business opportunities we see. We are confident that the steps we have taken to build a strong core business will continue to pay off. I'll now turn the call over to our Chief Financial Officer, Paul Kim. Paul?
Thanks, Brandon. Revenue in the first quarter totaled $66 million, compared to $320 million in the first quarter of 2022. Roughly $3 million came from COVID-19 testing for Q1, which was not part of our guidance. Revenue from our core business totaled $63 million, which exceeded our guidance of $56 million and grew 150% year-over-year. Gross margin was 28.4%. The decline in gross margin year-over-year is primarily related to the higher costs of anatomic pathology revenues from Inform Diagnostics, which we purchased in Q2 of 2022. However, we are pleased to have achieved a 9 percentage point improvement in our gross margin sequentially over the prior quarter as we see our efforts to create efficiencies across our acquired businesses pay off. Turning now to operating expenses.
Total GAAP operating expenses were $43.6 million in the first quarter, down from $49.5 million in the fourth quarter of 2022. Non-GAAP operating expenses totaled $33.8 million, down from $38.7 million in the fourth quarter of 2022. Non-GAAP operating margin increased 15 percentage points sequentially to a negative 19%. More than offsetting the increase in R&D of $1.2 million, which was primarily related to our pharma business, was a decrease in G&A of $7 million as we continue our integration efforts to achieve efficiencies with our recent acquisitions. Adjusted EBITDA for the first quarter was a negative $7.2 million, compared to a positive $213.5 million in the first quarter of 2022.
On a non-GAAP basis and excluding equity-based compensation expense and intangible asset amortization, loss for the quarter was $6.5 million or $0.22 per share based on a 29.5 million weighted average shares outstanding. Turning over to the balance sheet. We ended the first quarter with approximately $860 million in cash equivalents and marketable securities, excluding investments pending settlement. Moving on to our outlook for 2023. Given the outperformance in the first quarter and the momentum, we're raising our core guidance, core revenue guidance to $250 million. This number does not anticipate additional revenue from COVID-19 testing. Looking ahead, we expect our gross margin and operating margins to continue to improve as we implement efficiencies throughout our integration efforts and recent acquisitions.
The margin improvement is forecast to be incremental for the remainder of the year as we plan to make further investments in resources to position the company for longer term growth. For full year 2023, utilizing a 28% tax rate and a share count of 31 million, we expect non-GAAP loss of approximately $1.25 per share for our shareholders, excluding stock-based compensation and amortization of intangible assets, as well as any one-time charges. Last quarter, when we acquired the pharma business, we said we would report on this business separately. Revenue from this business is not anticipated in our 2023 guidance, and we expect associated cash burn for this business to be approximately $15 million-$17 million this year, which is included in our EPS guidance.
Overall, we have strengthened our core business and bolstered our portfolio through strategic acquisitions. We see very good momentum ahead. Thank you for joining the call today. Operator, you can open it up for questions.
Certainly. We'll now be conducting a question-and-answer session. If you'd like to be placed into question queue, please press star one at this time. One moment, please, while we pull for questions. Our first question is coming from Dan Leonard from Credit Suisse. Your line is now live.
Thank you. I had a question on carrier screening. How much of the growth that you're seeing is market growth, same-store sales versus share gain?
Hey, this is Brandon. Thanks for the question. It's almost entirely share gain. We've executed well going to market with our Beacon Carrier Screening product. Clients' demands are extremely high as it relates to turnaround time, quality, other features and benefits, and we've excelled in all of those areas. Our new client acquisition rate has been tremendous in the first quarter and carrying into the second quarter.
Thank you. Brandon, could you give me an update on the billing transition, you know, moving some of the contracts from Inform Diagnostics to the legacy Fulgent offering?
Yeah, certainly. In progress, going well. I think, you know, historically, you know, we've used the terms, rolling up the contract, you know, rolling them up to our tax ID, the corporate level, et cetera. While some of that happens, I think we sort of wanna look at it from a contract optimization standpoint, you know. As we have now multiple subsidiaries and obviously many hundreds of contracts. Our goal is to optimize those contracts across our, you know, several subsidiaries and labs, and it's going pretty well. The progress we've made has helped us go to market with certain products and services. As we continue to make additional progress, it's just more opportunity for us to sell in the marketplace.
