# Fulgent Genetics, Inc.: Form 10-Q for the period ended Mar 31, 2024

- Company: [Fulgent Genetics, Inc.](/companies/flgt.md) (CIK 1674930)
- Form: 10-Q
- Filed: 2024-05-03
- Accepted by EDGAR: May 3, 2024, 07:34 ET
- Period: 2024-03-31
- Accession: 0000950170-24-052485
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1674930/000095017024052485/flgt-20240331.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1674930/000095017024052485/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-01-01 to 2024-03-31 | $64.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2024-01-01 to 2024-03-31 | $42.4m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2024-01-01 to 2024-03-31 | $22.1m | us-gaap:GrossProfit |
| Research and development | 3 months, 2024-01-01 to 2024-03-31 | $11.4m | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2024-01-01 to 2024-03-31 | −$21.8m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2024-01-01 to 2024-03-31 | −$327.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-01-01 to 2024-03-31 | −$13.5m | us-gaap:NetIncomeLoss |
| Diluted shares (weighted) | 3 months, 2024-01-01 to 2024-03-31 | 29,769,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2024-01-01 to 2024-03-31 | $7.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2024-01-01 to 2024-03-31 | $4.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 3 months, 2024-01-01 to 2024-03-31 | $225.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2024-03-31 | $54.7m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2024-03-31 | $386.5m | us-gaap:AssetsCurrent |
| Total assets | at 2024-03-31 | $1.23bn | us-gaap:Assets |
| Current liabilities | at 2024-03-31 | $75.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-03-31 | $103.2m | us-gaap:Liabilities |
| Shareholders' equity | at 2024-03-31 | $1.13bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 22,855 characters.

*The following discussion and analysis of our financial condition and results of operations should be read together with our condensed consolidated financial statements and related notes included in this report. Additionally, pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K promulgated by the U.S. Securities and Exchange Commission, or SEC, in preparing this discussion and analysis, we presume that readers have access to and have read the discussion and analysis of our financial condition and results of operations included in our annual report on Form 10-K for our fiscal year ended December 31, 2023, filed with the SEC on February 28, 2024, or the 2023 Annual Report. As used in this discussion and analysis and elsewhere in this report, unless the context otherwise requires, the terms “Fulgent,” the “Company,” “we,” “us” and “our” refer to Fulgent Genetics, Inc. and its consolidated subsidiaries.*

### Forward-Looking Statements

*The following discussion and analysis contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Forward-looking statements are statements other than historical facts and relate to future events or circumstances or our future performance, and they are based on our current assumptions, expectations and beliefs concerning future developments and their potential effect on our business. The forward-looking statements in this discussion and analysis include statements about, among other things, our future financial and operating performance, our future cash flows and liquidity and our growth strategies, the development of our drug candidates, as well as anticipated trends in our business and industry. These forward-looking statements are subject to a number of risks and uncertainties, including, among others, those described under “Item 1A. Risk Factors” in Part I of the 2023 Annual Report. Moreover, we operate in a competitive and rapidly evolving industry and new risks emerge from time to time. It is not possible for us to predict all of the risks we may face, nor can we assess the impact of all factors on our business or the extent to which any factor or combination of factors could cause actual results to differ from our expectations. In light of these risks and uncertainties, the forward-looking events and circumstances described in this discussion and analysis may not occur, and actual results could differ materially and adversely from those described in or implied by any forward-looking statements we make. Although we have based our forward-looking statements on assumptions and expectations we believe are reasonable, we cannot guarantee future results, levels of activity, performance or achievements or other future events. As a result, forward-looking statements should not be relied on or viewed as predictions of future events, and this discussion and analysis should be read with the understanding that actual future results, levels of activity, performance and achievements may be materially different than our current expectations. The forward-looking statements in this discussion and analysis speak only as of the date of this report, and except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason after the date of this report to conform these statements to actual results or to changes in our expectations.*

### Overview

We are a technology-based company with a well-established laboratory services business and a therapeutic development business. Our laboratory services business, to which we formerly referred to as our clinical diagnostic business, includes technical laboratory services and professional interpretation of laboratory results by licensed physicians. Our therapeutic development business is focused on developing drug candidates for treating a broad range of cancers using a novel nanoencapsulation and targeted therapy platform designed to improve the therapeutic window and pharmacokinetic profile, or PK profile, of new and existing cancer drugs.

