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BTIG Downgrades Fulgent Genetics from Buy to Neutral

NEW YORK – Investment bank BTIG on Monday downgraded Fulgent Genetics from a Buy rating to Neutral saying the benefits the firm is seeing from its COVID-19 testing business may not be sustainable.

On Monday, Fulgent raised its full-year revenue guidance for the third time this year, this time to $300 million, which would represent 800 percent year-over-year growth. The Temple City, California firm had increased guidance in August from $120 million to $135 million.

BTIG analyst Sung Ji Nam said in a report that it may seem "counterintuitive" to downgrade Fulgent given the guidance raise, but added that $260 million of the guided revenues for 2020 are expected to be from COVID-19 testing, while only $40 million represents the firm's core genetic testing business.

BTIG continues to expect COVID testing demand "could be astronomical," she said, at least through the first quarter of 2021. Fulgent's stock is also up 238 percent year to date, Nam said.

"Given the recent explosion of new COVID cases, hospitalization rates, and daily deaths ... it is not surprising to us that the testing demand will continue to surge across the board," Nam said. "We are still not seeing the end in sight for the recent unprecedented surge in cases as we head into the holiday season and deeper into the [influenza] season." Indeed, the BTIG analysts will not be surprised if Fulgent beats this year's guidance by a huge margin and delivers large COVID testing revenue through the first half of 2021,  she added.

That said, the BTIG group is "not convinced that pure-play COVID testing at current levels is sustainable beyond 2021, and could start to meaningfully decline starting in the back half of next year," Nam said, in particular due to the availability of a SARS-CoV-2 vaccine. Overall, the BTIG analysts are projecting that COVID testing demand will decline dramatically over the next year or two across the industry.

Although Fulgent has done a "phenomenal job" ramping up COVID testing, BTIG is "less certain about to what extent the business can be re-purposed or reinvented" in the long term. The analysts acknowledged, however, that Fulgent's core genetic testing business "is better positioned than ever" due to "new customers, deepened relationships with payers, and significantly increased brand recognition," particularly for its Picture Genetics business.

BTIG is modeling 2020 revenues of $300 million for Fulgent, 2021 revenues of $428 million, and 2022 revenues of $143 million. For the core genetics business, the BTIG team expects revenues to ultimately grow from $40 million this year to $67 million by 2022.

In the long term for Fulgent's COVID testing business, BTIG said it estimates approximately $75 million of revenue "is durable in perpetuity post-pandemic."

In early morning trading Tuesday, Fulgent's shares on the Nasdaq were down more than 11 percent to $38.68.