Fulgent Genetics (Nasdaq: FLGT) filed its S-1/A with the Securities and Exchange Commission, announcing its upcoming initial public offering that is scheduled for Sept. 28, 2016.

The company estimates it will raise approximately $51.6 million (or approximately $59.9 million if the underwriters exercise in full their option to purchase additional shares). The company plans to sell 4.6 million shares priced at a range of $12 to $14 with an additional 690,000 shares available to its underwriters as an over-allotment option. Assuming Fulgent prices at the mid-point of its price range ($13), and underwriters exercise in full their option to purchase additional shares, Fulgent will have a market cap of $235.77 million.

The underwriters for the offering include: Credit Suisse, Raymond James, Piper Jaffray and BTIG.

Business Summary: Genetic Testing For a Wide Range of Conditions

Headquartered in Temple City, California, Fulgent Genetics is a biotechnology company that offers physicians a full range of genetic testing. The company has a proprietary platform that offers integrated data comparisons, suppression algorithms, advanced genetic testing and lab processes. Fulgent's testing menu includes 18,000 single-gene tests, 200 multi-gene tests and tests for more than 7,500 conditions, including various cancers, cardiovascular diseases and neurological disorders. It customers include hospitals, medical institutions, and laboratories. The company was founded in 2011 and currently has approximately 55 employees.

(Fulgent Genetics, Inc. S-1/A Form, SEC Filing)

Executive Management

The founder, director, chief executive officer and president of Fulgent Genetics, Ming Hsieh has more than 25 years of industry experience. Before founding Fulgent Genetics, Hsieh served as the CEO, chairman and director of Cogent, Inc., which is a biometric identification company that he co-founded in 1990. Hsieh holds both a B.S.E.E. and an M.S.E.E. from the University of Southern California.

Paul Kim serves as the chief financial officer for Fulgent Genetics, and he has been with the company since January 2016. Before that, Kim was retired from 2011 through 2015. Previously, he served as the CFO for Cogent, Inc. from 2004 to 2011. Prior to that, Kim served as the CFO for JNI Corporation from 2002 through 2003; a vice president and finance and corporate controller for JNI from 1999 to 2002; and in various other executive-level roles for several companies since 1990. He holds a Bachelor of Arts in economics from the University of California, Berkeley and is a certified public accountant.

Financial Highlights and Risks

The company's average billable test costs $1,400. In 2014, the company delivered 966 billable tests. In 2015, it delivered 6,852 billable tests. For the first six months of 2016 that ended on June 30, Fulgent delivered 5,209 billable tests. Fulgent has shown rapid revenue growth; it recorded revenue of $9.6 million in 2015, up from $1.3 million in year 2014. The company reports it has experienced a compound quarterly growth of 19.5 percent.

According to a study, the genetics testing industry is expected to reach $10.5 billion by 2022. It is currently at $4 billion and is rapidly expanding. The company has indicated that expansion of the market has been limited because of the prohibitive cost of genetic testing. It points to its own test pricing point as one of its strengths. The company also has a large test menu and a genetics library that is both expansive and growing.

Fulgent Genetics looks to continue expanding its menu of tests and its global presence. It also wants to enlarge its customer base and expand its diagnostic offerings. It also wants to pursue drug discovery and pharmacogenomics.

The company points to the rapid technological developments and advancement in genetics testing as one potential risk. If the company fails to keep abreast of the changes in technology, its own tests could become obsolete. It has a limited operational history and a history of losses, and the company states that it may never become profitable. The company reports net losses of $5 million in 2015 and $5.1 million for the first six months of 2016. Finally, Fulgent indicates that if it fails to expand its customer base, its commercial success may be limited.

More Attractive Competitors

At a current valuation of $235.77 million, Fulgent would trade at a price/sales multiple of 17.83x, using last twelve months' sales ended June 30, 2016. This is significantly higher than any of its competitors. Foundation Medicine (Nasdaq:FMI) trades at 9.05x sales, Genomic Health, Inc. (Nasdaq:GHDX) trades at 3.35x sales, and Myriad Genetics (Nasdaq:MYGN) trades at 1.99x sales. If we assigned FLGT a price/sales multiple of 10x price/sales, which is slightly higher than its peer FMI, given its higher growth rate, it would have a market cap valuation of $132 million. This appears to be a more reasonable valuation for the company and is well below the company's estimated valuation of $235.77 million.

Conclusion: Consider A Modest Allocation At Most

Fulgent's revenues and gross margins have dramatically increased and the growth of the genetic testing market is a positive sign for the company's future growth. However, at its current valuation it is too expensive. We estimate a valuation of $132 million, which is well below the company's target valuation. For that reason it does not appear to be a good investment to us. We suggest investors hold off until Fulgent trades at a more reasonable price.