Fulgent Genetics(FLGT) - 2020 Q4 - Annual Report

PART I Business Fulgent Genetics offers comprehensive genetic and large-scale COVID-19 testing services, leveraging a proprietary platform for significant 2020 growth Overview The company provides comprehensive genetic and large-scale COVID-19 testing services, achieving dramatic growth in 2020 with 4.4 million billable tests - The company offers a broad genetic test menu with over 18,000 single-gene tests and more than 900 panels, covering over 5,700 genetic conditions[14] - Since March 2020, Fulgent has offered COVID-19 testing services, processing orders for governmental bodies, municipalities, and large corporations, including operating testing sites for the County of Los Angeles and the New York City public school system[16] Billable Test Volume Growth | Year | Billable Tests Delivered | | :--- | :--- | | 2020 | 4.4 million | | 2019 | 59,000 | Our Technology Platform and Solution Fulgent's proprietary technology platform integrates gene probes, algorithms, and LIMS, driving operational efficiencies and a low internal cost per test - The company's proprietary technology platform integrates proprietary gene probes, advanced data comparison and suppression algorithms, adaptive learning software, and integrated laboratory information management systems (LIMS)[25][26][28] 2020 Key Operating Metrics | Metric | Value | | :--- | :--- | | Average Internal Cost per Billable Test | ~$20 | | Average Price per Billable Test | ~$96 | Our Genetic Tests and COVID-19 Tests The company offers diverse genetic tests, including single-gene and whole exome sequencing, alongside COVID-19 tests with FDA Emergency Use Authorization and at-home collection kits - Test offerings include single-gene tests, over 900 pre-established panels, whole exome/genome sequencing, and specialized tests like Solid Tumor Molecular Profiling and Rapid Whole Genome for NICU/PICU patients[36][37] - The company launched 'Picture Genetics' in 2019, a patient-initiated genetic testing service advertised directly to consumers[36] - Fulgent received an FDA Emergency Use Authorization (EUA) for its RT-PCR-based COVID-19 test, which includes an at-home specimen collection service through Picture Genetics, with labs capable of thousands of samples per day and a 24-48 hour turnaround time[39] Our Customers Fulgent's customer base expanded to include governmental bodies for COVID-19 testing, with the County of Los Angeles and San Bernardino County representing 28% and 10% of 2020 revenue, respectively Customer Concentration (2020 Revenue) | Customer | Percentage of Total Revenue | | :--- | :--- | | County of Los Angeles | 28% | | San Bernardino County | 10% | - The company classifies customers into three payor types: Insurance, Institutional (hospitals, labs, government bodies, corporations), and Patients (direct pay)[43] Competition Fulgent competes with numerous molecular genetic testing and COVID-19 diagnostic providers, leveraging its broad content and pricing, despite facing larger, more established competitors - Principal competitors include Ambry Genetics, Baylor Genetics, GeneDx, Laboratory Corporation of America Holdings, Myriad Genetics, Inc., and Quest Diagnostics Incorporated[57] - Key competitive factors in the market include breadth of genetic content, test customization, price, quality of results, turnaround time, and reimbursement arrangements[59] Regulation Operating in a heavily regulated environment, the company's CLIA-certified labs offer LDTs, facing potential FDA oversight, complex reimbursement rules, and stringent privacy and fraud laws - The company's laboratories in California and Texas are certified under the Clinical Laboratory Improvement Amendments (CLIA) and accredited by the College of American Pathologists (CAP)[69] - Fulgent's genetic tests are considered Laboratory Developed Tests (LDTs), historically not subject to FDA premarket review, but future regulation like the proposed VALID Act could change this[83][85] - The company is subject to various fraud and abuse laws, including the federal Anti-Kickback Statute, the Stark Law, and the False Claims Act, which carry severe penalties for non-compliance[113][118][121] - Compliance with data privacy laws such as HIPAA, HITECH, the California Consumer Privacy Act (CCPA), and the EU's General Data Protection Regulation (GDPR) is critical to operations[98][104][107] Risk Factors The company faces