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

Okay. I think we can go ahead and get started. All right. So it's a pleasure to have the Guardant team here with me: Helmy Eltoukhy, CEO; Derek Bertocci, CFO. Welcome to SVB Leerink Conference.

Thanks for having us, yes.

Yes, absolutely. So -- so the first one, Helmy, a lot to cover today. I have to sort of start with the quarter, given that it was just 2 days ago that's when you reported. The first question here is -- I mean, this clinical volume was strong. You had 78% year-over-year growth in the fourth quarter there. The caution that investors have, after delivering almost like 180% top line revenue growth in the second quarter; 155% in the third quarter; in revenue, the growth was about 87% in the fourth quarter. Is there something you can point to in the quarter that you -- that where things came in a little bit lower versus your expectation? Or was it the largely lumpy biopharma services revenue that accounted for it?

I mean we had a great Q4 of 2018 also, I mean, with a huge jump up from $20 million in revenue to $30 million in revenue sequentially. So this -- obviously, we see this sort of punctuated evolution, I think, as we have these kind of lumpy biopharma programs come in. And so certainly, '19 was a year where we had a lot of coincidence programs, a bunch of prospective studies, obviously, some large deals with AstraZeneca in terms of some of the companion diagnostic development. A lot of excitement around some drivers like TMB that year, that obviously led to this big kind of step-up in terms of pharma revenue. But we also have fairly good visibility longer-term into. Some of these contracts we signed 18 months before they start or 12 months before they start, and so we know that essentially the pipeline looks strong. But it's sort of punctuated in terms of how these things happen. I can give you -- if you think about the full ecosystem, we see the pendulum swinging full force towards cognitive therapy development with the acquisition of Loxo and Array and some of the other drugs that are being developed now by companies that really weren't in the drug therapy space that now are going full force there. And so those programs are ramping up. And we're in conversations with most of those companies. And so that's just the dynamics of the pharma business.

Okay. The second question that I was getting from investors is around Noridian. So just help us understand, there's some confusion there in terms of MolDX Pan-Cancer that was effective on February 3 versus Noridian's own administrative changes that need to happen. Could you walk us through that and help us understand why now -- why do you expect this to happen, first of all, in second quarter? What are the administrative changes? And then what's your level of confidence that it will happen in the second quarter?

Yes, a great question. So we've gotten this question a lot. Essentially because of the 21st Century Cure Act and the finalization of that, the Medicare contractors, these MACs, have to do a lot more work in terms of documentation and rigorously answering every comment. There's separation between articles and LCDs and coverage decisions. So there's a whole host of things they have to file and document that they didn't have to before. Most of these MACs are unfortunately fairly understaffed, and so it just is an administrative burden. We still have complete confidence in terms of the finalization of the policy in terms of Noridian. So Palmetto is essentially in charge of coverage decisions for about 50% to 60% of the country. So there are a number of MACs who have kind of ceded that duty and responsibility to Palmetto, and so that's why that was a critical milestone to get that Palmetto policy finalized. Historically, Palmetto has had the ability to kind of make those edits in other systems and kind of have things roll through fairly quickly. Because of the 21st Century Cure Act, Noridian has to do some of that work on their own. And so yes, we've -- we're as confident as we can be with anything that government says, that it would happen in Q2.

Okay. Another question, important question here is on the guide. You're implying 31% growth this year. Last year, you printed 137% growth. With the FDA approval for G360, that's expected, and we'll get into that. LUNAR-1 trials, they're starting. Pan-Cancer reimbursement that you said you're somewhat confident depending on the government. Why 31%? It seems like compared to last year, is it just tough compares? Or help us understand, is there some level of conservatism here? What would some of the things you'd like to see before.

I think '19 was a special year in some ways. We went from fairly low reimbursement in terms of ASP per test to much higher amount. We had a couple of things going for us. We had all of the payers that came on board. PAMA came into effect, which increased what we're able to get even out of the out-of-network payers. So we had a number of, I think, positive and better-than-expected kind of things go our way in terms of 2019. We had the launch of OMNI pretty much in terms of the full ramp-up that year. It's always hard when you have a new product to predict exactly what the uptake of that is. That improved ASP on the pharma side considerably. And then we had NILE as well in '19, which when we started the year we didn't know if that would read out positively, and we didn't know the effect of that. If we look at '19 versus '18, '18, we had a sort of -- there were some negative headwinds in the liquid biopsy space in '18. If you remember, there were a couple of papers that talked about liquid biopsy not being ready for prime time. So NILE did a great effect -- a great job in terms of really counter detailing that and really getting us back to kind of the full growth. But I think we were growing much faster than the whole market dynamic. And we think the market growing 20%, 30% is typically at the upper end of kind of sustained health care growth cycles. There's just a certain adoption curve to these technologies, especially when you get beyond the first 10%, 15% of the early adopters. You're starting to get into the middle majority. And so we see that growth continuing. Obviously, some of the Pan-Cancer LCD claims being maybe potentially pushed out to Q3 in terms of getting to full force. Obviously, they'll start in Q2 but in terms of getting ramped up and so on, impacting that a little bit. But I would say that the kind of the multiyear cycle looks very robust in terms of continued and sustained growth at those rates for years to come. And then we have, as you said, LUNAR-1 coming on board, obviously, LUNAR-2 in terms of like a whole different S-curve that we're being able to initiate in our business and internationalization and so on and globalization, some of these pandemics notwithstanding.

