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

Thank you, everybody, for joining me today. I'm David Westenberg, the life science tools and diagnostics analyst here at Piper. With me is Aaron Freidin, the Chief Financial Officer of GRAIL.

So we'll just start it off with the guide, 40% to 50% growth for Galleri. And I believe you said on the last call, 2025 might be below the growth levels of 2024. Can you walk us through kind of a little additional color into that brief 2025 commentary?

Yes, David, thanks for having us. So we've been on the market since April '21. We've done over 250,000 tests. We spent a lot of time experimenting on what works, how to sell, how to implement a first-of-its-kind multi-cancer test. Now we're focused on really extending our runway and making that a capital-efficient growth mechanism, not so much an investment. So last quarter, we announced we did a restructuring. With that, we will be not expecting to grow as fast in the U.S. We will still grow. We will guide what we expect to grow at year-end when we release those results, but it will be below the 30% to 50% range that we gave. Because again, we're going to really be focused on getting our U.S. commercial investment to be cost neutral basically as we're building awareness and integrating the test into various scenarios or environments.

Yes. And sorry to go directly at this, but I mean, it's the elephant, like the Illumina original acquisition thesis did have implied a lot more revenue than what we're seeing today. In terms of lesson learned and kind of what did not go as expected, can you run us through some of those things that didn't go as expected and what those lessons learned are and then kind of where you're going from here with a boatload of knowledge that you've learned over the last 3 years?

Yes. So one of the major complications that occurred, which was the antitrust cases that came in, we were never really allowed to integrate into Illumina. A lot of the thesis was that we would be able to take advantage of their global infrastructure to seek regulatory approval faster and a broader adoption globally. But since the companies were required to be held separate, we were never able to take advantage of that. It made for a much faster spinout given that nothing was integrated. But one of the primary reasons for us not achieving that was the fact we couldn't leverage any of their infrastructure.

Got you. Okay. You mentioned FDA approval and reimbursement maybe 2 years away. Can you talk about your plans to build the market before that time? And then how you do that in a cost-effective way before you gain reimbursement?

Yes. It's a great question. It's really why we're in the market today. Again, selling the first of its kind paradigm-changing multi-cancer screen wasn't something that we're just going to like fall into with broad reimbursement and be successful. So we're out in the space now. We're working with physicians, working on the test report, nice and simple test report for physicians and patients to understand, understanding how health systems are integrating the test into their protocols, into their workflows. There are some health systems out there that have developed early cancer detection, multi-cancer early detection clinics where they're figuring out then how to take that positive and make sure that person gets worked up that there ends up being a diagnosis or a resolution. And that's really enabled us to get really good and good experience on how to do this when we have broad access. So we're not talking about 5 to 10 years of figuring it out then. We can hopefully ramp faster and integrate more quickly. But it's the primary reason why we're on the market today.

Can you just maybe give us an update on your progress towards reimbursement? What are the upcoming milestones? What's the outlook overall? What's a good thing to track in terms of us as investors as we wait for that? And then in terms of strategy around legislation, I mean, could some of these biomarker bills help get coverage?

I'll start with the regulatory, where we're at with the FDA. So we've been in a breakthrough designation for quite some time now. We knew this would be the first of its kind test that the FDA would be looking at, and we're in regular discussion with them. So what we've got coming up is our -- the remainder of our module submission that we're in, with the final modules being the PATHFINDER 2 data and the NHS-Galleri data, that's a total of 175,000 participants in those studies. Will be submitted to the FDA as the final module in the first half of 2026. We then would expect there to be about a year review time from there, including an AdCom. If you think about it, we've had to spend a lot of time getting them to understand single cancer assessments and screening is different than multi-cancer. So again, it's why we engaged so early with them. And we believe we're in a good position here to submit an approvable package in the first half of '26. As far as the NCI legislation goes, as we all know, there's 2 ways to get reimbursement through Medicare and then broader more commercially, the USPSTF. And then there's the legislation path that companies have taken previously. We're really proud of the multi -- the large coalition of advocates who've put together and progressed the legislation to date. It's got bipartisan bicameral support to allow CMS to cover multi-cancer early detection tests. It's well positioned. And I can't sit here and predict when legislation will be voted upon or what's going to happen. For us, ideally, that legislation would pass prior to FDA approval. So we've got a couple of years before that has to be done. As far as the biomarker bills go, I think not really screening relevant, current read and understanding, more precision oncology.

