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

Good morning or good afternoon, I should say, depending where you are located, and welcome to the virtual fireside chat with Guardant Health. With us are Helmy Eltoukhy, CEO; and Derek Bertocci, Chief Financial Officer. My name is Brian Weinstein, and I cover Guardant here along with certain areas of medical technology, diagnostics and life science tools for our firm. Before jumping in, a couple of housekeeping reminders. Team Weinstein is hosting a set of Peloton rides in conjunction with the conference. The last one is a 30-minute Classic Rock Ride today with Emma Lovewell 4 p.m. Central. For instructions on how to access that, you can look at our last weekend's Backstreets' note or our daily recap notes from the conference. We're also hosting a recap dial-in that we're calling the Lido Lounge, named after the Lido Shuffle, the official song of Team Weinstein, and that takes place after the last session of the day today at 1:00 p.m. Again dial-in for that is in Backstreets. Finally, before jumping into the call, a man who would have his Jersey retired if compliance officers wore jerseys, Mr. Michael Besenjak told me, I'm required to inform you for a complete list of research disclosures or conflicts of interest to visit our website at williamblair.com. Okay. All that on the way. Thank you, guys, for taking time to talk to us. I really appreciate it.

Yes. Thanks for having us.

Thank you.

Of course. So the setup of the William Blair Growth Stock Conference, it is more of a generalist conference. And so not everybody that's dialed in here, and not everybody that you're talking to is a health care specialist, especially as it relates to kind of the technology in the business. So I was hoping just to start things out, if you could kind of explain the basics of the technology. What you're doing? And kind of provide a roadmap to the strategic vision and how that's evolved?

Yes. So we founded the company about 8 years ago. The whole thesis was that health care is very data starved and almost nowhere in health care as -- is as data started as in oncology. If you think about how a tumor grows and evolves and changes, it's really driven by these mutations in the genome of those cells. And the challenge for solid tumor oncology has been access to that data, those genetic changes has been locked away in tissue. And so the thesis was, if you could get access to that information through blood through a liquid biopsy as it's now called, you could really accelerate progress in the field, both on the therapeutic side, diagnostics side and get to the ultimate vision of early detection with a simple blood test. And so that was the initial vision, but because of our past experience and, let's say, failures with biology and the complexity of biology, we had a more systematic approach of how to get to early detection. Start with late-stage disease, Stage 3, Stage 4 cancer patients; develop tests that enable better therapeutic matching for those patients without the need for invasive biopsy through a simple blood test. And then use the information we derive from running that at scale as our compass to lead us on a path towards the performance that's required for early detection, to really understand the complexity of biology under the -- along the way. And now we're here 8 years later. We have the leading liquid biopsy, Guardant360, which has been used for over 150,000 cancer patients today by majority of oncologists in the United States. And on the back of that, we've made extraordinary progress in terms of developing 2 other areas of cancer care. The next stepping stone is thinking about how do you manage early cancer, how do you help cancer survivors with recurrence monitoring? And so we have a program called LUNAR-1 that is developing tests and technology for that patient segment. And then finally, we have a LUNAR-2 program that's developing tests for early detection for screening. And the first application we're using -- we're targeting with our technology is colorectal cancer screening. So replacing the existing tools, really having alternate means to colonoscopy that may be much simpler, much higher compliance through a simple blood test.

And can you talk, in any more detail, maybe take it one more level down about sort of the basics of your technology, how it works and what's proprietary to you guys?

Yes. So these tumors, as they grow and evolve, they're also dying. They shed what's called cell-free DNA or cell-free tumor DNA. It's a little fragments of DNA from their cells into the bloodstream, but at very low concentrations. And so we developed the platform we call digital sequencing that allows us with very high sensitivity to extract all of that sort of the detritus DNA or shed DNA that's in the blood with very high conversion efficiency. A lot of the technologies, a lot of the biochemistries that we're around at the time were very lossy. So if you take DNA from a tube of blood, most of them at best converted about 10% of that DNA into something that actually got sequenced or analyzed. We developed a chemistry that allowed us to convert over 80% of that DNA. So that translates to much better sensitivity. The other challenge was sequencing is very noisy. And these concentrations -- the concentrations of these tumor molecules; sometimes, you're only seeing 1 or 2 fragments in a whole tube of blood. And so the error rate has to be really low to make sure that you have very high fidelity, very high specificity. And so we have a molecular barcoding technology as well as informatics in the back end that allow us to reduce the error rate by over 1,000 fold of next-gen sequencing. And so we have single molecule sensitivity because of the high-efficiency chemistry at the back end and single molecule specificity because of the informatics at the back end. And the 2 really work hand-in-hand. So as we sequence more and more samples, because of our learning algorithms, we're able to further improve the sensitivity and specificity of the technology. And now because we've just sequenced so many liquid biopsies over the years, we have gotten to a point that is really, we believe, is second to none in terms of the performance of the technology.

