Nov 9, 2021
Operator
Good day and welcome to the Fulgent Genetics Third Quarter 2021 Earnings Conference Call. At this time, I would like to turn the conference over to Nicole Borsje, Investor Relations, please go ahead, ma'am.
Nicole Borsje
Great. Thanks.
Good afternoon and welcome to the Fulgent Genetics, third quarter 2021 financial results conference call. On the call today are Ming Hsieh, Chief Executive Officer, Paul Kim, Chief Financial Officer, Dr.
Larry Weiss, Chief Medical 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 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 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 results, including the Company's actual future results may be materially different And 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 risk factors that may cause actual 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, 2020, which is available in 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 U.S. or GAAP.
Management has presented this 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 Third quarter of 2021 for more information, including a description of how the Company calculates non-GAAP income and income per share, and a reconciliation of these financial measures to income and income per-share, the most directly comparable GAAP measures.
With that, I'd now like to turn the call over to Ming.
Ming Hsieh
Thank you [Indiscernible]. Good afternoon, and thank you for joining our call today to discuss our third quarter 2021 results.
We heard a very good, strong third quarter, with our core business being green, momentum, [Indiscernible] COVID infections with the Delta awareness through a meaningful uptake in our COVID testing warning in the quarter, I will cover some highlights from the third quarter before turning the call to our Chief Commercial Officer, Brandon Perthuis, to discuss the products and the go-to-market updates. And Paul Kim will discuss the power financial results and outlook in detail.
Take a look at our third quarter results: Revenue total of $228 million, 124% compared to third quarter of 2020 and up of 48% sequentially. We delivered approximately 2.2 million tests in the quarter, more than doubled the volume of our third quarter last year.
Paul will cover the details on the [Indiscernible] between our core and COVID business in the quarter. For the high-levels, both [Indiscernible] up for businesses outperformed the guidance we set for last quarter.
Our core business grow almost 300% year-over-year to over $40 million, due to the strength across the key areas, including KSI, CSI, and our revenue from Jamie in China. We also saw a meaningful increase in revenue from our current track with the CDC deals with a Web-spread, increase.
We have seen in [Indiscernible], positive rate. We continued to drove strong profitability, and a generate of $3.93 per share in GAAP EPS and $152 million in operating cash flow.
We were pleased to achieve the results this quarter that exceeded our expectations across-the-board, while our business has benefited from [Indiscernible] spikes in the events for COVID testing, we have continued to see the strength in our core businesses as we execute our strategy to expand the footprint in core NGS business constant that by the CSI and our operations in China. One particular highlight for us in the third quarter is the initial attraction we are seeing in the acquisition of CSI, by our [Indiscernible] you where we early increase your synergy across our business.
We are pleased that the CSI staff and a small sales team is fully supporting our continuing operations. And we are beginning to expand our sales team to support growth of the organization.
While also working to build our west coast of [Indiscernible]. Which will feel the enhanced the CSI on college testing capabilities, particularly in climatology and oncology.
We'll also supplement CS venue with our next-generation sequencing capabilities as a part of integration of CSI, where we're likely to see a meaningful increase in our test warning that is being reimbursed by insurance. We are encouraged by the expanded relationship we have with third-party players and look forward to build on this momentum as we continue to scale and expand our test menu.
We also continued to make progress on the development and launch of Helio Liver with our partners at the Helio Health announced some very promising data yesterday, and a team will be conducting a poster presentation on the performance of Helio Liver at the liver meeting 2021 which will be held virtually in upcoming week. Brandon will discuss in more details about -- we are -- where we encouraged buy the progress that we are seeing in the development of [Indiscernible] and hope to achieve the commercial bunch, in the coming months.
On other exciting recent announcement is our partnership with [Indiscernible] will be offering o-rings, pre omics, Protomonics as saying to our lead in the U.S. and China, which will create more team line multiomic solutions for our [Indiscernible] and the farmer customers.
And finally, we're well pleased with the activity, we've seen through the operations in China, where I've seen quarterly sales in our NGS test menu in China, while our [Indiscernible] is also gaining attraction. We'll be able to use a very large opportunity to ramp up our presence in the local Chinese market, one that we are in early stage of growth.
I'm very pleased with the ongoing progress we are making with expansions to our core business, while our COVID-19 testing solutions continued to drive strong cash generation from our bottom month. While the productivity around COVID-19 testing could some unpredictability in our businesses, we're turned particularly as the therapeutic treatments may become available in the near future.
We remain very optimistic of our postcode strategy and opportunity we have built to drive sustainable growth in the years ahead, armed with our [Indiscernible] and technology platform. Now, I'll turn the call to -- over to Brandon Perthuis, our Chief Commercial Officer.
