Fulgent Genetics Inc

F:7F0

Thank you, Lauren. I will start with some comments on our two business lines. Then Brandon will review our product and go-to-market updates for our lab service business. Paul will conclude with the financials and outlook before we take your questions. I am pleased with the momentum in our therapeutic development business as we progress on our clinical pipeline. We are seeing encouraging clinical data from our proprietary nano drug delivery platform, which powers both FID-07 and FID-022. I will share the recent updates from FID-07 and then share the progress we have made with FID-022. As a reminder, Fulgent has taken a different approach with FID-07. FID-07 is a nanoencapsulated paclitaxel developed under Fulgent's CleanChemo platform. The platform is designed to reduce toxicity typically associated with conventional chemotherapy while maintaining or improving efficacy, a profile Fulgent believes is preferable in combination oncology regimens.

Starting with FID-07, with the majority of Phase 2 complete, we had the End of Phase 2 meeting with the FDA in August. We look forward to sharing more with you later this year. Our Phase 3 study is in preparation. We are encouraged by our clinical trial progress achieved so far, and I believe entering the Phase 3 registration trial is an important step towards the potential commercialization of FID-07 for the treatment of recurrent or metastatic head and neck squamous cell carcinoma patients who currently have very few effective treatment options. We continue to approach conversations with partners who bring both resources and strategic alignment.

In the third quarter, we were pleased with the momentum of our second clinical candidate, FID-022. With the Phase 1 dose escalation at the fifth dose level ongoing, we expect to determine the maximum tolerated dose level in the first half of next year. FID-022 is a nanoencapsulated SN-38 for treatment of solid tumors, including potentially colon, pancreatic, ovarian, and bile duct cancers. Please note that both FID-07 and FID-022 are derived from the same proprietary CleanChemo delivery platform patented and fully owned by Fulgent. Similar to FID-07, FID-022 can also be used in various oncology drug combinations. In conclusion, we believe our core platform strategy is making meaningful progress. We are seeing greater potential in commercializing FID-07 and FID-022 to drive a large and growing market.

In our laboratory services business, we continue to see our AI and digital pathology solutions work at an accelerated pace and continue to expand our AI portfolio. We are pleased with the progress we have made to address billing and revenue cycle management, which continues to affect our third quarter results, and our team's ability to work effectively to deliver the improvement to our collection rates. I would like to thank our employees, partners, and stakeholders for your hard work and loyalty. I will now turn over the call to Brandon Perthuis, our Chief Commercial Officer, to talk more about our laboratory service business. Brandon.

Thank you, Ming. We ended the quarter at $90.4 million, an increase of 8% year-over-year and 6% sequentially. We continued integration efforts for Bako and StrataDx during the third quarter, which contributed to the overall performance. Breaking it down further, precision diagnostics ended at $41.8 million, a decrease of 18% year-over-year, but an increase of 1% sequentially. Anatomic pathology came in at $40.9 million, an increase of 57% year-over-year and 9% sequentially, and biopharma services ended the quarter at $7.7 million, an increase of 5% year-over-year and 19% sequentially.

Last quarter, we discussed managing the final phase of the transition of our billing and revenue cycle management system. We originally undertook this transition to achieve greater consistency across our operations and to drive long-term efficiency. While this transition continued to have a negative impact on the third quarter, we are pleased to announce we have made significant progress and have seen a positive sequential trend in reimbursement, which has contributed to improvements in our total revenue and gross margins as compared to the second quarter. While there is still additional effort needed to finalize the remaining customizations, and we cannot predict more precise timing for future improvements, we believe we have a clear line of sight into what is needed to return to historical collection rates.

We continue to monitor developments related to PAMA and any potential changes to the clinical lab fee schedule. Based on what we know today, we expect the impact to our business to be minimal. Our primary CPT codes have limited exposure to the reimbursement reductions currently contemplated under PAMA. As a result, we do not currently view PAMA as a material headwind to our revenue or earnings outlook. We will remain engaged with the evolving reimbursement landscape, but at this point, we feel comfortable with our positioning.

We continue to make significant progress integrating artificial intelligence into our pathology workflow. During the third quarter, our AI platform analyzed approximately 255,000 slide images, representing a 23% increase from the second quarter. Importantly, as utilization has scaled, the technical reliability of the platform has improved substantially, with failed analyses declining to just 0.01% during the quarter. We now have 4 AI modules in production, with our prostate cancer detection and grading module undergoing pathologist evaluation.

During the quarter, we also transitioned our production environment to a new AI analysis platform designed to improve speed, reliability, and scalability. The new architecture has meaningfully reduced processing times across several of our highest volume applications and provides the infrastructure to efficiently support additional AI modules as they move into production. We are particularly encouraged by the continued development of our prostate cancer application. In internal testing across 262 cases, the module identified 768 of 770 cancer-containing parts. Looking ahead, we expect to continue expanding the platform with 5 additional AI applications planned for deployment in the fourth quarter.

