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

Good morning, everybody. It's my pleasure to welcome everybody back to the 41st Annual Cowen and Company Healthcare Conference. My name is Doug Schenkel. I am the life science and diagnostic tools analyst here at Cowen. It's my pleasure to welcome Helmy Eltoukhy, Co-Founder and Chief Executive Officer of Guardant, back to our conference, as well as Mike Bell, who is here for the first time as Chief Financial Officer of Guardant. Gentlemen, thank you both for taking the time and being here with us this morning.

And thanks for having.

So for those who happen to not know Guardant and are maybe using this as an opportunity to just get up to speed on the story, Guardant is a molecular diagnostic company that provides comprehensive genomic profiling and other services to both clinical and biopharmaceutical customers. We believe Guardant's liquid biopsy panels are well positioned to be dominant in the comprehensive genetic profiling market across the cancer care continuum. So an interesting thing that's been happening in the space, which increasingly Guardant is playing a key role in, is really the broadening of menu. So you see Guardant moving from being a leader in therapy selection profiling, moving into both tissue, separate from blood, as well as to move into monitoring for recurrence and also into screening. So those are pipeline initiatives as well as new product initiatives, which have recently launched. So we'll talk about that momentarily. And along those lines, just to provide a road map, I think we're going to talk about the 2021 outlook a little bit. We will talk about some of these pipeline developments that I referenced and really try to unpack a little bit more on the company's long-term vision and strategy. Helmy, I was too busy being in awe and complementing you on your fantastic outfit this morning. I didn't get to ask you if you wanted to make some prepared remarks or if we should just get right into it. Do you want to just get into it? Or...

Yes, let's just get into it, yes.

Okay. All right. So guys, thanks, again, for being here.

Maybe to start just on the 2021 outlook, you guided revenue to -- and Mike, just correct me if I'm messing up any of this. I think it was $360 million to $370 million. The company has, even though the pandemic, been hitting plan, if not robustly exceeding plan. Kind of what is the guidance philosophy as we sit here entering 2021 where Garden has a lot of momentum, but at the same time, there's a lot of uncertainty in the market? How would you say you've skewed the error bars in the current environment and also keeping in mind, this is the first time, as CFO, you're setting guidance at a new company?

Yes, Doug, I think what we've tried to do with the guidance is really set out all of the key assumptions that we have for the year. I mean, first of all, we would say the fundamentals of the business are very strong. We did guide on the clinical volumes, and we guided those to being over 90,000 in 2021, which is over sort of 42% growth. So we see the clinical business as being very strong. And overall, the growth of the revenue is strong. But we did point out some key assumptions, one being on COVID and how that will impact the business. And our assumption is that this will last for the first half of the year. And then in the second half of the year, we'll be clear through that. So we do see some potential impact in the first half of the year. And we talked about reimbursement and the fact that we have the positive impact of going to the ADLT at the start of April, which will increase our Medicare rate, but offsetting that with some of the payers that we're -- that don't currently cover our tests. Changing to that new code could put some noise in the system and have a sort of temporary impact on us because we might get some zeros from some of those payers. But overall, we see the ADLT change being extremely positive for us. But the sort of the offset from the commercial side will negate the upside from the Medicare side in this year. And the other assumption that we made is that we're really pleased to be launching new products this year, and we launched Guardant Reveal last week. But we see expectations of reimbursement being probably much later in the year. And so we're expecting that to be nonmaterial for 2021, but again, a real growth driver for 2022. So we feel, really, that the guidance is strong, the clinical volumes are strong, and we, hopefully, laid out all the assumptions for people.

And Mike, that's helpful. And you're right, I mean, you guys did provide a lot of detail on the call. As I think about what you just walked us through, again, I would think the biggest risk to the outlook is probably things that are outside your control, things like if, for some reason, there was a resurgence in COVID that basically led to more lengthy headwinds that extended into the second half, that's probably the biggest for us. Conversely, I would think, the sources of upside are we turn the corner on the pandemic more quickly. The reimbursement headwinds that you've built into guidance don't materialize as much as what you've contemplated in guidance. On top of that, I would guess, there's the potential for some catch-up payments if there are issues. And then, of course, there's the new product contributions, which presumably you haven't factored in much for. Is that a fair characterization?

It is, yes. And I think that's why we wanted to set out the assumptions to show clearly why there is upside. And if things change during the year, then, obviously, we can update those assumptions. But I think, hopefully again, it's clear, and you set it out very well, Doug. Thanks.