Brandon?
Brandon Perthuis
Thanks, Ming. We continue to fire on all cylinders as we have made great progress with our core business, our new Helio Liver liquid biopsy test, integrating the CSI acquisition, launching the O&M (ph) collaboration, and continual response to the COVID-19 pandemic.
I will address each of these in detail, but would first like to comment on the overall performance of the business. We recorded $228 million in revenue the third quarter, an increase of 124% year-over-year.
While a bulk of this was driven by COVID-19 testing, our core business grew to over $40 million, an increase of approximately 300% year-over-year. As we have discussed over the course of the year, we have continued to diversify the business outside of pediatric rare disease, and in this quarter, we were able to continue that trend in a big way, with the addition of many new oncology services.
As we mentioned on the last call, [Indiscernible] have made a strategic investment in Helios health and have secured exclusive rights to commercialize lab-developed tests in the U.S. and Canada.
The first test we announced is a novel liquid biopsy tests for hepatocellular carcinoma, HCC, called Helio liver. HCC it is one of the fastest-growing and deadliest cancers in the U.S.
and early detection is critical to successful outcome, especially among high-risk population. In the U.S., more than 100 million people have non-alcoholic fatty liver disease, which is a major driver of liver cancer.
Helio liver leverages next-generation sequencing technology to test 28 gene from 77 CPG methylation sites and ASP, ASPO3 and DCP. For over a decade, there's been little to no improvement in a way HCC is detected.
Today, the standard of care is ultrasound, which is a relatively ineffective method of detection, with some quoting sensitivity in the 40% range. Ultrasound results are highly variable depending upon the size of the lesion, the location of the lesion, the body mass index of the patient, the equipment used and the experience of the Operator.
Considering that survivability of HCC is dramatic better, in early stages, specifically approximately 50% survivability at stage 1 and approximately 12% and 3% as at stages 3 and 4 respectively, a better tech has been needed for some time. In addition, early-stage detection allowed for more potentially curative treatment options, such as ablation and transplantation.
The folded Helio liver test has shown much better efficacy with sensitivity of 76% for early stage HCC in 92% for late-stage at a specificity of 91%. These numbers could improve as we gather more data, but already showing major improvement over ultrasound.
Another critical aspect of detecting HCC early is routine screening and surveillance of high-risk patients every 6 months. These include patients with cirrhotic liver, hepatitis B, and hepatitis C.
Unfortunately, many do not follow through with the current ultrasound monitoring for reasons including difficulty and scheduling, traveling to medical centers, etc. With the Helio liver tests, it's a simple blood draw.
This can be done at any position office or pro bottoming service. This should allow for better adherence to the six-month monitoring guidelines.
In summary, benefits of the novel Fulgent Helio liver test include increased patient adherence, higher sensitivity, more curative treatment options, ease-of-use, and lower cost of care. Expanding on that last point, cost of care is estimated at $466 thousand for a patient in late-stage treatment versus $132 thousand in early stage.
Helios liver becomes the more cost effective test versus current standard of care, which should prove to be an important as we have discussions with payers. Helio liver is scheduled to launch this year, and we will certainly be keeping the market updated on developments regarding this exciting new tests.
Another notable development from the third quarter was our acquisition of CSI, which closed in August. As a reminder, CSI offered over 400 unique tests in molecular oncology, flow cytometry, cyst cytogenetic, and histology.
We have completed the integration of CSI with nearly 100% employee retention and 100% client retention, we are now focused on the expansion of the business on a national level in the build-out of our cancer lab on the west coast to better serve clients nationally. A key piece of our growth strategy with the addition of CSI and Helio Liver is the expansion of our sales team.
Historically, Fulgent has been a very small, but very experienced sales team. However, considering the size of the addressable market for the new Helios liver and CSI business, we are aggressively expanding our sales organization.
On the Helios liver side, we are onboarding approximately 10 new sales managers who will be responsible for the product. From a go-to market perspective, key markets include New York, California, Illinois, Texas, and Florida, all of who have high incidence of HCC.
However, this will be a national rollout. As we gain sales experience during early launch, we anticipate the number of salespeople to expand rapidly as there are over 7,000 hepatology providers in the U.S.
that are immediate call points, and over 15,000 gastroenterologists at secondary call points. We had invested in data resources to assist in our account targeting and planning, allowing us to focus on those high volume positions with high expand on ultrasound and MRI's.
On the CSI side, historically, their team has also been small with only 3 to 4 salespeople. This number doubled this quarter, and we aim to double it again in the fourth quarter.