significant risks from operational fluctuations, reliance on COVID-19 testing, intense competition, customer concentration, sole suppliers, evolving regulations, and stock price volatility Business and Strategy Risks Key business risks include fluctuating operating results, reliance on temporary COVID-19 testing, a history of losses, intense competition, customer concentration, and sole supplier dependency - The expansion of the COVID-19 testing business has led to rapid growth but presents management challenges and is expected to decrease as vaccines become widely deployed[152][156] - The company has a history of losses and may not be able to sustain the profitability achieved in 2020[157] - Revenue is concentrated, with two customers (County of Los Angeles and San Bernardino County) accounting for 28% and 10% of total revenue in 2020, respectively[163] - The company relies on Illumina as the sole supplier for its next-generation sequencers and associated reagents, creating a significant supply chain risk[210] Regulatory Risks Regulatory risks include potential FDA oversight of LDTs, the need to maintain CLIA and state licenses, and compliance with complex healthcare laws like PAMA, HIPAA, and anti-fraud statutes - Potential changes in FDA enforcement discretion for Laboratory Developed Tests (LDTs), including possible legislation like the VALID Act, could subject the company's tests to premarket clearance or approval, increasing costs and delaying market access[252][257] - Failure to comply with federal (CLIA) and state laboratory licensing requirements could result in the loss of ability to perform tests and significant business disruption[264][270] - The marketing of COVID-19 tests under an Emergency Use Authorization (EUA) is subject to specific limitations, and the EUA can be terminated or revoked by the government[298][300] - Changes in healthcare policy, such as the Affordable Care Act (ACA) and the Protecting Access to Medicare Act (PAMA), could negatively impact reimbursement rates and financial results[286][288] Intellectual Property Risks Intellectual property risks stem from reliance on trade secrets over patents, which may offer inadequate protection, and the potential for costly third-party infringement litigation - The company primarily relies on trade secret protection rather than patents, which may not be effective if confidential information is disclosed or independently developed by competitors[316][317] - The company faces the risk of litigation from third parties claiming infringement of their intellectual property, which could result in substantial damages and prevent the sale of its tests[320][321] Common Stock Risks Common stock risks include high price volatility, limited liquidity due to concentrated ownership (CEO owning 28%), and no anticipated dividends, with returns dependent on stock price appreciation - The trading price of the company's common stock has been and may continue to be highly volatile[334] - As of December 31, 2020, executive officers, directors, and 5%+ beneficial owners collectively owned approximately 32% of the company's voting equity, with the founder and CEO alone owning 28%, allowing for significant control over stockholder matters[338] - The company does not intend to pay dividends in the foreseeable future, limiting investor returns to potential stock price appreciation[343] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Fulgent Genetics' common stock trades on Nasdaq under 'FLGT' since 2016, with no anticipated dividends, and proceeds from equity offerings funding operations and a joint venture - The company's common stock has been listed on the Nasdaq Global Market under the symbol "FLGT" since September 29, 2016[366] - The company does not anticipate paying any cash dividends in the foreseeable future, planning to retain future earnings to finance business growth[370] - The company has raised significant capital through multiple equity offerings, including its 2016 IPO and several equity distribution agreements and underwritten offerings in 2019 and 2020[372][374][375] Management's Discussion and Analysis of Financial Condition and Results of Operations Fulgent's 2020 financial performance was transformed by COVID-19 testing, with revenue surging to $421.7 million, net income of $214.3 million, and significantly strengthened liquidity from operations and equity offerings Results of Operations In 2020, revenue surged 