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

All right. Good morning. It's our pleasure to welcome Helmy Eltoukhy, and Derek Bertocci from -- Derek Bertocci, excuse me, from Guardant Health. Guardant Health is a molecular diagnostic company that provides comprehensive genomic profiling and other services to clinical and biopharmaceutical customers. We believe Guardant's liquid biopsy panels are well positioned to outpace tissue-based competitors due to the advantages of blood-based profiling and Guardant's strong supporting data and commercial prowess. Over the next 25 to 30 minutes, we're going to talk about the 2020 outlook, progress with reimbursement and regulation, an update on G360 commercial efforts and on this growing traction amongst biopharmaceutical partners. If we have time, we hope to close with a discussion of pipeline developments and associated timelines for LUNAR.

So thanks, guys, for being here. Really appreciate it. Just starting on the 2020 outlook, let's start by talking about really 2019 results and how that shaped the outlook for 2020. So just to frame this for everybody, management guided 2020 revenue to $275 million to $285 million. That was $8 million ahead of our forecast and the consensus expectation. So just looking back at 2019, you posted revenue and volumes throughout 2019 that vastly exceeded expectations and your original targets. So just starting there, what do you attribute the strength and the upside to from last year?

Yes. So '19, obviously, was a pretty fantastic year from multiple aspects. And if we look back to when we gave the initial guidance early in the year that was before NILE had readout. NILE is a large head-to-head study we did Guardant360 versus tissue. That readout positively in April. You really don't know a [ priori ] how these studies are going to read out. Two, it got published simultaneously in a top journal that was presented and highlighted by AACR, and we had made sales force additions where we nearly doubled the sales force at the same time. We had our LCD as well. And so we had this perfect storm of the right clinical data and then the right setup in terms of our infrastructure to be able to take advantage of that. That really -- we couldn't forecast initially. Obviously, we put some probability on that, but there's that aspect, but then we didn't know how much upside it will actually give us in terms of clinical volume as well. It's hard to know exactly how positive data is going to lead to commercial uptake. And obviously, all of those things went our way. They outpaced in terms of our own models, kind of where things ended up. I would say the other tailwinds we had were, there were a lot of things that went our way in terms of ASP, both on the clinical side and the pharma side. So clearly, we had the LCD coming in, in terms of lung coverage from Medicare. That's something, obviously, we could predict fairly well, but the effect of PAMA, PAMA actually moved a lot of the out-of-network appeals rates that we're able to secure from private payers, up significantly as well that year. And then I would say the third tailwind that was hard to kind of forecast in '19 was the move from pharma, from 360 to OMNI. And a lot of that, I think, was really, I think, sort of galvanized or catalyzed by the interest in TMB and immuno-oncology kind of development that was there, and we saw a huge uptake of that, that is better than expected in '19. And so that being said, people ask us, what is our process, what do you think guidance and so on. And I would say that it's a process that we've used for the last probably 3 or 4 years now that's been fairly accurate. We look at, essentially, our pipeline, we look -- we take a probability adjusted view in terms of each of those components. We have both a tops-down and bottoms-up model in terms of clinical volume. And there are some years where some of these things change, you get good clinical data, you have certain trends that happen in the pharma side that caused some of those probabilities to be maybe kind of underestimated. But that being said, it's typically fairly accurate. And 2020, I think, is another, I think, exciting year for us. We're still underpenetrated in the clinical side, and there's still that pendulum from tissue to liquid kind of swing a lot more on the pharma side as well.

Super helpful. And maybe just one quick follow-up. On 2020, I mean, it would be hard to have as many discrete drivers to upside align in any year as what happened in 2019. At the same time, to the extent that there is the potential for upside to your initial targets still are for pretty robust growth, I can think of things like more pharma partners, higher mix of OMNI versus 360 that is embedded into expectations, maybe quicker reimbursement penetration beyond what you have today and just continued strong execution of what is still an underpenetrated market. I mean are there other discrete sources of upside that could materialize?

