Guardant Health, Inc. (GH) Earnings Call Transcript & Summary

Good morning, everyone. My name is Tejas Savant, and I work on the Life Sciences team at JPMorgan. It's my pleasure this morning to introduce Helmy Eltoukhy, CEO and Founder of Guardant Health. At the end of Helmy's presentation, there will be a breakout with management in the Olympic Room. And with that, I'd like to hand it over to Helmy.

Thank you, Tejas. It's always exciting to be here, and thank you for the invitation this week. Please note our forward-looking statement. When we started Guardant several years ago, we were frustrated by the slow rate of progress in health care, and more specifically, oncology. We believe that this fundamentally came down to a lack of data, data that was largely locked away inside tumor tissue, serving as a bottleneck to our collective understanding of how tumors grow, evolve and change over time, and especially in response to applied interventions. We believe that liquid biopsies could be at the center of transforming cancer care by serving as a driving force to unlocking this data and vastly shortening development cycles. Few could imagine that in less than a decade from when we started Guardant, liquid biopsy would be transformed from a hopeful possibility to a life-saving reality for many patients. Consistent with our ethos of putting the patient first, let's start with an example. Star, a nonsmoker who is diagnosed with stage IV lung cancer when she was in the early 50s. She had advanced disease that had metastasized to the brain. There were challenges to immediately performing a tissue biopsy because of fluid buildup in her lungs. We are finding that such barriers to tissue acquisition, even in the first-line metastatic setting, are so much more common than many realize. Her physician decided to order a Guardant360 test, and the results came back as positive for an EGFR mutation. Her physician immediately started her on osimertinib. As a result of these actions, Star is still doing well today. In fact, her words are, "I'm alive today because of Guardant." As dramatic as these results are, we're finding that still too often, too many patients are not being matched to existing FDA-approved drugs because of the barrier of -- to the underlying molecular information is still too high. Guardant is breaking down these barriers through our technology platform, which is able to decode and access this molecular information through blood. So how does our technology platform work? Our platform has 3 components to it. At the front end, we have developed a high-efficiency chemistry that converts 2 to 3x more cell-free DNA molecules from a tube of blood than other methods. This translates to high sensitivity as it means we can do more with less. This has been followed by next-generation sequencing. At the back end is our learning bioinformatics engine, which has gathered insights from over 100,000 liquid biopsy samples and is consequently able to reduce noise by over 1,000-fold. This translates to ultrahigh specificity. The platform is then able to report genomic information across 4 main classes of alterations as well as microsatellite instability, or MSI, in order to convey the relevant comprehensive molecular information about a patient's cancer to a physician. We believe our platform will serve as a critical foundation in transforming cancer management across the continuum of care, potentially unlocking a greater than $50 billion market opportunity. Guardant is unique in its pursuit of building tools to serve all 3 separate but connected areas of cancer care. Starting with advanced cancer, our first test, Guardant360, addresses the needs of 700,000 advanced cancer patients with identification of effective treatment. This comprises a $6 billion opportunity. Our LUNAR-1 program and associated tests will potentially address the needs of early cancer patients and 15 million cancer survivors with residual disease detection in the adjuvant setting and recurrence monitoring, respectively, a $15 billion market opportunity. Finally, our LUNAR-2 program will potentially unlock a $30 billion screening opportunity for tens of millions of asymptomatic individuals with a simple blood test for their early detection of cancer. Realizing the large liquid biopsy opportunity, though, is easier said than done. It takes investment in several areas beyond just having a best-in-class technology platform to enable commercial adoption. Take, for example, our first market opportunity, the $6 billion therapy selection market. With Guardant360, we invested very heavily in clinical evidence from day 1 and now over 50 outcome studies, 150 peer-reviewed publications and first-of-their-kind landmark studies in multiple cancer types, including lung and breast. In addition, we have invested heavily on the regulatory front with respect to