It is a long process and we're talking many, many hundreds of contracts to go through. It's probably taken a bit longer than we anticipated, but all things are going pretty well.
Thank you. My final question, how do you anticipate gross margins are going to trend throughout the year?
Yeah, that's a very good question. We see both growth and operating margins gradually improving throughout the course of the year. That's coming from, you know, two primary points. One is the continued efficiency and the automation that we see throughout our business. It's not gonna be as fast as we might have anticipated just because we're gonna continue to invest in the infrastructure and the operations for continued expansion in our revenues throughout the course of the year. You will see a gradual improvement in growth and operating margins. With that improvement, we will still continue to make heavy investments in our operations because we anticipate the momentum that we see, particularly in the reproductive market that Brandon mentioned, to continue.
Okay. Thank you.
Thanks.
Thank you. Next question is coming from David Westenberg from Piper Sandler. Your line is now live.
Hi, thank you for taking the question. Congrats to a great start to the year. I wanna actually follow up with Dan's question in terms of market share wins and in carrier screening. Any sense for if this is maybe share wins or new customers from Sema4 shutting down that business or if it's moves from existing players? I guess the main reason why I'm kind of curious about the Sema4 is that I think a lot of those are the larger panels. Just wanna also maybe ask about reimbursement in those larger panels in carrier screening, because, you know, I think like some of the larger private insurance companies have been a little bit more, what's the word? Stricter on the payouts with those.
Yeah, certainly. No, we certainly benefited from Sema4 exiting the market. You know, I mentioned on the previous questions that a lot of the growth, which has been, you know, tremendous, has been from, you know, market share and new client acquisition. You know, we still see a long runway for adoption, right? As we join the Access to Carrier Screening Coalition, I mean, it's clear that, you know, that reproductive population is still underserved as it relates to carrier screening. We see a long runway for continued growth as expanded carrier screening is used more frequently in reproductive settings. We have the support of the American College of Medical Genetics and Genomics. We have the support of ACOG, we have the support of the genetic counselors.
You know, we see this as an evolving field that still has, you know, a long runway for growth. As it relates to reimbursement, from what we're seeing, we're pretty satisfied with what we're seeing. You know, I think most importantly is controlling the cost structure, right? You know, pre-COVID, we're always pretty proud of our cost structure, and we often said we had one of the lowest cost structures in the industry. That translates to Beacon, right? You know, our goal is to automate as much as we can, use informatics as much as we can. You know, we process all of our samples in-house, including the orthogonal confirmations. We don't have to outsource anything. We think it's incredibly important to control the cost structure.
With our cost structure and what we're seeing right now in terms of reimbursement, it's healthy and we think it could only improve from here as we work with the payers to continue to expand coverage policies.
All very helpful. Thank you. I just have one more because unfortunately my computer just crashed and I can't see my list of questions right now. I think you said strength in the Pharma Services business. Can you talk about some of the high demand offering that's kind of that's powering that? I mean, is this, you know, your new movement to a lot of different oncology tests that's pushing this, the strength in Pharma Services? I mean, what's going on there that's really driving that?
Well, you know, when we first launched Pharma Services as sort of a division and a focus for Fulgent, it was mostly NGS, right? Whether it was, you know, single gene, panels of genes, maybe exomes or genomes, but it was just NGS. Today, it's a full multi-omic product offering. You know, probably one of the most comprehensive product offerings out there as it relates to providing services for pharma and biopharma. Whether it's, you know, spatial, you know, spatial biology, proteomics, RNA sequencing, I don't even know honestly how many total tests we're providing to Pharma Services at this point. It's grown tremendously. All of those platforms allow us to both sort of bid on new contracts as well as drive deeper relationships with existing customers.
Thank you.
Thank you.
