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

Great. Thanks, everyone, for joining us this afternoon. I'm Vijay Kumar, the life science device analyst here at Evercore. Pleasure to have with us the team from GRAIL. We have CEO, Bob Ragusa; from Investor Relations, we have Alexis Tosti in the audience. So Bob, thanks for spending the time with us.

Thanks for having me here.

So it's been an interesting journey for GRAIL over the years, right? And we've tracked it through all its different permutations, combinations. Now that you had your first quarter out as a public company, I just wanted you to review third quarter. How do you think it went? Was it in line with your plans? Any surprises?

Yes. So in particular, Galleri commercial sales were quite strong. We were just a little bit over 50% growth year-on-year. There was a sequential dip in Q3, which we've seen from seasonality. So that was something that was expected. With that, we had guided at the Capital Markets Day and at the end of the last quarter, on the 30% to 50% revenue range for our Galleri product. With that, we tightened the range to 40% to 50% going to the end of the year.

Fantastic. And when I look at your test volumes, I think, north of 32,000 tests in the third quarter, how does the test volume growth compared to your revenue growth?

Yes. So it's pretty highly correlated at this point. So we see some minor ASP fluctuation, but it's pretty nominal at this point. So most of the volume growth translates pretty directly into revenue growth at this point.

Got you. And we're -- you're in a pretty unique position, right? It's in a category NF1 multi-cancer early detection, but you don't have reimbursement. So who's prescribing these tests? Give us a flavor for ordering physicians? And what kind of people are ordering these tests?

Yes. So we look at across -- it's a primary care physician universe that we're looking at. So it's not the oncology side. In the primary care, we're looking at people who are really predisposed to early detection, predisposed to prevention. So if you look across the spectrum, our providers would have a heavier emphasis on prevention than maybe the average PCP.

The -- are those concierge docs or -- because, again, my understanding is patients would have to pay out of pocket at this point in time. So give us a flavor for the type of physicians and type of customers who are willing to pay out of pocket?

Yes. So the test was $949 list price test. Early on, we saw a lot of traction with concierge doctors because there, I think, just the conversation of asking for self-pay is easier. Over time, though, in the most recent quarters, concierge doctors have gone from the predominant to less than half of the prescribers in our clinic channel. And so we're getting just more and more broad appeal. And again, the physicians with that preventative care mindset, get more comfortable with having the conversation about paying for a test. On the customer side, they're really looking -- it's usually people who have had some interaction with cancer, a family member or a friend, themselves personally is a big part of it. And then there's also -- we have a couple of channels where it's not self-pay. So large self-insured employers are offering the test as a benefit to their employees. So a lot of the larger companies, especially companies that own the employee for a long period of time, have longer tenured employees, they see the benefit because they're paying the ongoing medical bills. We also have had good traction in life insurance companies. So this is for in-force policyholders where a life insurance company will offer to them to pay for a Galleri test. And again, the interests there are highly aligned, right? The insurance company and the policyholder, both want longevity within that, and they think Galleri is a great way of getting that.

That's really interesting. It's -- when you look at those 2 buckets, right, either large self-insured employers or life insurance, what percentage of volumes are there right now? And where could those numbers go when you look at the medium term?

Yes. So I think our predominant channel is our clinical channel, the self-pay, that will continue to be that. And so it's both our clinic channel and then we also have a telemedicine channel, which is a small percentage, both life insurance and employer on the kind of minority side of the total pie chart of volume.

Got you. The other metric you guys disclosed was the number of physicians ordering the test. I think it was 12,000 in 3Q. What's -- are you adding new physicians? How is that number tracked over the past few quarters?

Yes. So at the end of Q2, we put out that we had 11,000 -- over 11,000 ordering prescribers. At the end of Q3, over 12,000. So seeing good growth in prescribers. Sales force, we're really -- we did a restructure in the middle of Q3. And with that, one of the things we wanted to do is really focus on higher-performing territories. So we're looking to both add kind of the breadth of prescribers, add prescribers and also have better depth where each prescriber is prescribing more. So having more focus on some of these areas that are more productive has been useful for us.

Understood. And what's been -- I don't know if it's too early to track what's been the reorder rates, percentage of physicians ordering the test. How is that number track for you guys?

Yes. So we haven't put that out. That's one of the things we're looking at is what's the right -- kind of right way to portray that? We're still in pretty early days, so reorder is a little more difficult, especially going back just a little time ramped our sales pretty quickly. So there's not a lot of time to measure. But we will be looking at putting a measure to see what's happened either over a specified time or overall time for reorders because we do think that will be an important element.

