GRAIL, Inc. (GRAL) Earnings Call Transcript & Summary

Welcome to the Canaccord Genuity MedTech, Diagnostics and Digital Health & Services Forum. I'm Kyle Nixon. I cover Life Science Tools and Diagnostics for Canaccord. Pleased to welcome you to a fireside chat with GRAIL. From the company, we have Aaron Freidin, CFO. For background, GRAIL offers the first multi-cancer early detection test of its kind called Galleri, and the company has been scaling and now we'll hear more about that today. Recently spun off from Illumina. So thanks, Aaron, for joining us today.

Yes, thanks for having us.

So it's been 4.5 months since the spinoff from Illumina. I want to ask you why are you comfortable with that spin-off? Is GRAIL a better company as a stand-alone entity? And how the past 4, 5 months kind of differed from your guys' perspective in terms of like kind of operating truly alone and not underneath that Illumina umbrella, even though it was separate to a certain extent before?

Yes, it's a great question. I'd say that we are stand-alone now. So whether -- we thought it was the best or not. That's what we are, and that's how we need to run our business. And as you guys saw last quarter, we initiated a restructuring to extend our cash runway to get through some of our key inflection points. We've executed against that this quarter, and we plan on continuing to drive that strategy.

Yes. So I think you cut like 30% in this restructure of the heads like at that point as well as the planned hires for '24. How did that -- how should investors really think about how that affects the growth profile of the company? Because you were kind of -- I mean, you were at this -- I want to talk about this more later, but you're at like nice revenue kind of like trajectory, like solid sequential growth. And then you might think like it’s a step back. So how does that affect the go-forward in terms of growth?

Yes. So I think as part of that cash savings, we've learned that we can really grow Galleri aggressively, but it's expensive prior to reimbursement. It's a non-reimbursed test, and it just takes time and effort to drive that pull through. So we are going to pull back on that growth rate. We're going to finish this year. We've just guided 40% to 50% growth for U.S. Galleri for 2024. I'd expect us in '25 to be lower than that 30% to 50% range that we provided at the beginning of the year, but still growing. It's not going to be a flat type -- a flat issue going forward. And what you saw this quarter and what we've seen for the past couple of years now is just the seasonality that happens in Q3. So our Q3 is generally lower or flat to Q2. But you can do the math, figure out what we expect Q4 to be given that we've tied the range of 40% to 50% growth for the year. And so I plan on the growth moderating and staying that way until we get to broad reimbursement or we really show and find that we can drive more effective and efficient sales in the U.S.

Okay. Yes. That's a lot of stuff there. Just on this like restructure though, so you cut investments look across the company, you focused more on the MCED Galleri. And even like in the regions and accounts that are kind of like stickier or like more -- higher probability, I guess, I would characterize it, but you're kind of moving away from the pipeline program, so MRD, DAC diagnostic aid. So maybe those will come back in the future, but like how do you think about like will you ever return to MRD in that? I mean these are areas that are actually attractive in diagnostics. And what has to happen in kind of the MCED world side of things to make go back to MRD?

Right. So Galleri was founded for MCED. So we want to make sure that we have -- GRAIL was founded for MCED, sorry. So we want to make sure that we have the cash runway, the flexibility to get through the key inflection points, such as FDA approval and so on. But to do so, we pulled back investment in developing our own MRD clinical monitoring product and then the diagnostic aid for cancer. Those are still assets that we have and the technology that we're excited by. So I think as just look out for us as we're working through this restructuring and implementing it and make sure the business isn't disrupted. We'll look for strategic ways to monetize or partner those assets.

Got it. That makes sense. And can you use both of those on the biopharma side because that's still an investment area, I guess?

Yes. So the -- we call it the PDX business, that's the MRD business from the biopharma business. We are using that technology with those partners. So we saw last week, I think AstraZeneca announced their Phase III trial using Galleri in it. So we'll continue to support that work and, it's important for us to do.

Got it. Okay. So you provided some test numbers in the past few quarters, and the revenue numbers are interesting as well. We've had those for many quarters as well. Maybe talk about like demand for Galleri in the early days here, pre-reimbursement. I mean it's been available as an LDT since like 2021, I think. So we have some -- really solid kind of like sort of time here. And how -- just a reminder on how you're recognizing revenue and cash collections for the test right now?