Yes, we see a few things. So obviously, this Pan-Cancer LCD that is getting finalized now, really seeing -- we're fairly underpenetrated outside of lung in terms of the nonlung cancer types. And so that, combined with drug approvals that should happen later this year in prostate and colorectal cancers, we saw, with the Piqray approval in last year in breast cancer, alpelisib, really big uptake in our breast volume as a result. And so when you have both those components, you've removed the barrier to reimbursement, and you've increased the need for testing to some of these drug approvals, that's a really nice setup for increasing clinical volume. So we see that as upside this year. A lot of the private payer coverage we've gotten historically has been in lung, which has been fairly neutral to our overall revenue because as we gain lung coverage, we often lose the ability to appeal claims on the nonlung side. But as we start expanding some of those private payer contracts to multi-cancer or Pan-Cancer, we see that as potentially additive now to revenue. And it's hard to forecast. None of that is really in the model right now in terms of some of those private payer gains. And obviously, that's upside as well. I would say longitudinal testing in terms of testing at progression, which is covered under our LCD now is upside that's there that's not modeled, and we have some programs for being able to really try to kind of build on that and leverage that in terms of our commercial channel. And so we see that as potential positive as well. And then as you said, some of the pharma catalysts as well there.

Okay. That's helpful. Maybe just to touch on a few regulatory and reimbursement timelines, again, potential catalysts for 2020, just to frame this. You're at, and again, just correct me if I miss any of this stuff, I think you're at 170 million covered lives. You're broadly reimbursed by Medicare and several commercial payers. Palmetto, as you've referred to, issued a final LCD for G360 and the vast majority of advanced solid tumors last year. And you've submitted 360 to the FDA. What's the likely time line from here for FDA approval?

We obviously submitted the package. It's really in their court. There's been back and forth conversations that have been going in the right direction. I think we're very optimistic it's headed in the right direction. But it's hard to say, it's typically a 6-month, sometimes 9-month review cycle so...

So keeping in mind what we've talked about already with the LCD, which is essentially Pan-Cancer. How important is FDA approval in terms of broadening CMS reimbursement?

So initially, we talked about the importance of FDA approval. We didn't have the LCD, all right? We didn't have the Pan-Cancer LCD. And so we were essentially -- our intent was to leverage the NCD in terms of getting to that Pan-Cancer coverage nanopolicy. Obviously, with the LCD, we're getting most of the benefit of that NCD. And so I would say the NCD may give us a marginal uplift from where we are, maybe, let's call it, 5% or 10% increase in reimbursement, but fairly marginal. We see the importance of FDA approval, really, as something that is important from a medium- to longer-term perspective, where it's about getting penetration into the middle majority and the laggards of the market where essentially, FDA approval is kind of a simple frame of reference in terms of knowing that the test is validated, meets a certain standard. It's something that you can order with ease and with a high sense of confidence, especially in the liquid biopsy space. And so given that we're still in the early, I think, innings of penetration it's important. But we think it'll be much more important heading into late '20, 2021 and 2022.

So it gives you that stamp of approval with certain docs who aren't on board with adopting right now. Does it help you with commercial payers from a reimbursement discussion perspective because, it's unclear, right?

Yes.

I think that's what we thought was going to happen with Foundation.

Yes, exactly.

And it's hard to tell now that's part of Roche. To us, it's not clear that it really catalyze broader coverage.

Yes. The sort of the carrot kind of at the end of the stick. Some payers talk about, "Oh, come to me after you have FDA approval," but it's not clear how much that actually move things. We think having clinical utility data, having health economic data with some of these private payers is maybe even more critical than FDA approval, but it certainly doesn't hurt. It's something that, obviously, is going to be a page in our clinical dossier that we submit, but how much it drives things forward is, I think, remains to be seen. We think areas that FDA approval does help are certainly, international expansion, global expansion in terms of being able to leverage that -- those net regulatory framework with other regulatory agencies. We think it also helps from the pharma side of things in terms of the CDx pipeline, thinking about opportunities where we can sort of have our commercial organizations work together in terms of promotion of the testing for certain drugs that are out there. And so it really does open up a lot of other avenues that we think will be important for our business outside of the specific FDA approval.