### Business Risks and Uncertainties and Other Factors Affecting Our Performance

Our business and prospects are exposed to numerous risks and uncertainties. For more information, see “Item 1A. Risk Factors” in Part I of the 2023 Annual Report. In addition, our performance in any period is affected by a number of other factors. See the description of some of the material factors affecting our performance in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2023 Annual Report.

### Results of Operations

The table below summarizes the results of our continuing operations for each of the periods presented. For a financial overview relating to our results of operations, including general descriptions of the make-up of material line items of our statement of operations data, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the 2023 Annual Report.

*(dollars in thousands)*

| Statement of Operations Data: | Three Months Ended March 31, 2024 | 2023 | $% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $64,485 | $66,168 | $(1,683) | (3%) |
| Cost of revenue | 42,381 | 47,357 | (4,976) | (11%) |
| Gross profit | 22,104 | 18,811 | 3,293 | 18% |
| Operating expenses: |  |  |  |  |
| Research and development | 11,434 | 9,782 | 1,652 | 17% |
| Selling and marketing | 8,989 | 10,083 | (1,094) | (11%) |
| General and administrative | 21,489 | 21,802 | (313) | (1%) |
| Amortization of intangible assets | 1,990 | 1,968 | 22 | 1% |
| Total operating expenses | 43,902 | 43,635 | 267 | 1% |
| Operating loss | (21,798) | (24,824) | 3,026 | 12% |
| Interest and other income, net | 7,625 | 3,775 | 3,850 | 102% |
| Loss before income taxes | (14,173) | (21,049) | 6,876 | 33% |
| Benefit from income taxes | (327) | (5,200) | 4,873 | 94% |
| Net loss from consolidated operations | (13,846) | (15,849) | 2,003 | 13% |
| Net loss attributable to noncontrolling interests | 384 | 509 | (125) | (25%) |
| Net loss attributable to Fulgent | $(13,462) | $(15,340) | $1,878 | 12% |

### Revenue

*(dollars in thousands)*

| Revenue Data: | Three Months Ended March 31, 2024 | 2023 | $% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Precision diagnostics | $37,446 | $27,905 | $9,541 | 34% |
| Anatomic pathology | 23,107 | 26,411 | (3,304) | (13)% |
| BioPharma services | 2,656 | 8,420 | (5,764) | (68)% |
| COVID-19 | 1,276 | 3,432 | (2,156) | (63)% |
| Total | $64,485 | $66,168 | $(1,683) | (3)% |

Revenue decreased $1.7 million, or 3%, from $66.2 million in the three months ended March 31, 2023 to $64.5 million in the three months ended March 31, 2024. The decrease in revenue between periods was primarily due to decreased revenue from BioPharma services, anatomic pathology, and COVID-19 testing, and partially offset by an increase in our precision diagnostic testing services.

The decrease in BioPharma services was attributed to timing of BioPharma service projects. The decrease in anatomic pathology services was due to weather issues and changes in reimbursement rates in the three months ended March 31, 2024. The decrease in COVID-19 revenue was due to ceased COVID-19 testing operations at the end of March 2023. For the three months ended March 31, 2024, precision diagnostics accounted for 58% of our consolidated revenue and increased $9.5 million compared to the three months ended March 31, 2023. The increase in precision diagnostics revenue was due to a growth in our reproductive health services, including our expanded Beacon787 testing, which launched in late February 2023, and growth in our specialized oncology tests and testing services.

We believe the factors that will affect our ability to grow these revenue streams are 1) the average price point we offer and the reimbursement rate from third-party payors; 2) the concentration of our payor base; 3) the competitive advantage we have due to our broad and flexible test menu, detection rate, and turnaround times; and 4) growth in size of an addressable market. Estimated collection amounts from third-party payors are subject to the complexities and ambiguities of billing, reimbursement regulations and claims processing, as well as considerations unique to Medicare and Medicaid programs. Because our proprietary technology platform allows for rapid scaling of a broad, flexible testing menu, we can offer our customers more scalable and affordable testing. Going forward, we will strive to maintain this competitive advantage and emphasize this in our marketing efforts to grow our testing revenue.

Our customer base includes insurance, institutional, and individual payors. In some periods, our revenue is concentrated on a smaller number of customers. For the laboratory services business, aggregating customers that are under common control, one customer comprised $12.6 million or 20% of our revenue in the three months ended March 31, 2024. No customer contributed 10% or more of the Company’s revenue in the three months ended March 31, 2023. To reduce this revenue risk, we will focus on increasing the number of customers and thereby reducing the concentration.

