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

Hi. Welcome to the 40th Annual Canaccord Genuity Global Growth Conference. I'm Max Masucci, lead diagnostics analyst here at Canaccord. Today, I'm pleased to be joined by Guardant Health, one of the most transformative companies in health care and the market leader in blood-based liquid biopsy test for therapy selection. Last Friday, Guardant achieved a milestone that we consider a landmark event in the precision medicine space when its Guardant360 test became the first FDA-approved liquid biopsy that is clinically and analytically validated for all solid tumor cancers. Guardant is just scratching the surface in a $50 billion-plus U.S. market and has additional shots on goal and disease monitoring and early cancer screening. So I'm pleased to welcome back CEO, Helmy Eltoukhy. Thanks again for joining us this year.

Thank you for having me, Max.

Great. So let's jump right in. Last Friday, the FDA granted approval for Guardant360 for comprehensive genomic profiling in patients with any solid tumor cancer. Guardant360 is also now approved as a companion diagnostic to identify non-small cell lung cancer patients with an EGFR alteration who may benefit from treatment with AstraZeneca's targeted therapy drug, Tagrisso. So before I really dive into the questions here, I'd like to ask a bigger picture question just for perspective. What do you think this FDA approval signifies and represents for the way cancer patients are managed in the U.S.? And what does this event mean for the field of precision medicine in general as we shift from a one-size-fits-all approach to health care to a more personalized approach?

Yes, that's a great question, Max. I think one of the challenges we see in the field, frankly, are the 80% of patients that aren't tested today that aren't tested with CGP. And so we're still, I would say, in the early innings in terms of adoption of this new type of technology, whether on the tissue side or the liquid side. One of the advantages of liquid is the fact that it's just so much faster. It empowers oncologists. You don't need this coordination with multiple medical specialties to be able to get biomarker information on a patient. And we think it can really solve this kind of this other pandemic that exists today, which is under genotyping, as we call it. And so we've spent a lot of resources on education. We've partnered with some of the top advocacy groups on the patient side to really shine a light on the fact that here we are today, we have all these amazing drugs that are FDA approved. The biomarkers are in guidelines. And yet a very small fraction of patients are tested for these drugs today. And so we see the biggest challenge but, frankly, the biggest opportunity is how do we convert those 80% into believers of CGP in the first-line setting. And that's where we believe liquid can really close that gap between clinical guidelines and clinical practice. I think there have been a couple of impediments, though, to full-scale adoption of liquid. Traditionally, it's been reimbursement, but that's largely solved in terms of pan-cancer coverage with our LCD first in December and now with this FDA approval with the NCD that will expand coverage. But I think the second barrier has just been, I think, the remaining skepticism of can liquid really work; is this science fiction, being able to reconstruct a tumor genomic just through a simple blood test. And so there's a lack of familiarity with this modality in terms of -- on the physician part. Tissue -- FDA approval was important on the CGP side but much more because of the reimbursement aspect. Tissue is always -- was already something that most physicians were comfortable with. It's historically been considered the gold standard and so we think this FDA approval is going to be an extremely important catalyst to driving adoption, driving confidence with the use of liquid and, hopefully, giving physicians kind of the assurance they need that this is something they can depend on, trust, especially in that first-line setting.

Absolutely. So let's stick with that subject. Let's talk about the impact the FDA approval may have on the use of Guardant360 in the clinical setting. What are your expectations for how FDA approval can drive increased utilization from docs who are regularly ordering Guardant360 and, on the same note, how might it serve as a catalyst to convert doctors that have been slower to accept and adopt blood-based testing over traditional tissue testing?