Well, that's a great overview. Thank you for that. And I think that will make it pretty clear to people who are not as familiar with the basics of what is that you're trying to do here. So to go from really, really kind of macro and big thoughts to something that's just much more in front of our face today, and that's kind of what's going on in light of COVID-19. I was hoping that maybe you guys would be able to take the opportunity to kind of refresh people on the impact that, that's had on your business and give us an update on trends through May and early June for the variety of businesses that you're in?

Yes. I think as we updated investors in our earnings call a few weeks ago, we saw about a 30% decline from the first 10-week run rate of Q1 to the trough in the end of March. And we then, over the next few weeks, certainly, through early May, we saw an improvement in performance, in terms of the clinical ordering. We saw about a 10% improvement at that point. I think our thesis at the time, and this still holds true, is that late-stage oncology, late-stage patients there, they have acute needs in terms of urgent needs, in terms of critical care. And while care can be delayed for a few weeks, it's very difficult to delay care too long because these patients have a near certainty, unfortunately of dying from cancer versus the high probability, but the risk of perhaps contracting COVID. And so that pendulum was swung towards fear, very early on, fear of COVID. But now we're really seeing a swing full-scale back to a new normal of how do you operate in this environment and get these cancer patients the critical care that they need. And so we've been always, I think, very optimistic that business will come back. It doesn't mean it's going to come back to exactly how things were 2 or 3 months ago. Cancer patients, there was an article a couple of weeks ago. They have about a 25% to 30% mortality rate from COVID. So if you think about at-risk populations, there's probably not a single population that's at greater risk than cancer patients. And so given that COVID is likely to be a backdrop for many quarters to come, there's going to have to be a new way of keeping these patients safe while getting them the care they need. And so we see a silver lining here for Guardant360 for liquid biopsies in the sense that a liquid biopsy is a simple blood draw. It really obviates the need for all the logistical hassles of getting access to tissue, of doing a rebiopsy and so on. And so anecdotally as well as I think what we're seeing is that there's a real opportunity here for liquid biopsies to really address the unmet need that's created by these challenging times and the challenging backdrop that exists. And so we've done a number of things. We've launched and expanded our mobile phlebotomy program, financial assistance program for those affected by COVID, expanded our virtual assets in terms of virtual calls, education programs. We have consultations by our medical affairs team through a video conference. And all of those have been leveraged in a really fantastic way by physicians as they really move towards this new digital environment in oncology.

That's great. You guys are clearly taking advantage of a situation that has propped up and I say take advantage in a positive way. You're maximizing your ability to help these patients. Just curious on the mobile phlebotomy side, how big was that kind of pre-COVID for you guys? Can you describe a little bit about what the scale and scope of that look like? And how it is that you're able to kind of expand this out? How you're partnering with people? And how big of a deal that could actually be?

My connection got lost here. Maybe, Derek, if you want to step in here.

The COVID-19 -- I'm sorry, the mobile phlebotomy is an important element in the sense that it provides doctors the ability to reach out to patients who, for whatever reason, are uncomfortable or the doctor is uncomfortable having them come to the office. And it goes along with some of the other benefits that we have with liquid biopsy, ease of getting the sample, quick turnaround and so forth. But mobile phlebotomy, while has increased significantly, is still not a very big part of the flow of patients. Most patients are still coming to the doctor's office or the hospital.

Yes. Okay. I realized that people who have been kind of hunkering down and sheltering in place for the last couple of months, but there's some people that think that because there's maybe less screening going on right now that you may end up with more late-stage patients that are presenting with initial diagnosis. Is that something that you believe is likely to play out?

Yes. I mean, the sort of backlog that may develop in the field, I think it's too early to say exactly whether some of the recovery is a backlog coming in or it's something that is really just things getting back to the -- back to their full swing. I think we'll know more in a couple of months.

Yes. And are you seeing anything in terms of this recovery that is different than sort of geographic opening up? I'm guessing you're seeing a lot of recovery in the southeast and whatnot, but is it broader than that? Are you seeing recovery in the Northeast and the Midwest as well?

