A Deep Dive on Fulgent Genetics

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For this blog post, I'll be analyzing a Seeking Alpha Article written by Shareholders Unite

Fulgent Genetics (NASDAQ: FLGT) is a biotech company that's in the gene sequencing field. While it isn't profitable yet, it has been experiencing growing revenue and positive EBITDA using GAAP. Despite a tough Q1 2020, the company is a lot stronger than people realize.

Photo by National Cancer Institute on Unsplash

Here are the Q4 2019 facts that will add confidence to the company (according to Shareholders Unite):

-the company gained a dozen new customers
-their Chinese joint venture grew 223% with the average selling price growing 20%
-organic growth was 48%

All of these, according to Shareholders Unite, should compensate for a weaker Q1.

Competitive Strengths are the center of the bull case

According to Shareholders Unite, Fulgent Genetics has the lowest operating costs among its peers. Here's a quote that stood out in Fulgent's Q4 2019 conference call:

"I've come to understand how our technology and approach truly set us apart from other laboratories in the market. Specifically, the Fulgent Laboratory Information Management System, or FLIMS for short, serves as the engine that drives many of our efficiencies... Our technology platform also allows us to be the only lab that enables our physician clients to customize genetic tests in real-time. We also recently became the first lab to routinely use next-generation sequencing for parental studies, which we have shown to be critically important in detecting clinically relevant germ-line mosaicism; this was recently published in the Journal of Molecular Diagnostics."

                                    

                                                    -Brandon Perthuis, Chief Commercial Officer of Fulgent Genetics

From that quote, Perthuis has described how their platform is the only platform that allows doctors to customize genetic tests and their platform has been the first to use the latest gene sequencing technology. But, the big thing that should catch your eye is how their platform is the ONLY platform that allows doctors to customize genetic tests. This is big and their gene sequencing platform has a blue ocean of its own!

Also, Fulgent's platform has evolved pretty quick. Here's what management said in the Q4 2019 conference call:

"At the time of our IPO in 2016, Fulgent was a rare disease company; today, we are comprehensive lab offering testing that spans all areas of genetic health, including prenatal, preimplantation, reproductive carrier screening, cardiovascular disease, neurodegenerative disease, and both, hereditary and somatic cancer." 

From being a company that was focused in rare diseases to becoming a gene sequencing company that covers all areas of health, Fulgent Genetics has expanded a lot in a short amount of time. 

Now, let's analyze it's financials

According to Yahoo Finance, Fulgent Genetics has been cash flow positive since 2019. Meanwhile, in their income statements, they've never had positive net income. While they continue to burn cash, Fulgent has $28 million in cash, which will help them last for more-than 3 years if they continue to burn cash at the same rate. Also, they have $2.68 million in debt, which is a lot less than the amount of cash they have. This company can buy a lot of time until they start becoming profitable. 

The company's liquidity situation is looking strong as their current ratio is 9.96, which should alleviate fears that they won't survive the coronavirus lockdowns. 

How does Fulgent compare to its peers?

When comparing Fulgent Genetics with its peers, it's interesting to see that the gene testing space is really crowded with players like Exact Sciences and Invitae but, it was very interesting to see Fulgent being the only company that has been showing positive free cash flow while the other players aren't. 

Conclusion

Fulgent Genetics is a promising play in the gene testing space. While there are immense risks that are present for biotech firms, from Shareholders Unite's analysis, the downside risk looks a lot lower for a small cap biotech company but should still be considered as speculative.