Maybe to dig in a little more on Guardant360 and performance and the outlook for this year. So digging deeper into your guidance, you're targeting 65,000 to 67,000 tests in 2020, that would be a 34% increase year-over-year at midpoint. That's robust, but it's still a long way to go, keeping in mind that the addressable opportunity is around 700,000 late-stage cancers. We went to the AACR Advances in Liquid Biopsies conference last month. You were supported by a lot of key thought leaders in the space at that meeting. And we talked to a bunch of those folks, and while they're excited, they said that the company is probably 5% to 8% penetrated as a percentage of the total opportunity. I guess one question I'd have is, and you may just not want to share it but I'll ask anyway, how many oncologists have ordered the test today? Because I guess what I'm trying to get at is penetration by oncologists and then are there oncologists who are really using this as a front-line test.

Yes, it's -- well over 7,000 oncologists have ordered the test today. It's -- there's -- estimates are 10,000 to 12,000 oncologists in the U.S. so majority have certainly ordered the test. The challenge, I think, that the field faces and this is whether it's liquid testing, tissue testing, or comprehensive genomic testing is not the breadth component. Most physicians have ordered an NGS test at some point in their lives. It's how does this testing become top of mind? How do they become embedded in terms of the clinical workflow at the first-line setting and so that's where our blood first initiatives, all these things, our reimbursement policies, trying to move to the top of the funnel with these physicians. And so we have a good number of physicians now that are -- do have our testing integrated into their workflow and in terms of the kind of -- when patients come in, that's something -- that's how they work their patients up. But obviously, we're still the early innings of that conversion cycle. Unfortunately, too often today, NGS testing is thought of as a sort of last resort or a second or third line option for patients. And that's where I think the whole industry is incented to work together to really try to change that to make it clear that if you're not testing upfront for all the markers that are NCCN Guidelines, you're doing your patients a disservice. And so we have a number of initiatives that we're working on, not just ourselves, but with advocacy of organizations, with other companies and so on, to really solve what we call this undergenotyping problem. And it's -- we've talked about in some of our presentations that only 8% of lung cancer patients are being tested for what some guidelines and less than 40% of colorectal cancer patients. And it's the same for many other cancer types. And I think some of the challenge has been the turnaround time with tissue testing is often 3 to 4 weeks, which doesn't marry up to the necessities of really clinical care in terms of what's called time-to-treatment. The patient comes in, they're pretty sick. They need to be put on a drug within 1 to 2 weeks. And so that's where our turnaround time of 6 to 7 days is really nice because it just fits in, in terms of the criticality of getting that information before the therapeutic trigger is pulled, so to speak. And so that just takes a lot of education. And that's something we've been investing in over the last 2 years, and we're continuing to ramp up our investments in terms of educating against this undergenotyping problem that exists.

Turnaround time of 6 to 7 days, I mean I may just be having a senior moment, but I thought of you guys as being closer to 9. Is that something that's improved recently?

No. I mean we've been -- we hit 7 days, I would say, I don't know, probably couple of years ago, 1.5 years.

So folks are getting it inconsistent. Is that something that is important to further improve? Or do you think 6 to 7's good enough?

There's a certain diminishing returns. One, from cost on our end, obviously, in terms of once you start contracting things they're just -- there's a certain end-to-end time that's hard to buffer against, right? And then two, a lot of these patients, when they first come in, there is a lot of paperwork that needs to be done in terms of insurance and all these things that typically takes 5 to 7 days. And so if you go to -- obviously, people want it in 5 minutes if you can give it to them. But in terms of actually moving the needle, we don't think you have to go that much faster.

In 2019, you brought on a lot of new salespeople to detail G360. I don't know if you'd be willing to share what your rep count is today, but I guess the other question here is do you anticipate making another big increase this year? And is that important to driving more volume per account?