It's fairly broadly geographically distributed. I would say community wasn't as hit and came back much more quickly. And academic, I think, was hit much harder and has been slower to recover. Some of the areas that I think have been slowest are New York, Northeast. Obviously, they're still dealing with some challenges. It's getting much better now. But they -- it is definitely much more drawn out in large metropolitan areas.

Yes. And what are your new development on services side, so the relationships with your pharma partners, have you seen that being impacted as a result of that? And have you seen any kind of a snapback in terms of the samples that they're sending in at this point?

So there's really 3 segments of our pharma business that are material. The prospective samples we get from ongoing trials. There was certainly some impact there because of delays of being able to enroll patients in some of the sites really being hampered, obviously, by them having to deal with COVID. Second, retrospective samples, certainly delays there being not as responsive and certain programs not moving as quickly. I would say the area that comprises development service is most of our companion diagnostic work. And to date, we've really seen no impact there, and things are moving pretty nicely there.

Got it. Okay. And then thinking kind of broadly, you talked about some of the changes as it relates to how patients are going to potentially be accessing your technology and whatnot. But I'm curious more about any thoughts that you have as a leader in the diagnostics industry about how diagnostics may change as an industry? And whether or not this is the opportunity for diagnostics to finally step out from the shadows and into the limelight and take advantage of all of the different promise that we've all -- people who are in the industry have known for a long time. Curious what you think about how diagnostics comes out of this?

We're certainly seeing a lot more enthusiasm on the private side of the picture from investors, really funding a number of companies that are targeting COVID or other areas of the diagnostic space. So that's, I think, encouraging to see. We're certainly also seeing, I think, from a government affairs perspective, more engagement on the part of different officials that are out there, certain different nonprofits and so on, I think, are much more engaged. How much of that continues in the next few quarters, I think, remains to be seen. I think there are structural challenges with diagnostics in general in terms of really the kind of murkiness of reimbursement for new areas and undeveloped areas. But I think there are certain pockets of diagnostics that have certainly taken, I think, the attention of investors and I think have revealed themselves to be very promising areas of investment. And so I'm hopeful that will continue for some time to come.

Talking on a little bit more about your products in particular here, for G360, any uptick there? And how that's played out? Can you talk about what's really driven that? And what are the key drivers going forward? Because it seems to people who are looking at it, like it's a no-brainer. Why would you go with something that is not a liquid biopsy solution? Why would somebody choose tissue? So what are the drivers that are really going to kind of take this to another inflection point? I mean, the growth has been great so far, but what's next?

Yes. No, we're still in the very early innings. Single-digit penetration in general, maybe just approaching double digits on lung volume. So there's a long way to go in terms of really getting this technology into the hands of those who could use it and need it. The challenge has really been less of tissue versus liquid. It's been one of comprehensive testing to guidelines versus sticking with the status quo. The status quo today is often really the ordering that's done through the pathologists, some of the auto-reflex hotspot tests that have been done. And so there's this real huge issue that exists in the United States, we call it undergenotyping, where we find that less than 15%, 20% of lung cancer patients are actually sequenced or genotyped to what -- to where the guidelines recommend. The guidelines recommend about 10 markers for lung cancer patients. Less than 20% of them are tested for those 10 markers, and that's with tissue or liquid. And so a lot of what our focus has been recently is, how do we shed a light on that undergenotyping problem? The fact that this enormous gap exists. And if you think about moving outcomes, improving outcomes, all we have to do is close that gap, and you're talking about doubling the life expectancy for many of these patients that have biomarkers. We can bend mortality curves today by just matching patients with drugs that are just sitting on shelves right now that they're potentially candidates for. And so that's really where our technology, if utilized, can really make fundamental impact on the field. And so we launched a campaign a couple of months ago, we call, Clear Your View. It's an unbranded campaign. It really doesn't talk about tissue or liquid. It really just sheds a light on this undergenotyping problem and it's -- we've joined forces with all the major lung advocacy groups as part of this. And it's something that we see as gaining a lot of traction, I think, is bringing awareness to the fact that there is a very simple way to improve outcomes for cancer patients. And so we see that as the fundamental gap, really a gap of awareness and education in terms of going from hotspot testing to comprehensive testing. And I think to your point, we see that the ease of use of our technology, the reimbursement we have, the quality of the data, the turnaround time we have, all of those, I think, make it a very easy and compelling choice to use Guardant360 over other approaches.