We believe we have superior turnaround time service in quality for cancer diagnostics, and looks forward to leveraging an expanded sales team to take the services national. On the partnership front, we were also excited to announce the addition of Omic's proteomic capability to the Fulgent platform.
Through this partnership, we will enable customers to leverage only high throughput protein biomarker discovery technology through our lab, which create an end-to-end platform for biomarker research discovery, and clinical trials. We are creating a one-stop shop Performa in clinical research customers by offering our extensive next-generation sequencing menu, oncology patients, and now Olink's proteomic assays of probably single sample at our labs.
This partnership will make it faster, easier, and more efficient for researchers to carry out their projects as it enables them to send their samples to one location and access all of the results from one portal. Fulgent is one of a handful of lab operating Olink capability in the U.S.
and we look forward to providing this enhanced service to our research customers. And finally, as Ming mentioned, we saw a big rebound in COVID-19 testing in the third quarter, driven by the highly contagious Delta variant.
We completed approximately 2.2 million COVID-19 tests in the quarter, which marked our third highest quarter for COVID-19 testing behind the first quarter of 2021 and the fourth quarter of 2020. These tests continue to come from a variety of sources, including counties, drive-thru sites, hospitals, clinics, etc.
We also saw schools go back in session, which restarted the flow of back-to-school samples. At this time, we're serving over 1,000 schools.
We are also supporting the back to work mandate and verification program with our newly launched online platform. This new system allows employees to upload their vaccine records or their weekly testing results and provide dashboards and quick access to employers to attract compliance.
While symptomatic testing ebbs and flows with the positivity rate, these back to work and back-to-school programs are more predictable long-term contracts. During the quarter, we also saw a record in terms of our COVID-19 next-generation sequencing tests due to the elevated number of cases and increased positivity rate.
We believe genomics study [Indiscernible] will continue to play a pivotal role in fighting and understanding COVID-19. We are pleased with our third quarter results and excited about the future prospects of our business.
We continue to have a pipeline of assets. We are evaluating and expect to see continued activity on the M&A and strategic investment front.
I will now turn the call over to Paul Kim our CFO. Paul.
Paul Kim
Thanks, Brandon. Revenue in the third quarter totaled $228 million, an increase of a 124%, compared to the third quarter of 2020, well exceeding our guidance of a $125 million to a $150 million.
Billable tests in the quarter totaled almost $2.2 million, more than twice the volume of Q3 last year. Breaking down the revenue a bit further, roughly $180 million came from COVID PCR testing, which exceeded our guidance by approximately $100 million and grew a 105% year-over-year, while roughly $40 million came from our core business, which exceeded our guidance of $32 million and grew approximately 300% year-over-year.
Now, as a reminder, our core revenue includes our NGS business, contribution from our Chinese JV, and now contribution from CSI. It also includes contribution from our CDC COVID NGS testing agreement, which we saw a meaningful uptick in activity this quarter due to increasing COVID positivity rates, have met the Delta variant spread.
We recognize that COVID NGS testing volume from the CDC can vary dramatically depending on COVID, positivity rates, so if we exclude the impact we saw from the CDC in the quarter, our Q3 core revenue still grew by more than 160% year-over-year compared to Q3 of 2020. While demand for COVID testing remains extremely volatile, we remain well-positioned to capture this demand if and when it fluctuate higher, which we saw in the third quarter, a reversal relative to the slowdown we saw in the second quarter.
We have continued to take a conservative stance on any expected revenue from COVID testing, given the inherent challenges and predicting COVID spikes or the emergence of other variance, we remain focused on executing on our post COVID growth opportunities, which include expanding the reach of CSI capabilities, working with Helio on our joint commercialization opportunities, growing on the footprint on our China operations and launching new initiatives such as the Olink partnership Brandon discussed. Our ASP s in the third quarter was a $105 slightly higher than the $99 we saw in the second quarter.
Our ASP s remain relatively stable over the last few quarters, trending modestly higher. As our test mix shifts more to NGS testing, cost per test in the quarter was $20, slightly lower than the second quarter due to the efficiencies inherent in our platform as our testing volume scales.
Gross margin increased to 80.9% up more than 6% points year-over-year, and up 4% points sequentially, given our higher overall volumes and the continued operational efficiency of our technology platform. Now, turning to operating expenses, total GAAP operating expenses were $25.1 million in the third quarter up from $18.9 million in the second quarter.
NON-GAAP operating expenses totaled $21.7 million up from $16 million last quarter. Our operating expenses increased primarily due to the ongoing investments in strategic headcount across our organization, as well as fees and services associated with our heightened M&A activity.