Yes. So right now, Galleri is mainly sold through self-pay channels, primarily the provider or clinic channel that would be your concierge medicine, but more and more so just physician practices where there's the right environment for folks to have the capital and the interest to actually buy the test on the self-pay basis. Really focused there. We've got over 11,000 prescribers now, and we're focused on bringing on more prescribers, but also driving pull-through with those existing prescribers. The rest of the business, so that's about 2/3 of the revenue, people paying for that out of pocket. The other 1/3 is what comes from our enterprise channels, which are essentially self-insured employers. We've got life insurance partners. I think you've seen Hancock's name get mentioned and others, where these -- the test is being paid for the self-insured employer world as a benefit for their eligible population. No self-insured employer wants to have a surprise of undiagnosed cancer and throws everything off, not just for the employees, but also financially. Life insurance is using this in their in-force policies where incentives are completely aligned. Insurance company wants you to outlive your policy. You want to outlive your policy. We've seen a good uptick there as well. So I'd continue -- we continue to sell into these cash or non-reimbursed markets until we get broad reimbursement.

Okay. So the test was kind of like designed for population scale, right? And so how does that kind of like intertwined with what you just said about these different channels, whether it's the self-insured employers, with the concierge medicine or the kind of PCP market. What does population scale really mean? How do you do that? What have you done? What does it look like so far?

Yes. It's a really broad, big question. So again, it starts basically at the beginning of the company. The way we designed our trials, whether its CCGA or PATHFINDER or now NHS-Galleri PATHFINDER -- and PATHFINDER 2 study, we're in an intended use population of population scale, meaning the demographics, the people that we went out and studied where we would use it, which is why you don't see test degradation from our original studies in the PATHFINDER and so on. So from a design standpoint, it was designed in the people for the population. Now that we're commercial, we're about to launch the next version of the test, which is more of a back-end version. It's going to be same performance as the current version, but it's going to really push costs down and increase throughput and scalability. So we'll move from something that will be automated from an equipment standpoint, but still takes people to move things around to a fully automated tubes come in the mail, go on a rack and they don't get touched again until it goes on a sequencer. And that will allow us to move into the millions of tests at a much more efficiently and cost-effective manner.

Okay. Yes. Now I want to return to the B2 in a second. So in terms of adoption trend so far, so I feel like '23 kind of hit like that $20-ish million mark quarter with revenue. And that's total revenue, not just screening, but it's just what we saw like a year ago with Illumina. And then this year, kind of hit like $25 million, $30 million, I guess, a quarter. It just seems like from year-to-year, it definitely stepped up. And then from quarter-to-quarter, it's more like muted growth maybe. Why did that -- it's great year-over-year growth. Again, it's just like -- the sequential stuff is kind of confusing. What has been happening besides the cuts to the sales force?

Yes. So I think Q3 is impacted by seasonality if you're comparing it to Q2. For the year, we'll grow 40% to 50% over the prior year. And Q4 is going to have -- if you do the math, we'll have pretty significant growth from Q3. So we don't see it as a tapping out of demand. We see it more as we're more focused now and not as blanketing the country as a strategy of drawing of getting tests. So we still think there's more than enough opportunity to grow. And then the long term, we don't really see growth right now as being the most important thing, right, whether we're growing prior to broad reimbursement at 20% or 40% or 50%, it's that real inflection point in GRAIL and Galleri being successful is going to be once we get into that broad reimbursement world.

Got it. Okay. And yes, you kind of discussed '25 expectations and clearly, like to go from where we are today to that you had to kind of have sequential growth, but it's been sort of interesting, I guess. So in terms of economics, ASP has been -- so the patient pay price is like $950 or so -- $949. ASPs have been hovering around $800 for the past couple of quarters. Why -- I mean that's a pretty good ASP actually considering it's a lot of just people paying themselves or these employers, which are probably not easy to negotiate with. What's been the reason for success on that? And what do you expect to happen when this goes to like Medicare? And we can discuss the Medicare separately, just like the pay -- the ASP is interesting.