Yes, I would totally agree with you about that. So as it relates to kind of the awareness issue, I mean, it sounds like that is the fundamental issue. And I think it's hard for a lot of people to understand how clinicians who are practicing in this space are not unaware of this technology that's out there. Is that simply because, in your view, that they're just too busy and they haven't heard about it? Is there still some people who are skeptical about it? Or is it just that they don't even understand that? Yes, I know it's out there, maybe it can help some patients, but they don't appreciate how impactful it can be? I mean, what is the real sticking point to why awareness has not been higher?

Well, so there was a study done in [indiscernible] general medicine that it takes about 7 years for 50% of physicians to adopt a new guideline in terms of their clinical workflow. So the half-life is just unfortunately very long in medicine, no matter how good the technology is. And I want to just reiterate, it's less of a liquid versus tissue. Certainly, that is an issue for some patients. I'm not trying to -- for some physicians, I'm not trying to say that some of them aren't skeptical of liquid biopsies. That's why we've invested in so much data and so much clinical evidence. But there's, I would say, an issue with whose responsibility is it to test the patient sample? Is it the pathologist? Is it the oncologist? And so I think there's some of that where there are standard ordering practices and workflows that are already in place today, changing them and reshuffling things, putting the onus of responsibility onto another medical provider, that just takes time. And you have to really work the whole account, you have to map out the relationships that exist. And so that's, I think, a lot of the fundamental challenge that exists today. I think, historically, reimbursement wasn't there. A lot of these tests were marketed as a sort of silver bullet that is maybe the last resort test, where you screen everything, just in case there's another option. And so there was -- there's some counter detailing that needs to be done right now to really educate and bring awareness that this is not a last resort test. This is what you do frontline just to make sure that all the frontline options are covered. And the last thing is the guidelines have changed really rapidly. There's been, I think, half a dozen drugs that have been added to the NCCN guidelines in the last 18 months for lung cancer alone. And so keeping up-to-date in terms of the rapid pace of change, not just in lung cancer, but breast cancer and prostate cancer and pancreatic cancer and so on, that's a lot of work to change all these workflows and so on. So it's really just a matter of education and awareness.

Yes. I appreciate that. And I guess that kind of goes into my next question on, the penetration, as you said, is still very low here. So when we think about competition, it's a really big pond that we're fishing in. And I'm guessing that in some ways, you might welcome some competition here. So we've seen guys like NeoGenomics and Inivata get together, Exact Sciences bought a small company in Arizona paradigm. So these are examples of interesting technologies now getting into bigger organizations that might be able to bring forward the entire market. So do you view this as a rising tide who lifts all boats, given your market position? And do you welcome those entrants into the community, I guess?

Yes. There's always been competitors in our market there. When we started, there were about 40 liquid biopsy companies. There are still probably 40, but half of them have gone away, and there's a new crop of 20. So anytime you have big markets, you're going to have a lot of competitors. And I would say nascent markers having -- nascent markets having competitors is good because it increases awareness, increases share of voice, and it highlights really the advantages of what we have to offer. It's all about understanding what good is. And it's kind of hard to do that without a relative comparison to other technologies or other service offerings and so on. So we're very confident that the competition only highlights, I think, the strength of the offering that we have as a company.

Yes. That's great. And Derek, one for you, just so you don't turn us down completely. There's been some reimbursement changes that have taken place over the last several months. It's a constantly evolving field here for you guys. Can you talk about how we should think about reimbursement for Guardant360? And how that's going to play out in light of those changes?

Sure. The big change to the kit that happened in Q1 was the expansion by Medicare from reimbursing for just lung cancer patients to all cancer patients rather than brain cancer patients. And that -- we basically got the benefit of that fully in Q1. So our Q1, even though it took a while for Noridian to begin paying, by the time we reported our results, we could see that they were paying for all samples across the whole quarter. So that's why we had about approximately $500 pickup in ASP in Q1. As we look forward, there are a couple of other ways that our ASP will improve. It will take time. First, FDA approval should get us an increase in the percentage of samples that get reimbursed because we'll get first-line coverage with the FDA approval under the NCD. Secondly, private insurance payers who have adopted a coverage plan have all adopted one that is based on the original Medicare Lung Cancer, LCD. So we get paid only for lung cancer patients by them. We get paid nothing for all other types of cancer. So similar to the evolution over 2 years of them moving from no coverage to a lung cancer coverage paradigm. As they move from lung cancer to pan-cancer, we'll get an increase because the cancers that they're not paying for today, they would begin to start paying for. So that would be -- those would be the things over the next, say, year to 2.