We believe these investments can improve diagnostic consistency, enhance pathologist productivity, and create meaningful operating leverage as testing volumes grow. Overall, we are pleased with our progress during the third quarter, especially around the improvements in revenue cycle management and the use of AI to scale our business. I'll now turn the call over to our Chief Financial Officer, Paul Kim. Paul.

Thank you, Brandon. Revenue in the third quarter of 2026 totaled $90.4 million, including $21.8 million from Bako Diagnostics and StrataDx, compared to $85.4 million in the second quarter of 2026, which included $16.9 million from Bako Diagnostics and StrataDx. The increase in our Q3 revenue is primarily due to the integration of Bako Diagnostics and StrataDx. The GAAP gross margin was 35.3% and non-GAAP gross margin for the third quarter was 36.3%. The increase sequentially in gross margin reflects fixed costs spread over a higher revenue base driven by better collection rates. We expect gross margins to normalize as our collection rate returns to historical norms and as revenue increases.

Now turning to operating expenses. Total GAAP operating expenses were $54.5 million for the third quarter, down from $61.8 million in the second quarter. The decrease in operating expenses was driven by a $3.2 million recovery in the third quarter of 2026 and the absence of a one-time $2.2 million impairment charge recorded in the second quarter on a customer relationship intangible asset following the loss of a customer in our therapeutic development segment. Non-GAAP operating expenses were $44.8 million in the third quarter, down from $49.2 million in the second quarter. GAAP operating margin improved to -24.9% in Q3 compared to -42.3% in Q2. Non-GAAP operating margin improved sequentially to -13.2% in Q3 compared to -26.2% in Q2.

Our GAAP loss in the current quarter was $13.2 million, a decrease from the prior quarter's GAAP loss of $29.5 million and a GAAP loss of $0.48 per share based on 27.7 million weighted average diluted shares outstanding. On a non-GAAP basis and excluding equity-based compensation expense and intangible asset amortization, loss for the quarter was approximately $2.4 million, or $0.09 per share based on 27.7 million weighted average diluted shares outstanding. Adjusted EBITDA for the third quarter was a loss of approximately $7.5 million compared to a loss of $17.1 million in the prior quarter. In the third quarter, we repurchased just over 15,000 shares under our stock repurchase program.

Since the inception of the stock repurchase program in March 2022, a total of over 7.5 million shares of common stock has been repurchased under our program with approximately $75.6 million currently remaining available for future purchases of our common stock. Turning to the balance sheet, we ended the third quarter with approximately $652.4 million in cash, cash equivalents, restricted cash, and marketable securities. The $100.9 million increase in cash from the previous quarter was primarily driven by a receipt of $112.3 million in federal tax refunds and related interest, partially offset by $11.4 million of cash used in operations and CapEx.

We are reaffirming our full-year revenue guidance and continue to expect total revenue to be in the range of $330 million to $340 million for 2026, representing year-over-year growth of 2.3% to 5.4%. We estimate precision diagnostics revenues of approximately $161 million to $165 million, anatomic pathology of approximately $146 million to $150 million, and biopharma services to be approximately $23 million to $25 million. On margins, we expect full-year non-GAAP gross margins to be in the mid-30% range, reflecting product mix shifts tied to our change in customer composition and lower collection rates associated with the transition to our new revenue cycle management and billing system.

We expect non-GAAP operating margins to be in the low negative 20% range for the year, an improvement from our prior expectation of the mid negative 20% range. We continue to prioritize our investments across two key areas: R&D, where we are advancing both our laboratory testing capabilities and clinical study pipeline, and the integration of Bako Diagnostics and StrataDx, where we are aligning our expanded sales organization, cross-selling our broad testing menu, and consolidating operations to drive productivity and operating efficiency.

Our billing system transition is still underway, and we saw encouraging improvements in the third quarter that we expect will support more consistent collections. Along with targeted upgrades to our laboratory infrastructure, these investments are designed to strengthen our competitive position and enhance throughput capacity. We believe our technology platform is highly scalable and positions us to drive operating leverage and margin expansion as volumes grow.

Our clinical programs continue to progress and we updated the timing of related spending accordingly. We now expect approximately $21 million in therapeutic development investment in 2026 as we continue advancing trials for FID-022 and FID-07. We now expect the full-year 2026 non-GAAP loss of $1.65 to $1.75 per share, an improvement from our prior guidance of a loss of $2.22 to $2.35 per share. This reflects discipline across the business, which has lowered our operating expenses. This excludes stock-based compensation, impairment loss, acquisition-related costs, amortization of intangible assets, as well as other charges or gains that we believe are not representative of our operations.