our work with the FDA and in relation to several companion diagnostic collaborations. All of this has now led to over 170 million covered lives on the reimbursement front and the recent finalization of our pan-cancer Medicare LCD. Finally, we have built a world-class operations offering market-leading 7-day turnaround time and a high-touch commercial organization that has enabled adoption of Guardant360 by over 7,000 oncologists and 60 biopharma companies. As much progress as we have made over the last few years in the advanced cancer setting, Star's story demonstrates that we are still very much in the early innings of adoption of comprehensive testing for precision oncology. As a reminder, $4 billion of the $6 billion therapy selection opportunity is on the clinical side. For the 700,000 patients that have metastatic disease of solid tumors, the sad reality is that majority of patients are not receiving guideline-recommended genomic testing. For lung cancer patients, for example, less than 8% are receiving such testing. And even in colorectal cancer, where there are even fewer guideline-recommended markers, less than 40% of patients are receiving complete testing. Indeed, the gap between clinical practice and clinical guidelines is still far too wide. Fortunately, we believe that recent published data demonstrating that Guardant360 is uniquely positioned to help close this gap. Specifically, we published the results of the NILE study last year. A close to 300-patient head-to-head study between the use of Guardant360 versus existing tissue standard-of-care testing in the -- for first-line biomarker testing in lung cancer. In this study, Guardant360 was able to completely genotype 95% of patients versus only 18% of patients with tissue standard-of-care testing and do it in almost half the time, 9 days versus 15 days. This data highlights the clear advantages of a blood-first paradigm for genomic testing in oncology, and we believe NILE and studies like it will continue to serve as a major catalyst for beginning to shift the market towards a greater embrace of a blood-first workflow. Our 50 outcome studies and 150 publications has led to continued progress on the reimbursement front. Following our lung Medicare LCD in August of 2018, we were able to carry that forward to private payers and now over 170 million lives covered for Guardant360. This last December, we were happy to announce a watershed moment for liquid biopsy and specifically for Guardant360 and the finalization of our pan-cancer Medicare LCD that will cover Guardant360 for the majority of solid tumor cancers in the first-line setting and at progression when tissue is unavailable. Similar to the significant bump we saw in test ASP with our first LCD, we expect this expanded policy to also have a significant positive impact. Furthermore, we expect that this milestone will usher in new tailwinds to further expand our current and future private payer coverage beyond lung cancer. Now I'll present a snapshot of our clinical adoption for Guardant360 for the first 3 quarters of 2019. If we compare those periods to the same periods in 2018, we have received -- we have achieved robust 31%, 77% and 89% year-over-year increases, respectively, in test volume, growing to just over 13,000 tests in Q3 of 2019. Drivers of this adoption were multiple positive data sets, helping to catalyze adoption of liquid biopsy testing, such as NILE, and early gains from our sales force expansion 1 year ago. Catalysts heading into 2020 will be further shifting the market to a blood-first paradigm, our recently finalized pan-cancer Medicare LCD, expansion to progression testing and upcoming targeted therapy approvals that will further drive demand for comprehensive genomic testing. Now shifting gears, our biopharma opportunity is a substantial portion of the $6 billion therapy selection market, which we estimated over $2 billion. This estimate comes from a bottoms up analysis of the over 1,200 targeted therapy, PARP and I-O programs that are currently underway and have an estimated need for enrollment of over 130,000 patients per year. The testing opportunity provided by these trials covers 4 categories, including prospective screening, retrospective analysis, companion diagnostic development and commercial collaboration opportunities, including real-world data and real-world evidence. In each of these 4 areas, we have and continue to make major strides in deepening our relationships with many of the 60 pharma companies we now support. As an example, today, we announced the strategic collaboration with Amgen to develop a companion diagnostic in the Guardant360 platform for their AMG 510 KRAS G12C inhibitor, initially geared towards lung cancer. This is an exciting program given that 13% of all non-small cell lung cancer patients harborage KRAS G12C mutation. Our organizations