Yes. There's a couple, I think, ways that liquid can, I think, catalyze adoption of CGP. We think this FDA approval specifically solves some of the reimbursement challenges, obviously, solves some of the perception challenges in terms of can you trust liquid, is it something that is well validated and so on. So that's going to go a long way towards getting the middle majority and the laggards in the market really onboard, which is, frankly, the biggest opportunity and the biggest upside from a clinical impact point of view in terms of improving outcomes and improving mortality curves. I would say that one of the challenges that exist today of widespread adoption of any kind of CGP has been, frankly, turnaround time. A lot of the turnaround time of tissue-based approaches take 3 to 4 weeks end-to-end in terms of getting the tissue block and then getting it sequenced. There is an urgent need to put a lot of these first-line metastatic patients on some kind of treatment within 7 to 10 days of initially seeing them. And so if it stretches much longer than that, the physician feels compelled to put them on some kind of treatment even if they have incomplete information or no information on the biomarker side. And so that's our turnaround time, coupled with the heavy validation we have and the customer service we have and so on, I think is going to be very important in terms of really addressing that unmet need that exists. It really marries up to the practical realities of clinical workflows today. And so we're very confident that the overall offering we have -- it's not just one piece, I think that's the challenge sometimes those on the outside have in terms of really understanding the complexity of the space is that it's not just the reagents in the box or the technology, it's really all of these different pieces. It's the clinical evidence that was on top of that, the breadth and depth of reimbursement, regulatory approvals, the competency and the breadth of the commercial team, reimbursement teams, client services teams as well as things like turnaround time, which are extremely palpable on the part of the physician. So we think we just have an overall offering now especially with this FDA approval that is really second to none.

Yes. I agree that generating evidence is debatably the most important aspect of driving adoption of any of these technologies. And despite all the progress we've made, we're still in the earliest stages of advancement in precision medicine. And so while we're sticking there, I'll just add that yesterday, during our keynote session with former FDA commissioner, Dr. Scott Gottlieb, he specifically called out liquid biopsies as an area that may see an acceleration in adoption given the value that they provide during the most disruptive period of COVID-19 and the value that they may provide on the backside of the pandemic as the U.S. health care system works through the buildup of delayed cancer treatments and new diagnoses. So it seems like the FDA approval was quite timely. So how do you think of these 2 dynamics being in play in the back half of the year and into early 2021?

No. I mean we're definitely seeing the -- I would say, I hate to call it a silver lining, but the silver lining in this kind of challenging time that we're all facing. If you think about cancer patients, there's about a 30% mortality rate due to COVID. And so the fear is quite justified in terms of protecting this patient group in terms of metastatic cancer patients, as much as possible sheltering them from exposure to COVID. And so what that means is you're going to have less face-to-face interactions, much more telemedicine. We've seen the pendulum swing from almost no telemedicine to now the majority of visits being telemedicine visits at the peak. And so -- and then with this pandemic raging on, I think there was an initial perception that this would be short-lived, and we go back to normal after a couple of months. And as that hope has kind of evaporated, I think physicians are realizing they need to implement new workflows for the next few quarters that can still provide their patients and the physicians with the highest quality information so that they can make the best treatment decisions. And that's where liquid biopsy plays an enormously helpful role, being able to -- even the blood test alone saves so much logistical hassles in terms of tissue acquisition or a surgical biopsy or a tissue biopsy or through interventional radiologist or a surgical oncologist. And so if you think about really the -- kind of the logistics that it just cuts through and really the empowerment it provides to the physician and to the patient to get that information really quickly, it's extremely well suited to this challenging environment. And in light of that, it's not just the FDA approval that will be helpful, but everything that we've done under that in terms of really going to mostly completely virtual in terms of our office details, in terms of our medical affairs team being able to do consultations over video conference. We have physician education programs over Zoom that are heavily subscribed. And some of the financial assistance programs we've put in place that are specific to COVID. I think all of that en masse has helped really well. Now of course, mobile phlebotomy, being able to protect the sickest patients and keep them at home. And so we've seen really nice utilization of all of these services. And I think it's why we're seeing kind of a -- we saw a rebound in June that was really fantastic in terms of the right metrics, getting to pre-COVID levels, despite what we see is going to be a continuing overhang on this space because of the impact of COVID. And so we do think that liquid biopsy can really play a role in this -- during this pandemic.

