COVID-19 is surging again throughout the country, creating an even larger opportunity for agile diagnostic businesses.
On Thursday, Elon Musk made news when the Tesla, Inc. (Nasdaq: TSLA, Rated “C”) founder claimed to test both positive and negative for the novel coronavirus, twice. We’re 45 weeks into the global pandemic and the United States still has a testing problem.
Enter Fulgent Genetics, Inc. (Nasdaq: FLGT, Rated “B-”). It’s a smaller company many investors don’t know about, and it has a solution.
The problem, apart from the raging infection rates globally, is that not all tests are created equally.
Some, like the four given to Musk, are based on antigens. These so-called rapid tests look for viral proteins called antigens that are found on the surface of the virus. They also have the added benefitting of being inexpensive, at about $5 per test.
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The gold standard is polymerase chain reaction variant. PCR tests detect viral genetic material through a process called amplification. They are far more accurate but can cost between $50 to $100 each. They also must be sent away to labs for diagnostics, creating delays of up to a week.
Given the costs and the absence of national testing protocols, businesses, states and local governments have veered toward rapid tests. In July, the Food and Drug Administration granted emergency approval for the use of six rapid tests. And, in September, the Trump administration began deploying 150 million of these tests across the country.
There is a big problem, though. Antigen tests can only detect proteins five to seven days after the onset of symptoms. Researchers have determined that infectiousness may last up to 10 days. The result has been a lot of bad data and even greater spread of the virus.
In the week ended Nov. 7, the Center for Disease Control found COVID-19 positivity increased 8.4% week-over-week. A week later, the Washington Post reported that the number of new cases reached 167,276.
The solution seems to be a high-quality, low-cost PCR test with fast turnaround times.
Fulgent Genetics makes such a test. The company also has the platform to deliver tests at scale, making this an almost unimaginably incredible opportunity.
The Temple City, Calif.-based company began in 2011 as a genetic testing platform. The founders worked with clinicians and patients to deliver reliable genetic tests for couples looking to become pregnant, or for individuals susceptible to cancer or cardiovascular disease. A Fulgent test was a reliable way to learn about potential genetic risks at a reasonable cost.
However, the business changed course in March when the novel coronavirus started to impact Americans. Managers quickly leveraged the company diagnostic platform for COVID-19 testing. They hired new staff and built mobile labs in the company parking lot. They saw what the platform could become.
This was possible because the core technology was built from the ground up by engineers, not geneticists. They used parallel processing and machine learning artificial intelligence to process tests quickly and cost effectively. They built in extreme scalability.
Last week, CEO Ming Hsieh spoke to that scale. During the third-quarter financial-results conference call, Hsieh said that with only a modest investment in infrastructure, Fulgent was able to grow test volume by 5,000% year-over-year. During the same time frame, gross margins improved by 19% sequentially. Quarterly profits doubled to $63.5 million.
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In September, the company contracted with the New York public school system, the largest in the country. Fulgent will provide a self-administered, at home PCR test with results available within 24 hours. This follows another blockbuster deal in July for Los Angeles County for drive through PCR testing.
It’s rare for a company of Fulgent’s size to be in the running for such contracts, let alone win them.
Investors should expect this scenario to play out time and again as COVID-19 cases continue to unfortunately expand. Fulgent is in the right place at the right time with the right product. That’s a winning combination.
Shares trade at only 8.5 times forward earnings and the market capitalization is still less than $1 billion. Given the sales leverage, the stock could trade to $75 within 12 months, or 76% above current levels.
Investors should consider buying Fulgent into any material weakness.
Best wishes,
Jon D. Markman