1196% to $421.7 million due to COVID-19 testing, driving gross profit up 1702% to $331.9 million and resulting in a net income of $214.3 million Financial Performance Comparison (2020 vs. 2019) | Metric | 2020 | 2019 | % Change | | :--- | :--- | :--- | :--- | | Revenue | $421.7M | $32.5M | 1196% | | Gross Profit | $331.9M | $18.4M | 1702% | | Operating Income (Loss) | $290.2M | ($0.4M) | 67894% | | Net Income (Loss) | $214.3M | ($0.4M) | 52244% | | Billable Tests Delivered | 4.4M | 59K | 7373% | | Avg. Price per Test | $96 | $555 | (83)% | | Cost per Test | $20 | $241 | (92)% | - The dramatic increase in revenue was primarily due to the volume of COVID-19 tests, which have a lower price point than the company's traditional genetic tests, leading to a substantial decline in the average selling price per test[440][441] - Cost of revenue increased primarily due to higher reagent and supply expenses ($49.9 million), consulting/labor ($10.6 million), and personnel costs ($8.1 million) needed to support the massive increase in test volume[445] Liquidity and Capital Resources As of December 31, 2020, the company reported a strong liquidity position with $87.4 million in cash and $344.4 million in marketable securities, driven by operations and equity offerings Cash and Marketable Securities (Year-End, million) | Item | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash and Cash Equivalents | $87.4 | $12.0 | | Marketable Securities | $344.4 | $58.3 | Summary of Cash Flows (Year Ended Dec 31, million) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net Cash from Operations | $140.6 | $5.5 | | Net Cash used in Investing | ($326.4) | ($29.0) | | Net Cash from Financing | $261.3 | $28.8 | - The company raised a total of $261.3 million from financing activities in 2020, primarily through sales of common stock via various equity distribution agreements[476] Controls and Procedures As of December 31, 2020, management concluded that the company's disclosure controls and internal control over financial reporting were effective, with no material changes reported - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[498] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020, based on the COSO 2013 framework[499] PART III Directors, Executive Officers, Corporate Governance, Executive Compensation, and Other Matters Information for Items 10-14, covering directors, executive officers, corporate governance, compensation, security ownership, and related transactions, is incorporated by reference from the 2021 proxy statement - Information regarding Directors, Executive Officers, Corporate Governance (Item 10), Executive Compensation (Item 11), Security Ownership (Item 12), Certain Relationships and Related Transactions (Item 13), and Principal Accounting Fees and Services (Item 14) is incorporated by reference from the registrant's definitive proxy statement for its 2021 annual meeting of stockholders[506][507][508][509][510] PART IV Exhibits, Financial Statement Schedules The consolidated financial statements are filed with this report, with other schedules omitted, and an index of all 10-K exhibits is included - The consolidated financial statements are filed with this report, and all other financial statement schedules have been omitted[514] Financial Statements Audited consolidated financial statements for 2020 and 2019 show dramatic financial improvement, with total assets reaching $700.5 million, net income of $214.3 million, and diluted EPS of $8.91 in 2020 Consolidated Balance Sheet Data (in thousands) | Account | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $87,426 | $11,965 | | Marketable securities | $344,443 | $58,251 | | Trade accounts receivable, net | $183,857 | $6,555 | | Total Assets | $700,461 | $88,756 | | Liabilities | | | | Accounts payable | $26,488 | $1,581 | | Income tax payable | $53,319 | $24 | | Total Liabilities | $131,074 | $5,979 | | Stockholders' Equity | $569,387 | $82,777 | Consolidated Statement of Operations Data (in thousands) | Account | 2020 | 2019 | | :--- | :--- | :--- | | Revenue | $421,712 | $32,528 | | Gross Profit | $331,905 | $18,421 | | Operating Income (Loss) | $290,158 | ($428) | | Net Income (Loss) | $214,310 | ($411) | | Diluted EPS | $8.91 | ($0.02) | - The company's revenue is disaggregated by payor type, with Insurance ($257.6 million) and Institutional ($163.1 million) customers being the primary sources of revenue in 2020[620]