Great. And moving on to reimbursement, which is one of those challenges that you called out that may not be -- it might not be as evident to somebody evaluating the business from the outside, the actions that you need to take in order to improve your reimbursement. So can you just speak to how the FDA approval might help you get paid more on Medicare volumes? And I know that right now about 85% of your Medicare samples are being reimbursed under your final LCD from Noridian. But the current LCD that you have, I believe, provides coverage for Guardant360 when tissue is not available for collection. And it's our understanding that your FDA approval, it covers Guardant360 regardless of tissue availability. So how does the FDA approval chart a path for further improvements in reimbursement? And how does it improve your position when you're engaging in conversations with private payers as well?

Yes. Now we see a lot of upside that's extremely significant on the reimbursement front due to the FDA approval. So as you pointed out, we're getting paid for about 85% of claims today. And a large reason for the 15% we don't get paid on is really that tissue insufficiency requirement. And so with the removal of that with the NCD, we think we can make up a lot of that ground, certainly, conservatively, maybe get to 90%, maybe even 95% over time. And so that is obviously very meaningful. The second benefit that we'll likely see is really -- we have about 180 million covered lives today, and most of those covered lives on the private payer side are lung-only policies. And so we think the FDA approval for pan-cancer tumor profiling gives us a very strong proof point to really convince those payers that -- who already believe in Guardant360 for lung to really expand their existing coverage to pan-cancer. And so that will create nice tailwinds in terms of ASP as well. And then finally, we do believe FDA approval is an important point of validation for many of the payers who don't pay us at all today. There's 140 million, 150 million lives we still need to convince in terms of the payers that cover them. And we think FDA approval has had a precedent in the diagnostics industry for accelerated coverage by some of those payers. And so we believe that will continue to accelerate, and that will certainly be some nice upside. The kind of last area that we'll see some tailwinds in the reimbursement side is as we qualify for an advanced diagnostic laboratory test, we'll be able to then move our current Medicare price to the median of our private payer rate, and we think there should be some upside there from where our current Medicare rate is. So it's certainly very meaningful on the revenue side of the business.

Great. And let's now move over to your biopharma business. So let's start with do you have any expectations for an increase in biopharma samples that you're processing in your lab following the FDA approval? It does seem to be that there continues to be an increase in the number of biopharma projects that are up for grabs and the size of these deals. So is this in line with what you're seeing?

There's -- we believe the biopharma kind of TAM is conservatively a $2 billion opportunity and growing rapidly. We see the investment, especially in the targeted therapy side of the house, continuing to grow. I think the pendulum swung back from I/O back to targeted therapy recently. And so we see a lot of opportunities there. And frankly, liquid biopsies are still only a very small percentage of -- not very highly penetrated into that space. Liquid biopsy, though it's been shown now multiple times by, I think, publications I have been involved with, can speed things up, can find more patients faster, can really reduce the time of trials. Things that are enormously meaningful. When you're talking about $1 billion or multibillion-dollar drug, every day means an extra couple of million dollars of revenue under the patent life of that drug. And so we have no doubt the value that liquid biopsy can provide and acceleration can provide to these programs. But I think for some companies, it's still thought of as a nice to have rather than a necessary component of these programs. But we're seeing that kind of perception shift. We think FDA approval is a critical piece of that because it removes the uncertainty of can this technology get over the finish line as a companion diagnostic. Secondly, there is no doubt that this will continue the momentum on our companion diagnostic work we're doing with pharma. Many diagnostic companies claim they can get an FDA approval. It's especially more difficult on the NGS side of the picture. And now the fact that we're over that hump, and we've kind of proven we can get across it, I think, has already proven that it's going to be, I think, something that just generates -- it accelerates the momentum that we've already seen. We've announced a number of deals already in the first half of this year with some great partners, and I think we're going to continue to see the momentum there. And essentially, all of those programs tend to have associated sample volume kind of with them. And so there's no doubt that we'll see, I think, a positive impact in our biopharma business as a whole.