Revenue from non-U.S. sources increased $2.5 million, or 62%, from $4.1 million in the three months ended March 31, 2023 to $6.6 million in the three months ended March 31, 2024. The increase in revenue from non-U.S. sources between periods were primarily due to increased sales of our traditional genetic testing services to customers in China through Fujian Fujun Gene Biotech Co., Ltd., or FF Gene Biotech.

### Cost of Revenue

*(dollars in thousands)*

|  | Three Months Ended March 31, 2024 | 2023 | $% Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Cost of revenue | $42,381 | $47,357 | $(4,976) | (11)% |
| Cost of revenue as a % of revenue | 65.7% | 71.6% |  |  |

Our consolidated cost of revenue decreased $5.0 million, or 11%, from $47.4 million in the three months ended March 31, 2023 to $42.4 million in the three months ended March 31, 2024. The decrease was primarily due to decreases of $2.1 million consulting and outside labor costs, $921,000 in personnel costs including equity-based compensation, $615,000 in facility expenses, $591,000 in shipping and handling expenses, and $575,000 in reagents and supply expenses related to cessation of COVID-19 testing operations and closure of a laboratory.

Our consolidated cost of revenues as a percentage of revenue decreased from 71.6% to 65.7%. Our gross profit increased $3.3 million, from $18.8 million in the three months ended March 31, 2023 to $22.1 million in the three months ended March 31, 2024. Our gross profit as a percentage of revenue, or gross margin, increased from 28.4% to 34.3%. The changes were primarily due to product mix.

### Research and Development

*(dollars in thousands)*

| Research and development | Three Months Ended March 31, 2024 | 2023 | Change | Change |
| --- | ---: | ---: | ---: | ---: |
| Laboratory services | $7,321 | $7,309 | $12 | 0% |
| Therapeutic development | 4,113 | 2,473 | 1,640 | 66% |
|  | $11,434 | $9,782 | $1,652 | 17% |

27

Research and development expenses for the laboratory services business were mainly for developing our technology and future testing and testing services. The expenses were flat for the three months ended March 31, 2024 and 2023.

Research and development expenses for the therapeutic development business were primarily related to the development of FID-007. The expenses increased $1.6 million, or 66%, from $2.5 million in the three months ended March 31, 2023 to $4.1 million in the three months ended March 31, 2024. The change was primarily due to increased expenses related to a drug study with our contract research organizations. We anticipate research and development expenditures for this segment to increase as we expect to begin enrollment for a phase 2 study of FID-007 in the second quarter of 2024.

### Selling and Marketing

Our consolidated selling and marketing expenses decreased $1.1 million, or 11%, from $10.1 million in the three months ended March 31, 2023 to $9.0 million in the three months ended March 31, 2024. The decrease was primarily due to decreases of $607,000 in consulting and outside labor costs related to cessation of COVID-19 testing operations and $482,000 in facility expenses.

### General and Administrative

Our consolidated general and administrative expenses decreased $313,000, or 1%, from $21.8 million in the three months ended March 31, 2023 to $21.5 million in the three months ended March 31, 2024 due to decreases of $2.4 million in provisions for credit losses and $881,000 in business insurance expense, partially offset by increases of $2.4 million in personnel costs including equity-based compensation expense and $708,000 in facility expenses.

### Amortization of Intangible Assets

Amortization of intangible assets represents amortization expenses on the intangible assets arose from the business combinations in 2022 and 2021 and a patent purchased in 2021. Amortization expenses were $2.0 million for each of the three months ended March 31, 2024 and 2023.

### Interest and Other Income, net

Interest and other income, net, is primarily comprised of interest income, net, which was $7.6 million and $3.8 million in the three months ended March 31, 2024 and 2023, respectively. This interest income, net, related to interest earned on various investments in marketable securities including realized gain or loss on sale of marketable securities, net of interest expenses incurred for our notes payable. The increase in interest income, net, was primarily due to increased interest rates on marketable securities relative to the prior comparative period.

### Benefit from Income Taxes

Benefit from income taxes was $327,000 and $5.2 million for the three months ended March 31, 2024 and 2023, respectively. The effective tax rate was 2% and 25% for the three months ended March 31, 2024 and 2023, respectively. The change in the effective tax rate compared to prior period is due to the valuation allowance in the current period that precludes us from recognizing the benefit from our net operating losses.

### Net Loss Attributable to Noncontrolling Interest

Net loss attributable to noncontrolling interest represents net loss attributable to the minority shareholders from entities not wholly owned.