Perfect. Then just can you talk about the important steps in the FDA regulatory pathway? Kind of what conversations have you had with the FDA? And what do you think they want to see from you if you want to give a little -- I know you just gave color on that, but maybe a little more specifics on that.

Yes. So as I mentioned, we've been working with them for a while. They've looked at our NHS-Galleri study, the original PATHFINDER study, PATHFINDER 2 study. Those have all been done as IDEs and they've seen our test performance to date. So it's going to be -- in my view, the most important thing for them to see is performance continue, right? Our performance didn't degrade from our research studies into our interventional studies. And once the PATHFINDER 2 study reads out and NHS study reads out, that will be 125,000 folks with performance data. The NHS-Galleri study will also -- since it's longitudinal, it will also have a clinical utility aspect to it. You'll be able to see state shift from the control group versus the Galleri group, something that if they're interested in, we'll have. But I mean, they've said they're going to look at performance and safety in the U.S. and they want to make sure that the test has -- any MCED test has the ability to localize the cancer and not everybody is just getting pushed to some sort of full body scan. So we're encouraged by those facts.

Got you. So the tumor of origin is a changing factor for them. Can you remind us what your tumor origin accuracy was last?

It's about 90%.

Okay. Great. Now going back to dollar efficient, you have the commercial strategy where you want to keep this dollar efficient. Now PCPs, of course, are located all across the country, most numerous doc. And how do you keep that strategy dollar efficient just given the fact how much they are distributed?

Yes. So we've had several different commercial approaches to the PCPs since we've launched. So we've done the go everywhere, find all the gallery tests, see what uptake is. And we've realized that, that's not as efficient as just doubling down on concentrated areas where we're actually seeing more success. So that means we can use less reps scale-wise, prior to the restructuring that we announced, we had about 400 folks in commercial with about 200 being quota-carrying. After the restructuring, we've got about 200 folks in commercial with 150 being quota-carrying. So really focusing on the folks out there on the street for clinicians and then also our self-insured employers and so on, making sure that we're able to drive efficiency there.

Got you. Sorry, this is not part of the original questions, but it's kind of interesting. So I mean, what are these concentrated markets of ordering? I mean, is this higher economic areas? Is this populations with older people? I mean, what's kind of the key market [ in these areas ]?

The N mix of things. Some of those areas include both those things. So higher income is definitely helpful for a self-pay test. It's not reimbursed. But we're also finding that regions where there's a KOL or a physician that is a true champion, where there's a health system that has enabled their physicians to offer the test through self-pay. So there's kind of a brand name health system in the area. Some of the probably more tactical things that we've learned is, you need to run -- statistically, you need to run about 100 tests to get a positive, but you can run 200 and not get a positive. Physicians who run 100 or 200 not get one, they're probably not going to order as much as somebody who runs 100 or 150. So we're putting together these doctors with each other so they can hear from each other. You need to put together large numbers when you're chasing a 1% incidence rate disease. And we're finding that, that real-world data is really helpful and impactful.

Got you. Now I mean, you're constantly innovating. I mean that's what you need to do as a company and spending money on R&D as well as other costs. So just can you talk about your plans to remain solvent long enough to achieve profitability? Can you remind us your cash flow runway? And what are your needs in terms of raising additional capital before you become profitable?

Yes. So at the end of Q3, we had $850 million-ish on the balance sheet. We guided we'd burn $220 million for the rest of the year. So that puts you at about $105 million for Q4. So we'll end the year somewhere around $700-ish million. So we've got cash for some time. We see cash into 2028. In 2024, we've finished the last blood draws for the NHS-Galleri study. We've finished the enrollment for the PATHFINDER 2 study. Those are -- again, that's 175,000 folks. Those costs are going to subside. We will finish development of the next generation -- next version of the test, which we'll launch this month, which is a lower cost, high throughput version. There will be some costs continuing into '25, but eventually, that will stabilize and also provide a higher gross margin. And then we expect to continue to grow. So we see runway into 2028. We've got to execute against our plan. There are some assumptions in there that costs -- commercial is going to start paying for itself. But we've got enough time to make adjustments if we have to further that runway.

Got it. Maybe you can talk about some of the differences -- potential differences between the first and second generation of Galleri test. I mean you mentioned speed and profitability. I mean, are we going to see anything in terms of sensitivity specificity? I mean, I think specificity is a little harder because you're -- I think you're at 99%. But any other kind of tweaks you make to the test?

