Fulgent Genetics' Q1 2024 earnings call transcript [1] might seem, at first glance, a typical story of post-pandemic adjustment. COVID-19 testing revenue has dwindled to a trickle, the company is strategically refocusing, and core revenue growth is projected at a respectable 7% for the year. However, a deeper dive into the transcript reveals a subtler, potentially more significant narrative: a quiet revolution may be brewing in Fulgent's anatomic pathology (AP) division, one with the potential to transform not only the company's fortunes, but the very nature of AP itself.

While acknowledging headwinds in the AP business – attributed to factors like physician retirements, practice acquisitions, and reimbursement pressure – Fulgent's leadership paints a picture of strategic investments and technological advancements aimed at not merely stemming losses, but unlocking long-term growth and efficiency. Ming Hsieh, Fulgent's CEO, explicitly states the intention to "heavily invest in the [indiscernible] structure and technology" of the AP business [2], predicting a turnaround driven by "digital AI innovation."

This commitment to technological transformation goes beyond mere rhetoric. Fulgent is consolidating its Texas and New York AP operations into a new state-of-the-art facility, a move indicative of a broader strategy to centralize and streamline operations. Simultaneously, the company is investing in digital slide imaging and AI, technologies with the potential to dramatically enhance both the efficiency and quality of AP processes.

Why is this significant?

Anatomic pathology, the microscopic examination of tissue samples to diagnose diseases, has long been a labor-intensive, manual process. The reliance on individual pathologists to visually analyze slides, often under significant time constraints, introduces inherent subjectivity and potential for variability. Fulgent's investment in digital slide imaging and AI aims to address these limitations head-on, paving the way for a more standardized, objective, and efficient approach to AP.

Digital slide imaging allows for the creation of high-resolution digital representations of tissue slides, which can then be analyzed remotely by pathologists and shared easily for second opinions or consultations. AI algorithms, trained on vast datasets of annotated slides, can be used to automate tasks like cell counting, tumor grading, and feature identification, assisting pathologists in their decision-making process and potentially reducing the risk of errors.

The Potential Impact of Digital Pathology and AI

The implications of this shift are profound. By introducing digital technology and AI into AP, Fulgent aims to:

Fulgent's ambitions in AP extend beyond mere operational improvements. By positioning itself as a leader in digital pathology and AI, the company aims to attract new clients, forge deeper relationships with existing ones, and ultimately capture a greater share of the AP market. This strategic vision aligns perfectly with broader trends in healthcare, where data-driven insights and automation are increasingly recognized as essential for improving patient care and managing costs.

The Numbers Tell a Story

While Fulgent projects a decline in AP revenue for 2024, this is largely attributed to existing pricing pressure and lower contract rates – factors unrelated to the company's technological investments. These investments are long-term plays, aimed at transforming the fundamental nature of AP and unlocking a future of sustainable growth.

"We hypothesize that Fulgent's investment in digital pathology and AI will lead to a significant turnaround in its AP division within the next two to three years."

Quantifiable Metrics:

We will track the following metrics to assess the validity of our hypothesis:

Note: Some financial data for Q4 2023 and Q1 2024 is company-wide, as division-specific financials were not disclosed in the transcripts.

Revenue Trends: Precision Diagnostics vs. Anatomic Pathology

The chart below illustrates Fulgent's projected revenue for 2024, highlighting the anticipated growth in Precision Diagnostics and the projected decline in Anatomic Pathology. Fulgent is actively working to reverse this trend in AP through its strategic investments in digital pathology and AI.

Conclusion: A Quiet Revolution with the Potential for a Loud Impact

Fulgent Genetics' strategic gamble on AP may not be immediately apparent in the current quarter's numbers, but the company is laying the groundwork for a potential paradigm shift in the field. If their vision comes to fruition, the quiet revolution brewing in their AP division could have a ripple effect far beyond the company itself, transforming how diseases are diagnosed and treated for years to come.

"Fun Fact: The global digital pathology market size was valued at USD 940.7 million in 2022 and is projected to grow at a compound annual growth rate (CAGR) of 11.3% from 2023 to 2030 [4]. Fulgent is well-positioned to capitalize on this rapidly expanding market with its strategic focus on digital slide imaging and AI."