Got you. And maybe the last one here on your early commercial experience. What's gone well? What's been the pressure pain points as you've gone -- reached out to physicians and they've been ordering these tests?

Yes. So I think one of the things, again, you have primary care physicians, you have a prevention mindset. But the odds work against it a little bit in terms of -- for any individual at a population scale, it all works out. But if you have roughly a 1% signal detection rate and you're prescribing, you might prescribe 30 prescriptions and not see any positives. And so what we found is getting groups of physicians together, that are experienced Galleri users with some less experienced Galleri users and people have done several hundred where they can describe the experience of finding positives, how the workups went, what that meant to the patients. That really helps bridge the gap for newer prescribers. And it also invigorates the current prescribers. When they -- when people see a positive, especially in aggressive cancers, they really understand the value and start to appreciate the technology.

Got you. And what's been the real-world test performance? Has it match in line with some of the data that you guys have put out, especially specificity comes to mind, I think the bar was 99 or 99 and above?

Yes. So in our case control study, we had a set of specifications and performance. And what we've seen is in both specificity as well as positive predictive value, those numbers continue to repeat, both in our case control study as well as PATHFINDER. And then importantly, in the NHS, in the first one where they did an early analysis across 140,000 people in the randomized controlled trial, they came back and said the data was very promising, which we took to be as good or better than the current published data. And so that would be yet another replication point between CCGA, PATHFINDER and now NHS Galleri, at least in the first round.

That's helpful. And since you brought up NHS, I think the Street perception of NHS was -- it was different, right? Because I think NHS decided to push out the rollout of test, I think, towards the end of the trial. So that's '26. And perhaps that was as a negative. But I think the NHS actually said these were good results, right? So maybe walk us through on what happened with NHS? And what is this discrepancy Street perception versus your -- what NHS has communicated to you, GRAIL?

Yes. It's maybe bridging the very promising data and the decision not to do the pilot is if you think about going back to 2021, I mean, prior when they're setting up the study, people had a lot of belief and still do, obviously, in the power of the technology, the power of MCED. And so there was a little bit of what if. What if -- even though no other screening study has shown first year to meet some of the really high criteria that they put forth, what if it does? And so they wanted a mechanism to be able to get the technology out there quickly if it were to meet that, even though there wasn't necessarily the expectation. And so what they looked at is some ambitious prescribed targets around positive predictive value, around number of late-stage cancers found and number of total cancers found in the intervention arm versus the control arm. And when they looked at the data, while the data performance was promising, they didn't trip the exceptional criteria that they had to go forward with a pilot. So we'll look in 2026 to look at the full data and after round 3 is when we would expect to see some of the reduction in late-stage cancers, in particular, to show up as they have in other screening studies, and that would enable them to make a decision to be able to potentially roll out to the population there. And so that would be -- with the rollout there would be a very significant opportunity as the intended use population there between 50 and 79 is about 19 million people.

And I'm sure the team internally, they've tried to do the modeling exercise, right, based on what NHS just said about the test performance. If it mirrors what we've seen in PATHFINDER in terms of sensitivity, PPV and specificity, is 3 years -- is that enough time to show a reduction in late-stage cancer? I think that's what NHS is looking for.

Yes. So in the modeling, we believe it still has -- that is enough time. Obviously, the further out you go, we've seen in other studies, the better and better it gets, but we should be able to see it after year 3.

And that should that meet the bar that NHS is looking for?

We'll have to see where the data comes out.

And I'm curious on this NHS study, does GRAIL get to see the data? Or do you get to see this at the end of 3 years?

Yes. So it's a blinded study. So even we get asked a lot about the early -- that early first round look. And so the study is going to remain blinded until the final readout. So we're not going to be able to have any publication on that until 2026.

Got you. But do you know what the bar is, what NHS is looking for?

We will know the bars, yes.

Understood. And sorry, just to go back on -- if it does meet the bar and NHS does decide to roll it out, what would be the -- what would the curve look like in terms of adoption?

So the adoption -- so the interesting thing there is similar to the study, the way it would roll out is through an invitation system with the NHS. So similar to the way the study was done. So it should be relatively rapid adoption at the rate that they want to get it out there because they'll -- instead of going physician by physician, they'll actually go directly to the patients and invite them for that screening, similar to the way they do screenings today.

And is there -- have they -- when this is rolled out in 2026, have they -- do you have a rough sense on what the revenue opportunity could be? Because I think the one thing that we have struggled with is what the test ASP could look like in 2026?