Non-GAAP operating margin increased over 5% points from the second quarter to 71.8%. Our expense structure remains very lean in enabling us to drive significant profitability from our revenue outperformance.
Adjusted EBITDA for the third quarter was $167.3 million, compared to $67.4 million in the third quarter of 2020. On a non-GAAP basis and excluding equity-based compensation expense and intangible asset amortization, income for the quarter was a $126.3 million or $4.05 per diluted share based on $31.2 million weighted average diluted shares outstanding.
This takes into account the tax effect for stock-based compensation and intangible asset amortization in the quarter. Turning to the balance sheet, we ended the third quarter with $877 million in cash, cash equivalents and marketable securities.
We also generated a $152 million from cash from operations during the quarter fueling our cash balance. Despite the cash investments we have made this year, including the cash investment of $43.4 million for CSI which closed in the third quarter, $20 million for Helio, and $19 million for controlling interest in the China JV, we are on our track to reach our goal of reaching a billion dollars in cash, cash equivalents, and marketable securities on the Balance Sheet before the end of the year, excluding any additional M&A announcements, which is certainly a possibility.
Now, moving onto our outlook. Starting with COVID revenue, as we discussed, COVID revenue continues to be volatile due to many factors outside our control.
As cases trend higher, we tend to see a positive correlation and test volumes. At the same time, government agencies and schools have put regular testing protocols in place to both supplement vaccination programs and monitoring potential breakthrough cases.
With that, we expect COVID revenues for the year will be at least $815 million up from our previous guidance of $690 million, this increase of a 125 million accounts for the outperformance in Q3. As a reminder, COVID revenue guidance includes only revenue from RT - PCR COVID testing, including picture at-home COVID kits.
Moving onto our core revenue guidance, which include revenue from our core NGS testing, covered NGS testing, and the impact from CSI, we expect our core NGS business will continue to see strong growth as we further capitalize on our investments. We expect core NGS revenues will total approximately $95 million, consistent with our previous guidance.
For COVID NGS revenue from the CDC, we're raising our guidance to $20 million from $15 million given the strength we saw in this program in Q3 due to higher positivity rate. Altogether, we expect our total core revenue s will be a $115 million for the year.
With the $815 million in code revenues and what $115 million in core revenue, we expect total revenues will be approximately $930 million for the year, up from our previous guidance of $800 million. We acknowledge that the vast majority of this increase will be coming from COVID related testing, but remain confident in our core business and believe one of the very early stage of ramping on our numerous opportunities, as we are focused on our core business.
From a profitability standpoint, we continue to expect to show ongoing leverage in our business, which drops to the bottom line and drives cash flow generation. Our foundational technology platform that underpins our business operations continue to drive extremely growth -- extremely high growth and operating margins.
That being said, we could see some fluctuations in the near-term as we continue to digest investments and headcount in M&A. At the full-year 2021, utilizing an estimated 27% tax rate and a share count of $31 million, we expect net non-GAAP income of approximately $502 million or $16 per share for our shareholders, excluding stock-based compensation.
Our updated guidance is posted on slides on our Investor Relations website, which shows a detailed [Indiscernible] that I just discussed. We feel very good about the positioning headed into the fourth quarter as we have set ourselves up to benefit from a number of long-term strategic initiatives.
We are excited about the potential to drive sustainable growth in our core business in the quarters ahead, armed with the large cash balance and capital structure, or also continuously evaluating more and more M&A opportunities that could be complementary to our expanding platform. Thank you for joining our call today.
Operator, now you can open it up for questions.
Operator
Thank you. [Operator instructions] We'll pause for just a moment to allow everyone an opportunity to signal for questions.
Our first question comes from Kevin DeGeeter with Oppenheimer.
Kevin Degeeter
Hey guys, thanks for taking my questions. Congrats on a really nice quarter here.
A few things, I think Ming highlighted in his prepared comments progress on commercial reimbursement across the portfolio. I guess maybe 2 points on that.
Can you quantify the portion of revenue that came from third-party reimbursement and more generally, how do you measure going through the next couple of quarters, continued strength in gaining expanded reimbursement? Is it being able to disclose specific coverage, or a network decision with national payers, is it lives covered, is it percentage of revenue?
Just kind of what's the best way to measure improvement on that metric?
Ming Hsieh
Yeah. Thank you, Kevin.
I think that in general, our insurance, in terms of life courage, we have about 160 million lives covered under our insurance contracts. But in terms of revenue, in terms -- most were COVID revenue as we [Indiscernible] reimbursement.
We also have the 9-year assurance contracts that we should be the -- our relationship with the Biopharma companies. So Paul, you can take a little more to add to cover for what is Kevin 's questions.