Our per share guidance reflects the 4.1 million shares repurchased year-to-date and assumes no further repurchases. Finally, our cash position remains strong. During the third quarter, we received approximately $112.3 million in federal tax refunds and related interest that were delayed due to constrained resources at the IRS. For fiscal year 2026, assuming capital purchases of $13 million, spend on our therapeutic development of $21 million, and excluding any future stock repurchases or other expenditures outside the ordinary course, which could include additional M&A, we are anticipating ending the year with approximately $630 million of cash, cash equivalents, restricted cash, and investments in marketable securities.

The increase from our prior forecast of $610 million is attributed to the improved operating outlook and lower therapeutic development spend. We are pleased with our results for the quarter and are encouraged by the operational progress we made executing against our strategic initiatives to drive AI and digital solutions across our laboratory services business, and are proud of the momentum on our pharmaceutical pipeline. We believe we are well positioned for longer-term growth and strategic investments, innovations, and expanded offerings that deliver value. Thank you for joining our call today. Operator, you may now open it up for questions.

Thank you. Yes, for all the different questions. Go ahead, Paul.

I'll let Brandon tee it up and then I'll put some numbers around it.

Yes, thanks, Paul, and thanks, Karan, for the question. Interesting analogy to ask and kind of what inning it's in using the baseball analogy, and perhaps a little bit hard to say, but I think we're pretty deep into the game. I think as I addressed in the last quarter, we had challenges related to implementation of customizations that were needed in the new RCM system to maximize [ the collections ]. Since we've noticed that, we've made progress implementing a number of these required customizations, and we're seeing the impact of those customizations on our improved collection rate. That was reflected in the third quarter performance. We still have some fine-tuning to do, but we are pretty encouraged with the progress so far.

Hi, Karan. This is Paul Kim. Yes, the uptick in the gross margins, aside from the higher revenues for Q3, we were pleased to see that. Actually, the uptick in the gross margins, that happened quicker than we thought. And as Brandon indicated, we're not done yet. We've gotten started this quarter, but we did make it a priority for the company to optimize the collection rates as much as possible. So we believe with additional work that we have in terms of policies and focus that there's room for gross margins to continue to grind higher. The other thing that I would like to point out is, given the fact that it's the end of Q3, when we take a look at our overall forecast, the cash forecast for the year, it's actually coming in a lot more favorable than we thought.

So we raised our cash forecast from $610 million to $630 million and the narrowing of the EPS as well. If you take a look at the operating expenses, the operating expenses, particularly for like the G&A, you'll see that is lower than our historical run rate. And that's because even on the operating expense side, we have not stored up a lot of bad debt that we had. We continue to go after some of the old balances and we had favorable collections even on the bad debt side. The last thing that I will comment on is the revenue range. The revenue range, we left it the same as we had it last quarter between $330 million and $340 million. But we anticipate that Q4 should be a nice quarter for the company as well.

And just leaving the range from $330 million to $340 million gives us ample room for us to reach a target that we'll be satisfied with.

Thank you. Yes. So I will tee it up in terms of the numbers. We'll go in reverse order and then I'll turn it over to Brandon. If you take a look at our forecast for Q4, if you look at the midpoint of the $330 million to $340 million, if we came at the midpoint of that, which is $335 million, it says that Q4, if you back into that number, is about flat in terms of our revenues compared to Q3. But we're not shooting for that, right? We're shooting for a number that's higher than that.

So if you take a look at the upper end of the range of $330 million to $340 million, that leaves us room to have a sequential increase from Q3 to Q4. And we always reserve the right to come in even higher than that. But I'll turn it over to Brandon who can talk about the dynamics of what he sees in terms of customer orders and flow in November and December to give you additional comfort that we're doing everything possible to expand our footprint. We're doing everything possible to continue to increase our revenues, and then all in the meanwhile, improving our gross margins and our overall spend.

Go ahead, Brandon.

Yes, well, Paul, I think you covered it really well. In addition to what Paul said, we still do have some fine-tuning to do on this RCM system, our Revenue Cycle Management system. Again, we're really proud of the progress that we've made so far, but still additional work to do there, so taking the prudent approach to the range as we work to get this system where we want it. In terms of seasonality, I think at this point, with our diversified business across pathology, rare disease, women's health, and our biopharma services, we see some seasonality, but we're coming in a little bit more shielded from it. So as Paul mentioned, we're going to shoot for a good Q4. I think we have the opportunities we need, hopefully, to be at the higher end of that range. But like I said, still some work to do in certain areas, but feeling pretty good about where we are from a business perspective.

Yes, that'd be great. Thank you. Yes, thank you for the questions. I think with the AI, it definitely helps us increase the efficiency, but more importantly would be quality. We have a second level of quality assurance assisting our pathologists getting the data with more speed and fewer errors. So I think we will see the productivity improvement as well as the future gross margin improvements.

Operator, [ 4-9-7. ] If there are no more questions, we can conclude the call.

We appreciate everyone for joining our conference call. We look forward to updating you on our next quarter results. And when we report next quarter results, we also look forward to giving out our guidance for 2027. Thank you very much.

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