Yes. So performance-wise, it was designed to be noninferior to the current version. So it will be at least as good as the current version. It may be better, it will be at least as good. And the specificity is 99.5%. So no changes there. The study, that development was done to get to a high throughput, lower-cost version to support a PMA, to support NHS adoption if the U.K. decided to roll it out. So what you'll see in '25 once we roll out at the end of this year as volume switches from one version to the other is there'll be a variable cost improvement to begin with. With regard to variable costs, we've really pushed down the cost of sequencing. We're putting 4x more samples on a flow cell in this version than we were on the last version. And then what you'll see over the longer tail as we get more demand as we receive more tests is the fixed cost leverage. Now we built a highly automated robotic lab, which will remove a lot of direct labor, but we'll have to grow into the scale that we'll build there.

Just in terms of the degree in which you can cut costs or COGS with the second generation of tests and what's the -- is there an end goal to get to?

As [ low as possible ]. So we've guided the U.S. gross margins to 60% at scale. That's based off of this version that we're launching. It's going to be dependent on the scale. As I said, we've pushed sequencing costs down. We can focus on other consumables and reagents and then the wraparound costs, shipping, kitting and all that stuff. But we've really optimized sequencing costs in this version. So with the scale, we will be able to get to where I mentioned.

And have you quantitated the gross margins from that? I mean that is 60% overall. No upside there. And then what kind of operating margins would you expect to achieve in a 5% time frame?

So speaking in the U.S., hard for me to predict out 5 years from now when we're going to be going through broad reimbursement and scaling at that time period. I think long term, we've guided operating margins in the 5% to 10% range as a business in the next 5 years. I think if you look internationally, there's opportunities to have better operating margins or increase operating margins sooner if we were to have an international health system or country roll it out, just given that the U.K. did something, there's no sales force really needed. It's a national invitation system. So your gross margins will be lower for sure, but your operating margin should be pretty healthy. So I don't have a ton I can guide you on right now given how interesting the next 5 years going to be.

No worries. Just in terms of -- don't even know what kind of word to use, but just the entire Illumina saga, maybe just extremely dramatic. I used a different word in the question, but I don't want to do that thing, but something show. Can you just talk about how did that impact the company? And how do you kind of get past that drama or maybe it hasn't impacted you at all because maybe all the spotlight was on Illumina. But just if you can maybe just kind of discuss that -- those events and how you kept the company together.

So loaded question. I'd say we have a resilient employee base that has just done an exceptional job. We were acquired, announced in 2020, closed in '21. In April '21, we launched a test in the middle of COVID. And we've now done over 250,000 tests in that time period. We were held separate the entire time from Illumina. We still were owned by them. We still had to report into them from a financial perspective, budgeting perspective. But we still got to have our own management team and so on. I think it's been really good for our employees to be beyond this time period because it was just such a period of uncertainty. Are we going to be more controlled? Are we going to be less controlled and so on? But we were well set up to navigate that. And the other thing that we did that really helped was we put a small group of people in the day-to-day managing of, as you said, the drama and sheltered the rest of the company from it. No matter what happened, if they executed, it would be better for everybody. So let's not distract folks. And we did a reasonably good job of setting that up.

And then maybe just looking into your biopharma business, somewhere some of the notable partnerships in there. And what are some of the opportunities to grow that?

So it's -- on top of Galleri, we've got this methylation -- it's an methylation platform that enables Galleri and also our biopharma business partnerships. We've got an RUO assay that we're working with several biopharma partners on. The most notable is with AstraZeneca. They've just announced the use of our assay in a Phase III lung cancer adjuvant study. It's one of the first times a ctDNA test is being deployed in a Phase III trial to target earlier cancers to see how well their compounds work there. So there's a business there that we're excited by. AZ is the only one we've currently announced, but it's an area that we're continuing to work in, balancing that with making sure that we have all the capital we need to get MCED Galleri broadly accessible. So I think there's more that we'll likely do with those assets, the MRD asset and then the diagnostic aid for cancer asset as we think more strategically about how to monetize those assets over 2025.

Got you. I mean you are one of the unique with the -- using a tumor -- more tumor-naive assay. I mean, obviously, [ this is regarded ], but there's not that many others. It's technologically difficult to do sequencing intensive. I mean, is there -- maybe some sort of business development relationships or other kind of nondilutive financing ways of getting that out to the market?

I'm sure there are. And those are things that we'll be looking at and considering.