Great. So as you mentioned, beyond Tagrisso, you hold additional companion diagnostics agreements for AstraZeneca's Imfinzi, Amgen's AMG 510, and you recently announced 2 new CDx deals with Janssen and Radius Health. So first, should we expect any increase in the contribution Tagrisso may have on that pharma development services line with the FDA approval? And then should we expect a future stream of FDA approvals for the other CDx agreements? And then maybe I'll just -- I'll make this a multifaceted question. What were some of the key things you learned from the successful FDA approval of the CDx with Tagrisso that you're looking to apply to your future CDxs?

No. I mean whenever you go through a first-of-its-kind approval like this, there's a lot of learnings you're having in both sides of the house, trying to understand the best way to validate this type of technology. We have a sensitivity that is really kind of unparalleled, we believe. And so how do you kind of test for that? How do you orthogonally validate that and so on? So those are some of the questions that we had to get through. Now that we've been through that, and we've gotten to a good understanding, and I think in a good working relationship -- and the FDA has been great through this process -- I think we think that's going to streamline the path for supplementary PMAs, these additional ones. And so our view is that, essentially, we have built this vehicle now, this sort of aircraft carrier in Guardant360. And Tagrisso is just the first of many of these specific companion diagnostic claims that will sit on top of that. And the beauty of that is -- and where I think the synergies with these partners we work with, it doesn't just end when the companion diagnostic is launched. If you think about it, that's when the big battle begins, is how do you get more patients tested so more patients can get on those specific drugs that are breakthrough therapies. And the beauty of essentially working with a platform like Guardant360 is that it's already there in the wild. It already has huge testing volumes. And so from a pharma company's point of view, they essentially get a running start on day 1. Essentially, you have thousands of patients being tested per week that essentially are potential candidates for their drug. And so that, once again, pays for itself. And just a couple of months of launch, if you can accelerate time-to-peak sales and bring that down a few -- by a few weeks even, that's enormous value. And so that's where we see kind of the space is going because, at some point, physicians can't remember to order 17 different single companion diagnostics. It's really going to be a universal diagnostic with companion therapeutics at the end of the day. And so that's what we believe that is so seminal about this FDA approval is that I think it really helps shift that paradigm in the liquid side to that kind of true precision oncology framework. And you're going to see, I think, a much more synergistic relationship with diagnostic companies like ourselves and the pharma companies we support.

Great. So all of these questions have been very unique to Guardant Health, but now I have to lob in a standard question that we're lobbing into everybody. And it's about your Q2 results this past week. So revenues grew 23% year-over-year despite COVID-19 headwinds. Solid clinical volumes was enough to offset a 47% year-over-year decrease in biopharma samples. So what sort of recovery have you seen in both of these segments since the April lows? And are there any trends that you can point to over the past couple of weeks? And just how should we think about the pacing of recovery in the back half of 2020 just with some of the lingering COVID impacts in play?