Thank you. Next question today is coming from Andrew Cooper from Raymond James. Your line is now live.
Hey, everybody. Thanks for the questions. maybe just first wanna check one on the guide. you know, I know the $240 million prior didn't include any COVID. Just wanna make sure the $250 million, I think you said no incremental COVID. Is part of that raise the $2 million of COVID in 1Q, or is that $250 million number purely core and anything in COVID is above and beyond?
Yeah. Thank you for that question. The $250 million is pure core.
Okay.
$250 million is pure core for the year. To give a little bit of, you know, color on the breakout of the areas, when we initially laid out the guidance, about eight or nine weeks ago, we said that the core revenues would be approximately $240 million. We said that Pharma Services would be approximately $13 million. Precision Diagnostics and Anatomic Pathology would be evenly split at about $113.5 million each, adding up to the $240 million. We see momentum across all of our businesses, virtually all of it is coming from the strength in Precision Diagnostics as well as strength in Pharma Services.
We like that very, very much because we think both those two areas are at the core of what the company was founded upon, and we're translating those kinds of capabilities over into anatomic pathology. In short, we see momentum within the last eight or nine weeks from the time that we initially gave our guidance across all three of our businesses.
Okay, great. Maybe just one last quick one on guidance before I transition a little bit. The, the 2Q number, you know, is down just very slightly on core at about $62 million. I'm assuming that AP and Precision Diagnostics are growing, but Pharma can be a little bit lumpy. Is that the right way to think about why there's not a little bit more sequential progress from 1Q to 2Q?
I think, you might be, you know, reading a little bit too much into it. I mean, if you take a step back, it's only been two months since we provided our fiscal year guidance, and now we're raising it. The rise and the particular strength in the reproductive health and what Brandon has talked about has only happened in the past couple of weeks, and we like to see how that plays out before potentially raising. This is only the first quarter, and we have plenty of opportunities to communicate where we think the business is going and where we think that we're gonna be ending the year. That's also associated with the question that I got on the growth of the operating margins.
You know, we are seeing a lot of those efficiencies. On the flip side, we are anticipating this momentum to continue throughout the course of the year. We continue to make incremental investments in infrastructure and operations for that momentum because we anticipate that to actually strengthen as we get into the later quarters.
Okay. Helpful. Maybe shifting gears a little bit, just sticking with expanded carrier screening, like you mentioned, kind of a newer, you know, newer business for you, at least at the scale that you are in the U.S. You've got this big cash balance. I think a lot of the other players out there, we see, you know, selling carrier screening have additional offerings there. Is there anything, whether from an inorganic perspective, potentially you feel like you need to add to be a little bit more interesting, or at least that you could capitalize on to bundle with carrier screening to go to, you know, more than just necessarily IVF clinics, but out into the OBGYN field?
How do we think about, you know, where there's potential opportunity or need to expand, now that you've found some real footing in that business?
That's a great question. You hit on an area that we talk about quite a bit. You are correct that a lot of our expanded carrier screening business is coming from the IVF clinic, so couples trying to get pregnant. You know, we have everything it takes, the product, the turnaround time, the contracts to penetrate the OBGYN market, but we are missing a piece there, right? Often expanded carrier screening is ordered in tandem with noninvasive prenatal screening, NIPS or NIPT, as it was once called. We don't have that today. It's something we've talked about for a while. You know, we could maybe do a strategic, you know, partnership. You know, we could maybe launch it organically. But that's the one sort of piece of the reproductive puzzle that we don't have right now.
We do have preimplantation genetic testing for aneuploidy, which is important, you know, in the reproductive setting. You know, you know, we're exploring all options and, you know, wouldn't rule any, you know, additional product launches out in the future.
Okay. Great. I'll stop there. Thanks, everybody.
Thank you. We reached the end of our question and answer session. I'd like to turn the floor back over for any further or closing comments.
Yeah. Thank you very much, for everyone, joining our call, today. We're looking forward to provide you the update in the coming quarters. Thank you.
Thank you. That does conclude today's teleconference webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.