Brandon Perthuis
Hey, Ming, is Brandon --
Kevin Degeeter
Brandon, just to clarify the question, I'm referring to, non-profit.
Brandon Perthuis
Right. So the synergies between a Fulgent and CSI, in terms of levering the contracts, really hasn't begun to be realized, meaning, we've been focused on integrating CSI and not cross-selling traditional Fulgent tests with CSI Salesforce and contracts.
So, long story short, those efficiencies have not been recognized yet. So the insurance billing we would see to-date would be the traditional CSI business flow [Indiscernible] fair cytogenetics, those products and services.
In terms of -- on a go-forward basis, we continue to put effort into becoming more in network. I think we're really happy to be able to sit here and say today that we have 160 million covered lives, but it's a never-ending feet.
We continue to go after these smaller regional contracts. Some of the Blue Cross Blue Shield contracts, we don't have yet, so we do have resources working on that on a daily basis to continue to improve and increase the number of covered lives we have.
Kevin Degeeter
With regards to sales force expansion for CSI and the oncology franchise, I think your comments suggest somewhere around 15 reps. By the end of the year.
At least with the current portfolio. How do you think about appropriate sizing for clinical oncology sales force over say an 18 months to 24 months horizon?
Brandon Perthuis
Much bigger than that, right? What we're doing, Kevin, from a go-to-market perspective, is looking at those states where we're particularly strong with managed care and we think that's a good place to start in terms of increasing our headcount.
As we mentioned, historically, CSI has been a wonderful business. They've run that business very well for a long time, but it's been a bit focused in Southeast region.
Our first objective is to take that Laboratory National, expand outside the Southeast region. We believe we have the managed care contracts to do that and we believe in certain states we're particularly strong in managed care, so that's where we're placing our headcount.
I think over time, that number must be bigger. It is a massive market with a tone of call point.
We are differentiating a little bit as it relates to oncologists versus pathologists, and we may have some sub-specialty salespeople for oncology, but I think it's a number that's going to continue to grow, especially as we land additional managed care contracts in those states. I think we will be reporting likely each quarter, have this head count expand.
But I could see in 2020 that number being significantly more than 15 and that's -- I'm specifically talking about the CSI sales force, not the Helio Salesforce, which would be a different call point.
Kevin Degeeter
Understood. And then I'm just with regard -- got one more and then I'll get back in the queue with regard to balance sheet and all with your guidance so close to a billion dollars on the balance sheet by the end of the year, yes, an equivalent to 40% plus of current market cap.
How do you think about buybacks or just balance sheet management here? Just kind of given the current balance sheet profile relative to the current stock price?
Paul Kim
Thank you for that question, Kevin. Buyback and other options are certainly things that we can consider.
But our primary focus is investing in this business and executing on our post - COVID M&A strategy. If you take a look at our core revenues, the amount of core revenues that we threw up in 2019 was $32 million.
The amount of core revenues that we had in 2020 was $36 million. The amount of core revenues that we had in a single quarter now is $40 million.
Even if you stripped out the NGS from the CDC, because it's hard to predict which way COVID it's going to go, We still had accelerated core revenues in a massive way, and this was possible because of our expanded operational capabilities, our quality, our reputation, our quality of people, and their more senior people that are gravitating towards Fulgent, as well as progress in our reimbursement. If you take a look at our strategy, particularly for M&A, what we're doing is we're using the capital, being very conscious about which assets and which companies to evaluate, and we're doing both, so for example, CSI has bolstered and strengthened traditional capabilities for us and the cancer market being able to provide end-to-end solution.
And then for Helio, an investment such as in that area, was an evolving newer markets were liquid biopsy. We also made an investment in China now taking over controlling interest, which will expand our footprint on an international basis.
So if you take a look at the approach that we're taking, we're using the massive amount of capital that we continue to write, generate additional cash web. And we're deploying that from an M&A perspective.
And we're bolstering the traditional markets as well as looking forward all utilizing our technology and our operational platform. So the long and short of it is, buybacks are certainly an option, but it's our intention to deploy this capital externally as well as investing aggressively within our internal structure.
Kevin Degeeter
Thanks for taking our questions.
Operator
And there are no further questions at this time. I will now turn the call back to Ming Hsieh for closing remarks.
Ming Hsieh
Again, thank you for joining the conference. We are very excited for the opportunity we're facing, and that definitely we have the capital and technology, and we'll be the major player in this very exciting, dynamic [Indiscernible] to the market.
So thank you very much for joining the call and looking forward to update you in the next quarter. Thank you.
Operator
And thank you for joining us. This concludes today's call.
You may now disconnect.