### Liquidity and Capital Resources

### Liquidity and Sources of Cash

We had $846.2 million and $847.7 million in cash, cash equivalents, and marketable securities as of March 31, 2024 and December 31, 2023, respectively. Our marketable securities primarily consist of U.S. government and U.S. agency debt securities, U.S. treasury bills, corporate bonds, municipal bonds, and Yankee debt securities as of March 31, 2024 and December 31, 2023.

Our primary uses of cash are to fund our operations, repurchase our stock, and to fund strategic acquisitions as we continue to invest in and seek to grow our business. Cash used to fund operating expenses is impacted by the timing of our expense payments, as reflected in the changes in our outstanding accounts payable and accrued expenses.

We believe our existing cash, cash equivalent, and short-term marketable securities will be sufficient to meet our anticipated cash requirements for at least the next 12 months. Cash provided by operations has significantly contributed to our ability to meet our liquidity needs, including paying for capital expenditures; however, cash provided by our operations has in the past experienced fluctuations from period to period, which we expect may continue in the future. These fluctuations can occur because of a variety of factors, including, among others, factors relating to the demand for our tests, the amount and timing of sales, the prices we charge for our tests due to changes in product mix, customer mix, general price degradation for tests, or other factors, the rate and timing of our billing and collections cycles and the timing and amount of our commitments and other payments. Moreover, even if our liquidity expectations are correct, we may still seek to raise additional capital through securities offerings, credit facilities or other debt financings, asset sales or collaborations or licensing arrangements.

If we raise additional funds by issuing equity securities, our existing stockholders could experience substantial dilution. Additionally, any preferred stock we issue could provide for rights, preferences or privileges senior to those of our common stock, and our issuance of any additional equity securities, or the possibility of such an issuance, could cause the market price of our common stock to decline. The terms of any debt securities we issue or borrowings we incur, if available, could impose significant restrictions on our operations, such as limitations on our ability to incur additional debt or issue additional equity or other restrictions that could adversely affect our ability to conduct our business, and would result in increased fixed payment obligations. If we seek to sell assets or enter into collaborations or licensing arrangements to raise capital, we may be required to accept unfavorable terms or relinquish or license to a third party our rights to important or valuable technologies or tests we may otherwise seek to develop ourselves. Moreover, we may incur substantial costs in pursuing future capital, including investment banking, legal and accounting fees, printing and distribution expenses and other similar costs. Additional funding may not be available to us when needed, on acceptable terms or at all. If we are not able to secure funding if and when needed and on reasonable terms, we may be forced to delay, reduce the scope of or eliminate one or more sales and marketing initiatives, research and development programs or other growth plans or strategies. In addition, we may be forced to work with a partner on one or more aspects of our tests or market development programs or initiatives, which could lower the economic value to us of these tests, programs or initiatives. Any such outcome could significantly harm our business, performance and prospects.

### Cash Flows

The following table summarizes our cash flows for each of the periods indicated:

*(in thousands)*

|  | Three Months Ended March 31, 2024 | 2023 |
| --- | ---: | ---: |
| Net cash provided by (used in) operating activities | $7,266 | $(7,907) |
| Net cash used in investing activities | $(47,186) | $(4,354) |
| Net cash used in financing activities | $(2,807) | $(1,101) |

#### Operating Activities

During the three months ended March 31, 2024, our operations provided $7.3 million of cash, as compared to $7.9 million used in the three months ended March 31, 2023. The increase in cash provided from operating activities in the three months ended March 31, 2024, as compared with the corresponding period in 2023 was primarily due to the timing of cash receipts from customers and cash payments for operating expenses. We expect to incur more operating expenses and use more cash in operating activities in the coming year as a result of our planned and ongoing clinical trials for FID-007 and as we continue to invest resources to grow our laboratory services business.

#### Investing Activities

The cash provided by or used in investing activities are impacted by capital expenditures for operation needs and timing of payments, timing of maturities of marketable securities, and discretionary business combinations and other investment.

Cash used in investing activities in the three months ended March 31, 2024, was $47.2 million, which primarily related to $195.7 million on purchase of marketable securities and $4.1 million on purchases of fixed assets, partially offset by $95.5 million related to maturities of marketable securities and $56.9 million on proceeds from the sale of marketable securities.

Cash used in investing activities in the three months ended March 31, 2023, was $4.4 million, which primarily related to $143.9 million on purchase of marketable securities and $2.0 million on purchases of fixed assets, partially offset by $141.4 million related to maturities of marketable securities.

