(Award-winning tech columnist Jon Markman publishes of Strategic Advantage, a popular daily newsletter about the digital transformation of business, entertainment and society -- and how to invest in it. Click here for a free two-week trial.)
COVID-19 is surging throughout the country, creating an opportunity for agile diagnostic businesses. This is how one newcomer is building an empire.
Elon Musk made news last week when the Tesla ( (TSLA) - Get Report) founder claimed to test both positive and negative for the novel coronavirus, twice. Forty five weeks into the global pandemic and the United States still has a testing problem.
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 in the surface of the virus. They also have the added benefitting of being inexpensive, at about $5 per test.
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, state and local governments have veered toward rapid tests. The Food and Drug Administration, in July 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 5-7 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 but low cost PCR test with fast turnaround times.
Fulgent Genetics makes such a test. The company also the platform to deliver tests at scale.
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.
The business changed course on 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.
Ming Hsieh, chief executive officer, last week 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.
In September the company contracted with 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. The deal 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.
Musk said on Saturday said he would seek a PCR test after 4 antigen tests proved inconclusive.
Investors should expect this scenario to play out time and again as COVID-19 cases continue to expand. Fulgent is in the right place at the right time with the right product.
Shares trade at only 8.5x 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.