Yes, we think of all of these channels and all of these line items in our business in terms of what's the return on investment -- invested capital, right? And so we nearly doubled the size of the sales force, I think, 1.5 years ago from 30 to just under 60. I would say that we'll continue to make additions to the sales force when we see a few items. One, we want to get to a certain revenue number per rep in terms of productivity to make sure that the unit economics makes sense in terms of that investment; two, we need to see essentially signs that were not saturating call volume in a certain region. Access is very difficult in some regions and you can add more reps, but if they can only get into a physician's office once a quarter, it doesn't make a difference. And so I would say, in both of those fronts, we're seeing opportunities for investments and continuing to make investments. And so -- but that's not the only place we're investing, it is in number of reps. It's really -- we have to think about this as surround sound. You have to essentially use every channel and every opportunity to be top of mind in the physician's office. And so an area where we have ramped up investments considerably is our digital marketing, digital promotion, things like social media, online kind of avenue, e-mail even and so on. And those have been very productive for us. And third area is medical affairs, I talked about this education piece and us ramping up investment education. That's largely through our medical affairs channel, which has really helped in terms of putting the training wheels or kind of the safety blanket, so to speak, on the complexity of genomic testing in this space. And so they're really on call, our genomic specialists, to be able to interpret the test results, do case reviews and so on. And that has been very beneficial for our clinical volume.

Maybe just a couple of minutes on OMNI. So Guardant offers biopharmaceutical customers an alternative to G360 with GuardantOMNI at screens for about 500 genes encompassing. It also encompasses MSI, TMB you're looking at germline and somatic mutations, and you've got breakthrough designation from the FDA, I think, on the TMB front.

Yes.

So in 2019, we estimate that OMNI represented almost 70% of biopharma tests, actually, just in the fourth quarter, I should say. And that helped with ASP upside in the quarter as well because you get paid more on those than you do on G360. Is this tracking ahead of what you would have expected? And if so, why do you think it's happening?

Yes. I would say, yes. Certainly, I think the surge in OMNI testing is, I think, exceeded our expectations. When you have a new project, and we launched it in late '17, so it's a fairly new project in terms of our portfolio. And I think there are a number of factors there. I think certainly, the heavy competition in the immuno-oncology space has helped them that when you think about MSI and TMB and some of these other bells and whistles in terms of thinking about how do we select those patients that have the highest response rate...

And give way for biopharma to differentiate in their side.

Exactly, exactly. I think the other trend that's been positive is just the broadening of the pipeline in terms of even targeted therapies. There are things that are -- the genes and markers and OMNI that aren't on 360, where pharma is really taking a harder look at. And so that's going to help. The other, I think, third avenue is HRD, really having a full homologous repair deficiency signature is, I think -- that OMNI provides has been another growth driver. And so clearly, over the longer term, we see most of our business, moving over to OMNI. And even at some point, the clinical side of the business gravitating towards that as 360 becomes no longer sufficient to really capture all the relevant biomarkers that are needed.

You'd submit OMNI to FDA at some point, do you think that happens?

Yes. It's something that we're working on as we speak and we're making very good progress on.

Okay. And it's FDA approval, I mean, we talked about the importance of FDA approval, and we're talking about G360. In general, is that -- I mean, you have -- was it over 60 biopharmaceutical partners already? I mean how important is FDA approval to those partners and new partners?

It's important. I mean it's -- clearly, a lot of the companies that are working with us, imagine developing a drug that may have a companion diagnostic associated with it. If they know as a company that we have gotten over that FDA bar, that they minimize risk in terms of working with us and partnering with our products, it's a big feather in our cap.

Right. So we have about 5 minutes left, let's spend that time talking about the pipeline. So starting on LUNAR-1, you initiated the COBRA study in collaboration with NRG Oncology to establish clinical utility of LUNAR-1 in 1,400 patients with Stage II colon cancer to assess if detection of ctDNA post-surgery, followed by adjuvant therapy can lead to better outcomes and active surveillance. Another study with similar goals was announced under the Stand Up To Cancer initiative, a collaboration with MGH and Dana-Farber for patients with Stage III colon cancer. And really, what you're trying to do is establish the clinical utility of LUNAR-1. How many genes, mutations, CNBs, methylation signatures, whatever you're willing to share, how are you building the LUNAR-1 assay?