#### Financing Activities

Cash used in financing activities in the three months ended March 31, 2024, was $2.8 million, which primarily related to $1.7 million common stock withholding for employee tax obligations and $765,000 for repayment of notes payable.

Cash used in financing activities in the three months ended March 31, 2023, was $1.1 million, which primarily related to $869,000 common stock withholding for employee tax obligations.

We do not expect to use any credit facilities for the foreseeable future due to the strong cash position as of March 31, 2024.

### Stock Repurchase Program

In March 2022, our Board of Directors authorized a $250.0 million stock repurchase program. The stock repurchase program has no expiration from the date of authorization. Under the stock repurchase program, we may repurchase shares from time to time in the open market or in privately negotiated transactions.

During the three months ended March 31, 2024, we repurchased 10,000 shares of our common stock under our stock repurchase program at an aggregate cost of $225,000 under the stock repurchase program. We did not repurchase any common stock under our stock repurchase program during the three months ended March 31, 2023. As of March 31, 2024, a total of approximately $150.5 million remained available for future repurchases of our common stock under our stock repurchase program.

### Critical Accounting Policies and Use of Estimates

There have been no material changes to our critical accounting policies or estimates from the information provided in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included in the 2023 Annual Report.

### Recent Accounting Pronouncements

See Note 2, *Summary of Significant Accounting Policies*, to our condensed consolidated financial statements included in this report for information about recent accounting pronouncements.

### Off-Balance Sheet Arrangements

We did not have during the periods presented, and do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

## Market risk

As filed, 174 characters.

For quantitative and qualitative disclosures about market risk, see Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our 2023 Annual Report.

## Controls and procedures

As filed, 2,548 characters.

### Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. As required by Rule 13a-15(b) under the Exchange Act, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of March 31, 2024. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2024.

### Changes in Internal Control over Financial Reporting

There have not been any changes in our internal control (as required by Rule 13a-15(b) under the Exchange Act) over the financial reporting during the three months ended March 31, 2024 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

### Inherent Limitations on Disclosure Controls and Procedures and Internal Control over Financial Reporting

Management recognizes that any controls and procedures, no matter how well-designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Because of these inherent limitations, our disclosure and internal controls may not prevent or detect all instances of fraud, misstatements or other control issues. In addition, projections of any evaluation of the effectiveness of disclosure or internal controls to future periods are subject to risks, including, among others, that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate.

## Risk factors

As filed, 8,219 characters.

Except as set forth below, there have been no material changes to the risk factors set forth in Part I, Item 1A, “Risk Factors,” of the 2023 Annual Report.

**Any changes in laws, regulations, or the enforcement discretion of the FDA with respect to the marketing of diagnostic products, or violations of laws or regulations by us, could materially and adversely affect our business, prospects, results of operations, or financial condition.**

The laws and regulations governing the marketing of diagnostic products are evolving, extremely complex and in many instances, have no significant regulatory or judicial interpretations of these laws and regulations. Pursuant to its authority under the federal FDC Act, the FDA has jurisdiction over medical devices, including IVDs, and, therefore, potentially our clinical laboratory tests. Among other things, pursuant to the FDC Act and its implementing regulations, the FDA regulates the research, testing, manufacturing, safety, labeling, storage, recordkeeping, premarket clearance or approval, marketing and promotion, and sales and distribution of medical devices in the United States to ensure that medical products distributed domestically are safe and effective for their intended uses. In addition, the FDA regulates the import and export of medical devices.

Although the FDA has statutory authority to assure that medical devices and IVDs, potentially including our tests, are safe and effective for their intended uses, the FDA had historically exercised enforcement discretion and not enforced applicable provisions of the FDC Act and regulations with respect to LDTs, which are a particular type of medical device. We believe our tests are not currently subject to the FDA’s medical device regulations and the applicable FDC Act provisions due to their status as LDTs. However, in October 2023, the FDA issued a proposed rule aimed at regulating LDTs under the current medical device framework and proposing to phase out its existing enforcement discretion policy for this category of diagnostic tests. The agency’s final rule was released to the public on April 29, 2024 and will be officially published in the Federal Register on May 6, 2024, with an effective date of July 5, 2024.