Okay. ASP has been hovering around $800, I think, for a couple of quarters here. Where do you see that going over time? And is this -- how do you improve that?

So ASPs at $800 for a non-reimbursed test, essentially self-pay. We're pretty happy with that. I think long term, as this gets to broadly accessible, we see the price coming down, which is why we're focused on driving down the cost of the test. At a population level, $800 test for any sort of government or payer to pay is a good chunk. So we think long term that, that price will come down. Right now it's a mix of the self-pay through clinics. We've got some self-insured employers who are buying the test as a benefit for their employees. And then we have life insurance partners, companies who give this test to their in-force policies where their customer, the policyholders' incentives are completely aligned with theirs. Everybody wants to outlive the policy. And the life insurance companies have seen that this really helps them achieve that.

Just in terms of getting to population scale, what has to happen operation-wise to get you into population scale size? And maybe we could just talk about all the different things that go into that vision, whether it be U.S. preventative services task force, legislation. I mean, anything that gets you into the true population test?

Yes. So in the U.S., I think you've mentioned what it will take. It's either legislation plus a CMS national coverage decision or to the USPSTF. Internationally, it will be different. I think the NHS-Galleri study of 140,000 individuals is going to -- assuming the data is good, is going to open up doors for other single-payer systems globally. There we see interest today, but we're really focused on getting that data out to hopefully make those discussions more rapid when they happen. And then operationally, we're learning a lot commercially about how to implement, as I talked about earlier, but we're also running the back-end lab, right? We've built a lab capable of doing significantly more capacity than we currently -- significantly more tests than we currently have. We've got extensive capacity. So making sure that, that runs, it runs consistently, got the quality checks in place, so on and so on. So regulatory, we've gone through what has to happen to really enable that volume in the U.S.

We're out of questions. If there's any from the audience, let us know. I guess I'll just kind of keep going because we have about 3 minutes left. Maybe just if you could talk about sensitivity and understanding of sensitivity because there's a trade-off. You could probably target 3 cancers and get an extremely high sensitivity rate or you can get more cancers. So can you just talk about the trade-off that you've decided? And let people know how that 40%, 45% something sensitivity rate.

Yes. So I think at the highest level, GRAIL's finding -- what the Galleri test finds is a methylation pattern from circulating tumor DNA in your blood, not looking for a specific tumor or a specific mutation or a specific cancer type. So it really comes down to the limit of detection of can you find it or not? Is that tumor shedding or not? So we're looking for cancer. We've find cancers that we've trained on. We find cancers that we haven't trained on because it's a common pattern that basically doesn't exist in people who are healthy, which is why you've got a 99.5% specificity. So that's the most important part. So to your question as far as picking 3 cancers, what we're finding -- it's a signal that all the cancers show and find. Could I change the denominator to only show 3 cancers? You could, but you're just basically masking the results of other cancers that you're finding. We think the right thing to do is return all results because that's how you save the most lives on a population basis. And also the way the test performs today, Stage 2 sensitivity, 70% for the 12 most deadly cancers. So at 99.5% specificity and 70% sensitivity, you're going to save a lot of lives in Stage 2. Overall, I think the sensitivity across all cancers is 48.5%, if I remember right. And that's higher for late stage, lower for the early stage. But not all cancers shed the same. All cancers are as aggressive as each other. So it really comes down to finding the cancers that you're going to die from, not die with. And we believe that's what Galleri is doing.

[indiscernible] I'm sorry if you heard me or not. But yes, I'm just curious if you've thought about that, like we know you need to get pancreatic and ovarian and lung and those early. I don't know if you've tried to focus a little bit more on that or if the focus is still trying to be broad.

Well, again, it goes back to what are we finding. We're finding a common cancer signal. And so that's not -- we're not optimizing that to find pancreatic or lung or anything because there's a common signal that all the cancers are sharing. With the 12 cancers that killer 66% of people that I mentioned, that 70% sensitivity, that's kind of a version of that. We also -- you can look at metrics for unscreened cancers where the sensitivity today is 0. But from a development perspective or from a bioinformatics perspective, it's not being optimized for any specific cancer. So our studies have all been done around asymptomatic individuals. Some of them have increased risk factors, where they might have smoked in the past. But we haven't done anything specifically looking at. You've got a BRCA mutation or any of those subpopulations. I know some health systems are using it in some of those populations, but we haven't done anything specifically there.

We actually don't have time. We actually didn't have time for that one.

Thank you.