will work together to support global filings in the U.S., EU and Japan. Furthermore, given the gap in comprehensive testing, part of the aim of this collaboration is to help support greater access to biomarker testing, so that more patients could obtain access to such potentially groundbreaking drugs as soon as they become approved. Shifting gears from Guardant360, GuardantOMNI, which we launched in late 2017, has increasingly become the workhorse of many of our biopharma collaborations. A big driver is what we believe to be the best-in-class performance of GuardantOMNI in identifying patients that could benefit from 3 main classes of therapies: the first, targeted therapies, were the test offers high-performance detection across 500 genes and MSI; the second, immuno-oncology, whereby we have a proprietary blood-based assessment of tumor mutational burden; and the third, PARPs, where OMNI can identify patients with a germline and somatic mechanisms of homologous repair deficiency. We are also increasingly seeing many of these agents being tested in combination. And so a single test like OMNI that can identify all such biomarkers is increasingly becoming a critical part of clinical development for many of our partners. Now I'll give an overview of our biopharma test adoption for the first 3 quarters of 2019. Comparing those periods to the same periods in 2018, we have achieved strong 61%, 112% and 111% year-over-year increases, respectively, and test volumes growing to just over 5,000 tests in Q3 of 2019. This growth is accompanied by robust increases in test ASP as our volumes shift increasingly from Gardant360 to GuardantOMNI. Further, we believe that the growing biomarker-driven therapeutic pipeline will be a continued catalyst for future growth. Now we'll shift focus to discuss our early cancer programs, LUNAR-1 and LUNAR-2. One of the biggest assets we have at Guardant that aids in our LUNAR development programs is our commercial engine. Using this engine, we can leverage data in actual physical blood samples from the over 100,000 Guardant360 samples we have processed to date to produce further biological insights that can vastly accelerate our research and development efforts. In this way, our commercial products acts -- act as a significant force multiplier that allows us to potentially overcome the complex biological challenges presented by early cancer detection in a way that we believe is competitively much more capital efficient than other approaches. And as we launch future products, we expect our pace of progress and learnings to only further compound and increase. Detection of cancer at its earliest stages in blood presents many difficulties. For example, genomic-only cell-free DNA approaches have shown to max out at around 50% sensitivity for detection of many cancer types. Epigenomic signatures can potentially boost sensitivity, especially for early cancer detection, but upfront chemistries for analyzing such signatures are often lossy and difficult to integrate with high-sensitivity genomic analysis. At Guardant, we have overcome these limitations by developing a proprietary chemistry that enables high-performance detection of not just genomic alterations but multiple classes of epigenomic signatures as well. For example, with this new technology platform, in the same stretch of DNA, we can simultaneously detect genomic alterations such as mutations, chemical modifications such as methylation and infer structural changes due to nucleosomal positioning, which we refer to as fragmentomics. As a result of this new chemistry, we have seen tremendous improvements in sensitivity through the synergistic combination of these 3 dimensions while continuing to maintain high specificity. For example, with this new platform, which is part of our recently CLIA-validated LUNAR-1 assay, this assay incorporates simultaneous detection of genomic and methylation signatures and does not require a tissue sample from cancer patients. This is important as the need for a tissue sample can serve as a major bottleneck in the adjuvant setting, just like it does in the advanced cancer setting. We recently presented data at ASCO, showing the ability of our LUNAR-1 assay to detect those patients that will recur quickly versus those that have a long-term recurrence-free disease with very high specificity, in this case, with 100% positive predictive value when ctDNA was detected. As exciting as these results are, a hallmark of our work at Guardant is to focus on clinical utility. That is, in this case, does detecting residual disease earlier make a difference in outcomes? This is still, unfortunately, an open question for many cancer types, but we believe key to comprehensively unlocking the large market opportunity that exists. We are committed to answering this question and are working with many collaborators