So I want to come to that eclipse LUNAR-2, which you're talking about as a whole different S-curve in a second. But timing-wise, FDA approval, again, just help us understand, I mean where do you stand? Have you had any questions from FDA so far? Because this would be the largest, sort of most impactful metastatic liquid biopsy launch for -- I mean, not launch but an FDA approval in the marketplace, first one of its kind. So what's your confidence on timing there?

Yes. I mean, there's very healthy back and forth. I mean, I think, as we mentioned on the call, we submitted additional data earlier this year. I think it's going in the right direction, and we're fairly confident it's going to happen. It's just really in the FDA's court right now in terms of exactly the timing of that. I think if we take a step back and you kind of think about what is the importance of FDA approval, when we did our IPO, I guess, 1.5 years ago, we didn't have the Pan-Cancer LCD at that point. Really, the only route to Pan-Cancer reimbursement was FDA approval. And so the 2 are essentially linked, the FDA approval and the NCD. With the LCD, we've sort of decoupled that reimbursement piece. And so FDA gives us, I think, some marginal improvement over the LCD potentially, maybe a 5% to 10% bump up over what we could get from the LCD. But we're really getting 90% of the reimbursement benefit from the LCD. So then what's the remaining benefit of FDA approval? It really is, I think, in terms of the medium- to longer-term, getting the middle majority and the laggards in the market on board. The early adopters that will go on and try different things, they're obviously very savvy in terms of trying new tests. But once you start getting into kind of the 30%, 40% penetration in the market, we've seen those -- it can be harder to kind of switch ordering patterns with those -- with that user base. And FDA approval, we know, is something that this stamp of quality, fairly well understood in terms of the rigor that's required to get there. We also think it enables us to work more closely with pharma companies in terms of co-promotion opportunities if we're FDA-approved for their particular drug, they can essentially promote us with their brand team. And it's a very synergistic relationship between the 2. And so there are, I think, very powerful and, I think, important growth drivers for us medium- to long-term with FDA approval. And then internationalization, much easier to piggyback on a PMA package that's been approved if you think about global regulatory approvals as well.

Okay. Another part of that reimbursement equation is are the commercial payers, elaborate your -- if you could, your strategy there now and what's your expectations once -- both -- after Pan-Cancer and potentially after FDA approval?

Yes. The conversations have been very positive right now after finalization of our LCD in terms of getting existing private payers that cover us for long and talking about expansion to other cancer types. And so -- but exact timing on that is difficult to ascertain. It is very choppy in terms of when you can get in front of some of these private payers and essentially exactly what the time scale for them revising their policies would be. That being said, I think all of that is upside to our model. Initially, when we got long private payer coverage, it was fairly neutral in terms of total revenue because we were increasing revenue on the lung side, but shutting off appeals revenue we were getting on the non-lung side. As we go to Pan-Cancer, though, now we're obviously, is it something that is fairly accretive to revenue into our business into ASP. And a lot of that we have not factored into some of the guidance we've given.

Got it. Let's switch to LUNAR-1 program. You've highlighted COBRA trial, the stand-up to cancer, a couple of other efforts ongoing there. If you could, on a high level, give us the strategy and the timing there and potentially when can these trials read out and sort of what is your expectation of these trials on the market and recurrence monitoring in CRC?

Yes. So for residual disease and recurrence monitoring, the biggest challenge in terms of opening up the clinical side and getting private payers on board and actually making a business out of it, getting into guidelines, and getting clinical adoption is really clinical utility. Multiple studies have shown -- our own other companies as well and other academic centers have shown the detection of ctDNA after surgery. You do find the high-risk individuals. You find those that still have cancers still have residual disease but no one has shown that, that information actually leads to an improvement in outcomes. Is it just lead time bias or does it make -- is there a difference in terms of outcomes when using that information. And so that's where interventional trials are needed, where use that information and you couple it with a therapy or another intervention and show that the combination of the 2 leads to outcomes improvements. And so that is what we're investing in with COBRA, with Pan-Cancer, with other studies that we've initiated and with the work that we're doing with pharma companies as well in their own adjuvant studies. And so we see in the near-term monetization opportunity in terms of working with pharma. But then in the medium term, being basically able to using the data from pharma, using the data that we've generated in our own as part of our clinical dossier is to essentially open up the reimbursement opportunity, help change guidelines, change physician practice and have another step-up in terms of opening the clinical markets for that type of testing. We know that the pharma opportunity can be fairly large on its own from what we're doing in therapy selection. So it's something that I think is exciting in the near- to medium-term. But obviously, the big bogey so to speak is really opening up the clinical markets and really getting those private payers on board that we believe are going to just need a very high level of clinical data and COBRA, the randomized control trial, which is the highest level of clinical evidence, and we think we'll -- if it's successful, should go long ways in terms of opening up that opportunity.

Okay. And in terms of the data readouts along that line or in the screening opportunity you have, how should we think about 2020 anything at AACR or ASCO that we should be knowing?

Yes, I think our track record is data releases in most of these conferences across our 3 segments. 360, we always have data of dozens of, I think, studies, they're presented on the therapy selection side. I think you can expect in both LUNAR-1 and LUNAR-2 at some of these conferences for us to have data readouts. They won't be from COBRA or Stand Up To Cancer or ECLIPSE but we are doing other studies, case-control studies and those kinds of things in parallel. And I think you can expect to see some of those readouts in some of the upcoming conferences.