And can you just remind everybody what the split is between Medicare and private payers for you guys right now?

Sure. Medicare represents 38% of our total volume. And so therefore, 52 -- 62% is private payers. Some private payers, we still don't have coverage issues with. We get paid, but it's more erratic. So we're working on those to get coverage decisions, and we're working with the payers that we have coverage decisions to move them from lung to a Pan-Cancer coverage.

Okay. Helmy, if we could go back and sort of finalize the discussion here over the last kind of 5 minutes on the pipeline for you guys, it's obviously impossible to cover in 5 minutes. But at a high level, maybe you can talk about some of the updates that you guys have recently shared at some of the medical conferences that have taken place virtually, but over the spring, we would love to hear your take on those?

Yes. So a number of updates. With our LUNAR-1 program in terms of the adjuvant setting in the early cancer patients, a number of updates on COBRA, which is one of the largest, I think, U.S.-based randomized-controlled trials in Stage 2 colorectal cancer patients, really using our test to determine which patients still have residual disease, putting them on treatment and seeing how those patients do versus active surveillance. We have another study in Stage 3 colorectal cancer patients that's with MGH and Stand Up To Cancer, and there was a presentation about that. I would say moving to LUNAR-2 in terms of our colorectal screening assay, we had update at DDW and AACR. Maybe focus into AACR data, this was a new cohort we had updated from last year. I think about 110, 113 cancer patients and 88 screened negatives. What we found is using colonoscopy screen negatives versus just self-reported healthy individuals improve the specificity pretty significantly, as you would imagine. And that's the type of patients that would be in an ECLIPSE like trial or a large pivotal trial are the screened patients. And so that was very encouraging to see. And that's -- in this new updated data set, we saw about 90% sensitivity with 96.6% specificity. And so we're very happy with improvements, kind of we're seeing on the specificity side. And certainly maintaining fairly...

I think Helmy meant to say that maintaining the high sensitivity that we had while increasing substantially specificity.

Yes. Understood. Okay. I was going to ask -- we lost you there for a little bit there, Helmy. But I think we got the gist of it. We lost you for about probably 20 seconds there.

Yes. We're just seeing better and better data, so it's encouraging to see.

Yes. Got it. I always ask you about expectations around kind of performance for a CRC assay that you think that you need to show to be commercially viable. But also, I always like to ask about the economic considerations. We've heard people talk about a $150 price point for a test in this market. I'm curious your thoughts on whether that's a barrier to you or whether you see that, that's sort of where this thing comes in?

Maybe you repeat the first part?

Yes. Sorry. Yes, the first part was your expectations around CRC screening performance that's needed to be commercially viable? So performance and then economics.

Yes. I think as long as we're anywhere close to the ballpark of the data that we presented, we have a killer product on the market. Just -- we just have seen that compliance is such a big issue in the field right now. The most patients, 30 million, 40 million of patients, aren't screened by any of the available tools. And so I think it's a blue ocean right now in terms of a very high-compliance, high-performance blood test that can come in and really add to the options that are there in a way that is compelling to both physicians and patients. In terms of health economics, our base case is really $500 every 3 years, but I would say that a lot of that is going to be dependent on the performance we see from ECLIPSE. And I think more so on the specificity side. Really, how many unneeded colonoscopies are engendered by this product. And so when you have specificities of like 96%, as we've shown, you're cutting enormous number of unneeded colonoscopies out from other approaches that are out there. And so there should be positive implications from a health economics and pricing perspective.

Yes. No, we would absolutely agree on that specificity side in particular. So -- okay. And just real quickly before we wrap up. On ECLIPSE, it was obviously delayed. Has that begun to enroll patients again? And I know you said you were unsure whether or not there'd be a delay to kind of when total enrollment would take place, but...

Yes. I mean, I think, we're still very optimistic. We can finish within 24 months especially that we increased the number of sites by 50%. We're certainly saying colonoscopy has come back up again, and a lot of our sites are concentrated in states that I think are more aggressive about opening up their economies. And so we're definitely seeing the impact -- positive impact of that.

Got it. Okay. As I've been saying all week, these 30 minutes always fly by. I mean, there's another set of questions I'd love to get into with you. Unfortunately, we can't. But I want to thank you both for taking time to talk with us today. We look forward for additional updates and hearing something from you on your earnings call, I guess, in August. So thank you so much.

Thanks so much. Thanks, Brian.

Thank you.

Take care. Bye-bye.