and stakeholders to help establish practice-changing medical evidence. For example, last night, we were pleased to announce the COBRA study, which is what we believe a first-of-its-kind, randomized controlled trial in collaboration with NRG Oncology, one of the premier cancer cooperative groups, to try to establish clinical utility for the detection of ctDNA in adjuvant colon cancer. COBRA is a prospective study that will enroll over 1,400 stage II colon cancer patients to systematically determine if ctDNA -- if detection of ctDNA using LUNAR-1 post surgery followed by adjuvant treatment can lead to better outcomes than active surveillance alone. This is potentially a groundbreaking study that we're excited to have been selected for, and we'll share updates as they are available. Now moving on to the screening opportunity. There are many challenges with existing techniques for screening for many cancer types. These techniques largely suffer from a combination of low sensitivity, low specificity and/or low compliance. Diving deeper into colorectal cancer, specifically, low compliance has been a challenge for many of the available tools for many years. In fact, the most recent data shows that CRC screening compliance rates have plateaued in the high 60s, far from the CDC goal of 80% compliance. This means there are still over 30 million Americans who are not screened by any of the available CRC screening methods. This presents a significant opportunity for a new tool that can drastically improve compliance rates through an opportunistic screening modality, such as through a blood test that can be administered during an office visit. We believe we can very nicely address this unmet need in CRC screening with our LUNAR-2 program. At AACR last year, we presented the performance of our LUNAR-2 assay for early colorectal cancer detection. Our LUNAR-2 assay incorporates 3 separate dimensions of DNA signatures, genomic, methylation and fragmentomic, into a single blood-based test. In a cohort comprising of 105 recently diagnosed colorectal cancer patients and 124 cancer-free, age-matched controls, our LUNAR-2 assay was able to detect 88% of colorectal cancers with 94% specificity. As illustrated by the bar graph on the right, the addition the addition of epigenomic signatures greatly boost sensitivities -- sensitivity to early-stage cancers. On the heels of this data and our confidence in the technical performance of the assay, we launched our 10,000-patient ECLIPSE study in Q4 of 2019. Eclipse is a prospective blood-based trial comparing the performance of screening colonoscopy to our LUNAR-2 blood test in individuals of average risk for colorectal cancer aged 45 to 84. We are currently in the process of ramping up to over 100 sites in the U.S., the majority of which are now enrolling patients as we speak. If successful, ECLIPSE will play a pivotal role in a potential FDA submission and support for coverage by CMS. Now I'll shift gears to our recent financial performance. Comparing the first 3 quarters of 2019 to the same periods 1 year earlier, we have achieved impressive 120%, 178% and 181% year-over-year increases in revenue, respectively, growing to $61 million in Q3 of 2019. Furthermore, we have achieved all of this growth while dramatically improving the gross profit margin profile of our revenue. Our gross profit margin has improved consistently across the first 3 quarters of 2019 over the year-ago period by 18.5, 20.2 and 15.9 gross margin points, respectively, culminating in 69.6% gross profit margin in Q3 of 2019. In summary, we have multiple near-term and long-term drivers for continued growth in our business. We will soon see some of the benefits of several near-term drivers, such as our pan-cancer Medicare coverage, continued momentum we are seeing with the private payers covering Guardant360, the significant growth we are seeing in our business from the success of GuardantOMNI and our companion diagnostic collaborations with pharma. We also expect to see growth in our business from FDA approval of Guardant360. Those catalysts, along with NILE, also support the continued establishment of a blood-first paradigm that we expect will further drive volume growth in our business. Over the longer term, we expect increased testing volumes to provide greater operating leverage and reduce COGS. And we are also very excited about the global expansion of our testing franchise beyond the U.S. For example, in Japan, we now have thousands of tests being ordered annually across more than 200 of the leading cancer centers across the country. Last but not least, clearly, the most exciting opportunities ahead of us are the vast multibillion-dollar markets in recurrence monitoring and early detection that we can potentially realize through the tremendous progress we are making with our LUNAR programs. Thank you.