Yes. So I think as we said in our call, we are very pleased with the recovery on the clinical side of the house. We essentially saw in June that we're able to recover to pre-COVID levels the levels we were seeing in March and February. And so that was great to see that we are -- I think that speaks to how fast our teams moved in terms of virtual calls and some of the digital assets that we deployed very quickly. And I think it also speaks to really the unmet need that we're able to serve with our technology and with our services. That said, I think we're seeing this pandemic rage on. We're still seeing the impact of reduced patient visits. There's still a swing towards telemedicine that is much higher than it ever was before. And so you have less physical face-to-face interaction, and we're seeing about 80% of offices that are still closed to details -- in-person details from outside companies. And so all of that reduces the efficacy and effectiveness of the sales process and education process. And so I think the top of the funnel will be in terms of patient visits and so on. I think we'll continue to see some impact for some time. And I think despite that, I think we can make some solid ground underneath that reduce patient flow. But what we're seeing, I think, is as hotspots crop up, we're definitely seeing some volatility in terms of declines regionally from week to week. As offices start closing back down again, there's disruption in terms of some of their services. And so that's something that I think will continue throughout the second half of the year that -- I think despite that, I think we said that third quarter volume, we expect to be up modestly from Q1. And so I think we're kind of -- it's nice to see that despite that backdrop, we're able to make some forward progress there. On the pharma side, I think -- on the clinical side, we've certainly seen what we can characterize as a very nice V-shaped recovery, so to speak. On the pharma side, we think that's going to be more prolonged, more of a U-shaped recovery. We think it's going to take a little bit longer for some of these delays to kind of flow through the system. Prospective studies are coming back a little bit, but retrospective studies used to be prospective studies at one point. And so there's a domino effect in terms of lives of not just the samples themselves but some of the contracting, the biobank shipments and so on. And so we're seeing some things kind of move out by a quarter or 2. I think the good news is we continue to see very strong engagement in terms of the pipeline, in terms of new conversations and new deals. We continue to see diversification in terms of the number of partners we're working with as well the depth of relationship in terms of the types of programs we're discussing with each of those partners. And clearly, our development services kind of revenue in terms of the companion diagnostic work we're doing has been extremely strong and continues to be so. So we haven't seen much impact in that specific area since those tend to be programs that are multiyear in nature and I think tend to be more buffered from some of the short-term impact of COVID. But all in all, I think we're very positive in terms of our outlook in the medium term.

Great. And we haven't even had an opportunity to touch on monitoring or screening much, but I guess we'll stick with the theme of some of the near-term catalysts or events, and this will be the last question. So you've been providing COVID-19 testing for your employees for several months. You remain engaged in conversations with, I believe, companies for employee testing as well as municipalities and larger-scale partners for potential COVID-19 testing services, and you've submitted your data to the FDA for emergency use authorization. Can you just quickly touch on the unique characteristics of your tests and the role that you might be able to play just given the continued constraints on the supply of testing?

Yes. We jumped into this kind of the need for testing because we felt it was our civic responsibility and kind of corporate responsibility to do it because we have the capabilities of being able to really hopefully impact in a meaningful way the lack of supply of testing. And so the test that the team developed is one that is fairly orthogonal to the existing supply chain. So we're not stealing from Peter to pay Paul, so to speak. We're truly additive. It's very fast, about 24 hours to 30 hours turnaround time, and the sensitivity is extremely good. We're seeing about maybe even 50x the sensitivity of some of the other tests that are out there. And it's sequencing-based in terms of the readout. And so we're not kind of stealing from the RT-PCR kind of supply chain and equipment base that's out there. So it's highly scalable. And so right now, the test is being used internally in terms of testing employees. And we -- frankly, I think it's been key to maintaining really the uninterrupted operations we've been able to maintain. We've even seen record turnaround times during this period, and we think it's really anecdotally increased morale but I think, more importantly, [ thwarted ] much bigger outbreaks potentially by us being able to find these things very quickly and take the right measures. And so we know that this can be very valuable. And I think we're in discussions with some of the partners that you mentioned to really understand kind of what is the ongoing need. And is this something we can make meaningful impact versus should we just stay laser-focused on some of the work in oncology that we're working on because others are kind of addressing the shortfall that exists. And so we'll certainly keep you posted as we make progress there and if we decide to scale things up.

Great. Well, thank you for everything you're doing, not only in cancer care but also now in infectious disease. It's been an unbelievable story to follow and we're really looking forward to the flurry of updates that are to come. So thanks for joining us, Helmy. Always appreciate it. Thanks.

Always a pleasure. Thank you.