I think what it really shows is there is a demand for this type of technology. Right now, barriers, you have to be able to afford it. It's an $800 test as a blended ASP is still an expensive test, but we're excited by it. It's a better place to be than it has to be cheaper and not getting adoption. But that being said, broad reimbursement, we would expect the price to come down to something more population level as far as affordability goes.

Yes. I think when Illumina acquired GRAIL, it was like maybe -- back in late 2020, they had this like 250 number, I think is what -- Is that the way to think about the long-term?

I don't know.

Does that make sense...

I mean lower than it is today, yes. I mean you can look at other population screens that are priced in the cancer area.

People might be look at Cologuard and if you've got 3 years, so it is a 1-year test -- I mean, it's just more or less an annual test kind of like just 1/3 to that 500, 600 that Cologuard's add. So it kind of gets you to that 200-ish range, but -- that makes sense. Now with COGS 2, we have been well below the -- the ASP, I guess, right? So what's happened like? And what's -- as we kind of think about [ B2 ], what can the automation from this back office kind of test afford you in terms of like reductions from COGS like today?

Yes. So this effort that we're going to be shipping at the end of this year would -- did two things. It's going to really drive down the variable cost. We've brought down the cost of sequencing significantly. I believe we're putting up to 4x amount of samples on a flow cell. So really driving down your variable costs. And you'll see that immediately as that volume transitions over from one version to the other. The automation, you'll see that benefit over time as we get more scale. The system is going to be capable of running a lot more than it currently is. And as we add more demand to that system, we'll be recognizing greater fixed cost leverage. But that's going to take some time. But you will see margin improvements year-over-year.

Got it. And with the version 2, you're talking about like transitioning. I think a full transition might take place by the end of next year. Is that the current guidance?

Yes. Our goal is going to be to get it done as quickly as possible. So safe to say by the end of next year.

And I mean, have you -- did you think about offering both tests at the same time and just seeing someone wanted like that kind of like upper scale test and then some -- maybe the most people wanted the kind of back office. But could you offer both at the same time or is it just one?

It's -- performance is going to be the same. So there wouldn't be any reason to offer the other one.

Yes. No. But I thought it's important to more narrow panel.

It's going to have the same performance criteria.

Same amount of cancers or...

Yes, same everything. So the design is noninferior to the current version.

Yes, of course. Of course. So that kind of makes sense. And how does that -- in terms of the FDA submission, which again is happening in a few years. How does this now impact that because you've had these past studies that have used a different assay -- different algorithm and now you have this new assay? I mean, does it change things at all?

Yes. So it was part of that PMA submission, and we're in discussions with the FDA and the NHS as well because they will be evaluating it for adoption in the U.K. Will be a bridging study, which will essentially just compare. Did you see the same thing in the new version that you saw on the old version with bank samples and so on. So we're working on that with the regulators as we speak.

Got it. So -- and now I feel like the FDA submission is going to be kind of -- an approval will be supported by PATHFINDER 2, which is 35,000 patients enrolled and then the NHS, the other study, which is like 140,000 patients. That's almost 180,000 patients there. What's -- I mean, is there like a readout that we should expect at some point? What's next in terms of like those 2 studies?

Yes. So for the PATHFINDER 2 study, which is the 35,000-person study in the U.S., we will do an interim readout in the back half of 2025. That will be -- it will look similar to the original PATHFINDER readout, which was 6,600 people. So similar metrics and so on. And for the U.S. NHS-Galleri study, that full study will read out in 2026. There likely will not be a readout between now and then. We're working with NHS on that because like the gap in that is we're going to submit our PMA to the FDA, including NHS and PATHFINDER 2 data in the first half of 2026. It won't be all of the PATHFINDER 2 data. It won't be all of the NHS data, but we will be submitting that to the FDA in the first half of '26. Those are really the next three big things that are coming up.

Okay. And so given the test has been offered to patients for the past over 3 -- 3.5 years, is there any follow-up data or like kind of longitudinal data as well because that would be helpful to kind of understand the retake rate into that?