Yes. So we haven't gone public with the pricing there. The one thing to think about, though, is the U.K. would be a very different situation because here in the U.S., as you see across all the diagnostic companies, you have relatively high sales and marketing costs. There, the sales and marketing costs will be very minimal because, again, because of an NHS invitation system, you don't have to go physician by physician. You get it not quite for free, but largely for free based on that.

Got you. And given those volumes, like I do understand there might be discrepancy between gross margins because how you're paying, you don't have the sales and marketing costs. But at the operating margin line item, should this be incremental to or in line with your idealized operating margins longer term at the corporate level?

Yes, we're expecting the operating margin to be similar with what the long-term targets are.

Got you. And then switching to the U.S., just remind us on the FDA timelines. What kind of study is needed, right? Because are we looking at 12 cancers, 30 cancers? What is the FDA asking you?

Yes, that's a good question. So on our FDA strategy, so right now, we're in a modular PMA process. So we've already submitted several modules. We anticipate having the last module with our clinical data to be submitted in the first half of 2026. So the key clinical data, and it's probably important to note, we've been in breakthrough designation with the FDA. And so we've had lots of discussions and gotten centered on 2 key registrational studies. One is PATHFINDER 2, which is 35,000 people in the U.S. and the other is NHS-Galleri, which is 140,000 in the U.K. So 175,000 people total. We expect the submission to be in the first half of 2026. We do expect -- since this is the first PMA, we expect to go through the FDA in MCED. So we expect that there will be an advisory board. And with that, we anticipate it will take about a 12-month period for an FDA decision on that. So that will put the decision time frame in first half of 2027.

And along with that, how should the reimbursement pathway evolve? Is there a regulatory path or legislative pathway for reimbursing MCED tests?

Yes. So right now, there is a bill in front of the legislature for the MCED bill, and that would give Medicare the authority to pay for MCED as a screening test. So it would create a coverage category for them, very similar to what was done with colorectal cancer to give coverage authority to Medicare for that. So that bill actually went through a markup this summer with -- in the House Ways and Means Committee. It was unanimously voted on 38 to 0 to move forward. It has bipartisan bicameral support. There's over 600 advocacy groups that are pushing for it. But we do need a legislative vehicle to be able to bring that forward. So from a practical standpoint, we need that prior to FDA approval. Obviously, the sooner it comes, the better and it would be good for the field because it would definitely embolden the field. But from a timing perspective, we need it before our FDA approval. And that would give -- again, that would give CMS the authority to be able to cover MCED tests.

Got you. And given some of the changes here in the post elections, is the new regime going to be more favorable to areas like MCED test?

Yes, it's interesting. Again, we had strong bipartisan support. So I think which political party everybody has been impacted by cancer. And so I don't think that's got a huge impact. It's hard to tell in the detailed level, but on a macro level, there's strong support on both sides of the aisle.

Got you. And I guess from a P&L perspective, I think post third quarter, you had $850 million of cash. What should the cash burn rate look like when you look at next year? Is that stepping down from Q4 levels? And what is that cash going to support your revenue growth? Is that through '27, '28?

Yes. So it's a good question. So we did a restructuring in August of this year. And really, when we were spun out in June, we were given what was earmarked to be about 2.5 years of cash. We looked at the business and really slot -- our true North Star is MCED and the Galleri test. So we wanted to make sure we had enough runway with that to get through some of these value inflection points around FDA submittal, FDA decision. And so the cash and the restructuring was designed to give us cash through into 2028. So with that, we had a cash burn of $105 million in the past quarter. We've guided to $220 million total for the second half of this year and then $325 million for 2025. And the reductions are really driven by the restructuring. Our major -- 2 major trials, both had their final study visits in July of this year. And so those costs are starting to fall off. And then we also have a new version of the assay that we're transitioning to at the end of this year. And that's brought a lot of automation and a lot of optimization to the assay itself. And with that, there's been a lot of development costs associated with that program over the last several years. And so some of that will start to fall off next year and then in follow-on years, which is what should create the cash runway to '28.

Understood. Maybe in the last minute here, the -- obviously, public markets have been challenging for small cap names, especially growth names. What do you think is the Street missing or perhaps not appreciating about GRAIL story? And what gives you the optimism when you look at the business?

Yes. I think one of the big things is people keep looking way out into the future, which -- and everybody sees the long game here, which is great. But I think what's less recognized is we're literally finding cancers, real cancers in real lives every day. And so that's here and now. So we're already at the volumes where that's a reality, where there's somebody on the other end of our test finding cancer every day. And so I think that's really been the big change.

Fantastic. I think with that, we're out of time. Bob, thank you so much for spending the time with us.

Yes. Thank you.