Yes. I think what we presented with our LUNAR assay, I think maybe a year ago, is that it's about a 500-kilo base panel. So we're looking at about 500,000 bases across the human genome. Really, across those signatures in terms of looking at regions that are differentially methylated, obviously, areas that have genomic alterations that are high incidence for certain cancer types. And then -- yes, and then really combining that information to come up with a classifier in terms of do these patients still have residual disease? Do they still have cancer and...

Really, it's a monitoring tool, of course.

Yes, it's a monitoring tool essentially. And so it's something that I think is fairly differentiated, this multimodal view that we're using in terms of using this for this setting. We're very happy with a lot of the data that we have presented in terms of being able to detect residual disease with high specificity. I think what we're trying to invest in now is does that information make a difference in outcomes. And so that's where the Stand Up To Cancer study, where this COBRA study and so on will help to establish that. In parallel, we are working with pharma partners as well and their adjuvant studies and really trying to spread our bets to as many buckets as possible so that we can essentially get over that clinical utility bar and change guidelines and get private payer reimbursement and so on.

We've been unsuccessful looking around in the normal places we look around in figuring out trial timelines, how long do you think the trials are going to take?

So COBRA is just getting underway as is the Stand Up To Cancer trials. Those are being run by those investigators, NRG Oncology and Dana-Farber and MGH. And it's hard to tell until you really start getting to the kind of the meat of the distribution in terms of enrollment to see how fast it'll happen. I think, obviously, we'll update everyone as we make progress there. And well, I think it remains to be seen whether there'll be any interim readouts or not.

Okay. And then very, very quickly. You're starting in colorectal. Does the LUNAR-1 approach lend itself to application and other cancers?

Oh, yes. Yes. We presented data in lung cancer, and we have studies in other cancer types. It's certainly something that will extend to many, many different cancer types.

Okay. LUNAR-2, you launched the 10,000 patient ECLIPSE study to validate your assay for colorectal cancer detection in individuals 45 to 84 years old. You're enrolling, I think, around 100 sites in the U.S., and it's expected to -- you're expected to get to primary completion January 2022. Did I mess any of that up?

Yes, I mean I just can expound on that. So I think we said we're up to 70 sites now. And yes, well, our goal is to get to over 100 sites. We've been very pleased with the progress so far. We started in Q4 of '19, and it's going faster than we expected in terms of getting these sites onboarded, getting patients enrolled. And I think at that time, we said it would take about 18 to 24 months for enrollment. I think -- what are the swings in terms of factors that can speed that up or slow it down really has a lot to do with prevalence we find. If we find it's closer to 0.6%, 0.7% prevalence of colorectal cancer in the patients that we enroll, then it's likely to be at the lower end of the timeline. If we find it's 0.3%, 0.4%, then it's likely to be at the higher end because we'll have to enroll more patients to get to the number of colorectal cancer patients we're looking to find in that trial.

From a performance standpoint, would you be willing to say what you think is good enough from a sensitivity and specificity standpoint to warrant commercialization?

Yes. That's something that we're getting a lot more information as we do fairly extensive market research now talking to hundreds of primary care physicians and dozens of GI docs. And what's found is I think something in the ballpark of what we have presented, something where our goal is for the trial. And the -- I think we presented 88% sensitivity with 94% specificity, and we're finding that having something that is in that ballpark is going to be fairly compelling. But once you're in the kind of not colonoscopy bucket, there's kind of a different frame of mind that the physician has. Colonoscopy is the gold standard. You can come in, you can treat the disease. You can cut the polyp out. There's just advantages there that aren't there for these noninvasive tests. And so what we're finding that's a bigger driver, once you're in that bucket, is how easy is the test to administer, what are the logistics around it, what are the -- some of the reimbursement issues and some of those pieces. And so that's where -- as important as the technology is, which we're very focused on, and obviously, the success of the trial, some of these kind of other factors in terms of the commercial channel and the customer experience are just as important as well.

Okay. All right. Unfortunately, we're out of time, but that was great. Really appreciate you spending the time with us.

No, thank you, Doug. Yes, it's a pleasure being here.