Yes. So again, that's a great question. And we're -- as far as retake rate goes, that is something that we're looking at getting -- putting together and then actually talking about publicly. There is a lot of interest and a lot of demand for that. And we do have that information. So we will start sharing that. We just got to get cleaned up internally to make sure we can repeatedly give the same numbers. And then as far as study data goes, longitudinal study data, the NHS trial will be the first look at longitudinal data that we'll have. We just -- I believe there was some longitudinal data in the reflection DOD press release that we just did. But the main one will be the NHS-Galleri study. That will really tell you -- that's the clinical utility study essentially. Do you see stage shift from later to earlier in your Galleri arm when compared to the control arm.

Yes. On the NHS study, what's the status of that 1 million kind of like expansion? Is that -- that happen possibly?

No. So that was the decision NHS made earlier this year to not move forward with the millions test pilot.

Like that was no forever?

Yes, that was -- so what that was intended to do was to bridge from the last study draw essentially to when they would make a commercial decision. They were overwhelmingly like saw stage ship data essentially in the first year results, they would roll it out. That has never been seen before, and it wasn't seen. So they are not moving forward with that million test pilot. However, they will review the final study readout in '26 and make a decision in '27, whether they want to roll it out to the population or not.

Okay. And what's the reason for the commercialization in only U.S. and U.K.? What's the -- why not the rest of the...

That's just where we had been focused as we were back in 2021, 2020, when we're being acquired, that's where we're focusing. The idea through some of the Illumina synergies or value would have been leveraging their international infrastructure. As you know, we could never integrate or leverage that. So we've kind of been on hold. Now we are -- we're getting lots of demand from international geos. We are being -- we are engaging in those where we believe that there is a near-term positive ROI, and we're not continuing to add to our cash burn problem. But that is work that we are doing.

I think is it something about -- it could be this. In the U.S. and in the U.K., you have kind of like a health care system that allows this population scale of screening because like you have the NHS trust system, I guess. And in Europe, obviously, I don't know -- I assume it's not something comparable. Is that...

I mean, each -- my understanding, again, I'm not the expert here, is each of the EU countries would make their own screening decision, but many of them have single-payer systems. And then there's also Southeast Asia and parts of the world as well.

There actually is a multi-cancer test that's been launched in Japan, I believe. That's doing relatively well. So yes, there's probably potential in other countries. That's interesting. So in terms of maybe first on Medicare reimbursement. So there is this -- there's been multiple kind of like pieces of legislation bills, et cetera, over the years. Now you've had this unanimous vote with the in-house to kind of get this bill passed, the MCED Bill on to the second, I suppose, I don't know the latest update, not 100% sure, but what's your expectations with that one? Is this finally the one that's going to help us create a path to get a Medicare reimbursement for MCED test?

Yes. So the purpose of that legislation is essentially to give CMS legislative authority to cover screening test, specifically for multi-cancer. That legislation has bicameral bipartisan support. It's very favorably throughout the Congress in the U.S. and so on, and it's looking for a vehicle to attach to. So what I would look out for is what's going to happen between now and the end of the year, what will happen at the beginning of next year. But it's got more than 60 senators, more than 300 Congress people who are supporting it. And as you said, it went through the Ways and Means Committee with a 38 to 0 vote. So there's something that Congress and -- sorry, that the government has in common with each other’s on both sides, saving lives being part of something that's going to do that for their constituents is something they really get behind. So we're excited by it. At the end of the day, we need to have FDA approval to then get to reimbursement. So not something that has to happen tomorrow, but we wouldn't mind it if it did.

I know like no one is an expert on this kind of stuff, at least [ I get our seat ]. But it seemed like the Biden administration was much more focused on precision medicine, cancer woman [indiscernible] all that great stuff. Now it seems like I'm not sure if that's a huge focus. We've talked about a lot about NIH today with other companies and how that could be cut going forward. Is there any reason to believe that like now there's -- I don't know, there's just less positive kind of attention on this sort of like oncology testing compared to before with under this administration?

I don't think so. I mean, again, my personal view is that both sides loved it before, and both sides are still there, all the key constituents supporters are still there. Like the family members that they lost to cancer haven't come back. So again, I still think there's a great opportunity for something to happen.

Yes. What matters as Congress who said bicameral supports, we're good. Okay. Got you. Now with FDA, I guess, we talked a lot about the submission and all that. There could be an AdCom meeting as well, too, would you expect?