The agency’s final rule provides that the LDT enforcement policy phase-out process will occur in gradual stages over a total period of four years, with pre-market approval applications for high-risk tests to be submitted by the 3.5-year mark. Moderate-risk and low-risks tests are expected to be in compliance at the 4-year mark, although FDA has stated that if premarket submissions are pending review it will continue to exercise enforcement discretion with respect to those tests. . Litigation challenging the agency’s authority to take adopt this final rule is highly likely, although the outcome of such litigation is uncertain. Litigation challenging the final rule may also have an impact on FDA’s plans to implement these new LDT requirements, making the potential implementation timeline somewhat uncertain. Affected stakeholders continue to press for a comprehensive legislative solution to create a harmonized paradigm for oversight of LDTs by both the FDA and CMS, instead of implementation of the FDA’s final rule, which may be disruptive to the industry and to patient access to certain diagnostic tests.

Separately, members of Congress have been working with stakeholders for several years on a possible bill to reform the regulation of in vitro clinical tests including LDTs. For example, as drafted and re-introduced for consideration by the current Congress, the Verifying Accurate, Leading-edge IVCT Development Act, or the VALID Act, has been garnering bipartisan and bicameral support. The VALID Act would codify into law the term “in vitro clinical test” to create a new medical product category separate from medical devices that includes products currently regulated as IVDs, as well as LDTs. The VALID Act would also create a new system for labs and hospitals to use to submit their tests electronically to the FDA for approval, which is aimed at reducing the amount of time it takes for the agency to approve such tests, and establish a new program to expedite the development of diagnostic tests that can be used to address a current unmet need for patients. Most recently, on March 21, 2024, the House Energy and Commerce held a subcommittee hearing titled “Evaluating Approaches to Diagnostic Test Regulation and the Impact of the FDA’s

Proposed Rule.” The private witnesses testifying at the hearing expressed broad support for the bipartisan VALID Act instead of the FDA’s plan to use its medical device authorities to regulate LDTs.

It is unclear whether Congress will take action, through the VALID Act or otherwise, to supersede FDA’s recent final rule with comprehensive diagnostic reform legislation, or whether such legislation would be signed into law by President Biden. In addition, at this time it is unclear what testing and data may be required to support any required FDA clearance or approval of our tests, should the final rule be fully implemented as envisioned by FDA and HHS.

If FDA implements the LDT final rule or Congress enacts comprehensive legislation to regulate in vitro diagnostics, or if the FDA disagrees with our assessment that our tests meet the criteria to be marketed LDTs, we could, for the first time, be subject to enforcement of a variety of regulatory requirements, including registration and listing, medical device reporting and quality control, and we could be required to obtain premarket clearance or approval for our existing tests and any new tests we may develop, which may force us to cease marketing our tests until we obtain the required clearance or approval. The premarket review process can be lengthy, expensive, time-consuming and unpredictable. Further, obtaining premarket clearance may involve, among other things, successfully completing clinical trials. Clinical trials require significant time and cash resources and are subject to a high degree of risk, including risks of experiencing delays, failing to complete the trial or obtaining unexpected or negative results. If we are required to obtain premarket clearance or approval and/or conduct premarket clinical trials, our development costs could significantly increase, our introduction of any new tests we may develop may be delayed and sales of our existing tests could be interrupted or stopped. Any of these outcomes could reduce our revenue or increase our costs and materially adversely affect our business, prospects, results of operations or financial condition. Moreover, any cleared or approved labeling claims may not be consistent with our current claims or adequate to support continued adoption of and reimbursement for our tests. For instance, if we are required by the FDA to label our tests as investigational, or if labeling claims the FDA allows us to make are limited, order levels may decline and reimbursement may be adversely affected. As a result, we could experience significantly increased development costs and a delay in generating additional revenue from our existing tests or from tests we may develop.

In addition, while we qualify all materials used in our products in accordance with the regulations and guidelines of CLIA, the FDA could promulgate regulations or guidance documents impacting our ability to purchase materials necessary for the performance of our tests. If any of the reagents we obtain from suppliers and use in our tests are affected by future regulatory actions, our business could be adversely affected, including by increasing the cost of testing or delaying, limiting or prohibiting the purchase of reagents necessary to perform testing with our products.

Failure to comply with any applicable FDA requirements could trigger a range of enforcement actions by the FDA, including warning letters, civil monetary penalties, injunctions, criminal prosecution, recall or seizure, operating restrictions, partial suspension or total shutdown of operations and denial of or challenges to applications for clearance or approval, as well as significant adverse publicity.

Filed May 3, 2024.
Source: SEC EDGAR, the filing index for accession 0000950170-24-052485. Last ingested by Listed: Oct 24, 2026, 15:07 ET. No prices; not investment advice.