Yes.

Would this -- I mean, just like this is such a like intense product, I think. It's 50 candidate potentially. It's just the data is kind of confusing because the metrics aren't really great on paper. But again, you're testing for so many cancers. It's not -- it's actually important to have this really high specificity, for example, where that's not really like to focus on other tests and stuff. So basically, with that AdCom meeting be maybe different or take longer to kind of like plan or something compared to other things like tests that we've seen in the past? I mean, just -- again, such a novel product. It just...

Yes, I agree, it is novel and agree to a lot of things that you said. I'd say we have been in breakthrough with the FDA though, since 2018 or '19, whenever that was. And there's been a lot of back and forth in understanding of what good looks like. We believe we have an approvable package based off of what we've put forward as far as our registrational studies and the data that we've shown to date, which the FDA, of course, has seen. We did PATHFINDER and NHS, those are under IDEs as well. So they've seen those things. So I think as long as our data and performance holds up the way it was, then I think that's a very positive indicator.

As you think about the commercial -- like true commercial payers like United and [ Cigna ] kind of companies covering over time, you'll have to have this like dossier. And in fact, even to Medicare, I'm sure you have dossier that has like economic benefit as a portion of that. I mean, there was like some data kind of like months ago about how cancer screening currently is like wasting billions of dollars in the health care system in the U.S. Do you think that, look, you actually had like an economic benefit study, it would like be in your favor that you would actually save the system, a lot of money as a part of this as well?

So it's early days on that. I can tell you cost per quality is comparable to current cancer screenings at current pricing levels. We see a path to breakeven at lower prices. But as far as savings, we'll see. We will be publishing more on that. And through the NHS, I mean it's a different system that the NHS will have. Some economic data attached to it. It will be longitudinal study and with follow-up. And then we also have the CMS Galleri REACH study, which is 50,000 individuals at 3 time points a year apart in the CMS population. There will be economics associated with that as well.

I mean the chronic care cancer like long term, like we're talking like a 10 to 20 years could be -- is part of this as well this question, but like it's -- so that will be interesting to see. So on -- I think finally on cash burn of the company that's like the most important thing probably from an investment perspective. So you'll burn your guessing -- you're estimating, I guess, $220 million this year in the second half of the year, and then $325 million next year. So how do you allocate that $325 million next year in terms of all your kind of OpEx stuff in the -- including trials and scaling Galleri and so forth?

Yes. I mean, as we announced in the restructuring, it's all purely around getting to MCED broad reimbursement, right? So making sure we're executing against our PMA, getting the quality systems in place, getting the study data read out and so on. R&D will be focused on getting the new version that's going to be out there, fine-tuned, implemented and so on. And sales and marketing is going to stay where it's at and continue to be more efficient, essentially. So we'll give more precise estimates for 2025 at year-end when we do guidance for next year. But I would expect us to be do no more than $325 million and then come down in '26 and '27, even with a more moderated growth.

And the -- I believe the runway right now with this, I just -- I believe it's over $800 million in cash that you have now. So it would be -- that's the runway gets you to like 2028?

Yes, we slow cash into 2028.

But breakeven that was like past that?

Yes.

Do you think that you need -- we didn't talk about USPSTF guidelines and things like that, but do you need reimbursement FDA approval guidelines, all these things to hit and MCED before you kind of get to breakeven, do you think?

It depends. That would be for sure pathway to get there. But I think if something were to develop internationally or some other larger volume deals were to present itself, we could get there without those things happen.

Got it. Okay. So I think we talked about the '25 kind of storyline, I guess, but anything else in terms of goals or objectives next year that you would like to address?

I think we've touched on them. It's a launch, the new version at the end of this year and implement it, get all the volumes moved over to it. Readout PATHFINDER 2 data in the back half of the year and have the PMA submission on the doorstep in the first half of 2026. Those are our primary -- and then sorry, lastly and most importantly, in my view, is execute our restructuring plan and continue to deliver the financials that we're guiding and the milestones on the time line that we committed to.

Got it. Okay. Well, it end. Very promising. Thanks, Aaron, for coming.

Yes. Thanks, Kyle.

Appreciate it.