Okay. All right. Thank you for that. Now Helmy, I want to go to -- it's a little bit of a repeat from the question I asked on the call, but I think it's an important thing that is an important topic to cover and one that's coming out more and more in our discussions. So again, maybe there's a better way to put this, but as I was first starting to dig in on the liquid biopsy market probably 5 or 6 years ago, I didn't know much about Guardant, but I always noticed either you or a colleague, Helmy, was in the room at FDA meetings or AACR meetings, not just explaining what Guardant did but playing a role as kind of one of the adults in the room, helping the agency as well as some of the medical groups in figuring out how to assess and advance liquid biopsies. And it was this approach that put you in a position to not just launch G360 but to do it successfully with clinical and regulatory rigor that resembles what I think most of us are used to seeing, or at least only seeing in biopharma historically. You're seeing more of that in the space. But at the time you started, it was pretty uncommon in tools and diagnostics. But now as we sit here in 2021, you are seeing a lot of the other major players in the space start to look a lot alike. I mean I talked about how your menu is evolving. We're seeing that amongst 4 or 5 major players in the space. And maybe I already answered my question. It's kind of the DNA of Guardant and the approach that differentiates you. But that being said, I'd love to get your thoughts on, as we fast forward 4 or five years, what's going to make Guardant special relative to these other companies that increasingly are trying to position themselves with similar menus?

Yes. No, that's a great. It's certainly something that we think about pretty deeply and intensely. We think about evolution of the space, evolution of the product portfolio, and how can we always be pushing those boundaries in a way that I think is commensurate to the capabilities of the technology and how they can truly impact clinical care in a way that truly provides clinical utility. I would say that there are multiple aspects to what we believe will continue the differentiation of Guardant among other companies. I think we continue to see technology differentiation. I think we're still pleasantly surprised that there continues to be pretty significant performance differences even in therapy selection and certainly in these other areas. And that hasn't just come because the competition hasn't moved, it's -- we've moved as well. We've continued to invest heavily in the technology, in the platform. And scale definitely helps with that. And the data that we're ingesting and the amount of data that we're ingesting has helped in that progress. I think, too -- so there's a technology side that we think is continuing to be a differentiating aspect. I would say the business side as well, I think, is something that we're very proud of. I think what's often underlooked in health care is business model innovation or really optimizing for how you actually build the business in some of these new spaces. And it's not easy to change a standard of care, change guidelines, get reimbursement, especially for new products that are high value in terms of reimbursement rates. And I think we've done a good job at, one, kind of figuring out that framework with therapy selection. And we're in a very good place in terms of ASP and payers. Still some more work to do, but we're really in the swing of things. And we've really taken that philosophy that we've -- and framework we've learned, and we're applying it to these other spaces, recurrence monitoring, obviously, and early detection. And so I think we think about certainly probability of technical success, like pharma does, but there's also probability of commercial success with these products. And I think that that's what has kept us grounded and what I believe will continue to provide us, I think, a differentiated return on investment in terms of how we think about the marginal dollar that we put into R&D. I think the last area is just the commercial capabilities that we've built up over the years. When we started, there were a lot of learnings that, obviously, we had to kind of figure out. But I do believe that in the oncology space, we've built a channel that, in my view, is second to none. It's now touching almost 10,000 oncologists who have ordered Guardant360. And there's just -- there's a lot of value that has been built up in that channel. The -- I think the high praise and the high level of partnership that we've developed with the oncology community. And that's why I think we can continue to invest in additional products. Certainly, tissue we believe will be successful, largely because of the channel and the infrastructure that we have built. But I think the same thing with recurrence monitoring. We're seeing in the early days of Guardant Reveal, it's only been a few days now, but tremendous, I think, enthusiasm for that product. And I think it really shows the strong relationships we've built with the oncology community that they're almost pulling us to really order those tests. And we're very pleased with the first few days of the launch there.

Yes. I won't ask how the launch is going since it's only been a few days. But...

Yes. Take it with a grain of salt.

No, it's interesting because, I guess, a different way of saying what I was saying before is it does seem like there's a handful of high-quality companies that are trying to essentially skate to the same spot on the Ice, but they're skating with different strengths. And yes, as I positioned it, you guys, Guardant, is skating from a position of strength that's rooted in regulatory and reimbursement and science. I kind of overlooked or just skipped past the commercial infrastructure. I mean, right now, I guess, as we think about Reveal as an example, is there a lot of investment required on the commercial side to support the Reveal rollout? Or is that an example of where you're just able to leverage existing specialty commercial strength in that channel and drop another high-quality product in the bag?

No, it's really the second. Clearly, there's some investment, marginal investment that's done to support that product, make sure it's successful. But there's high leverage there. And that's how we designed, I think, frankly, Guardant from the beginning was we saw a lot of diagnostic companies that were reinventing the wheel, had the multiplicative risk of completely different disease areas, different technology, different regulatory risk, different reimbursement risk, different sales force. So no leverage in those businesses. And the beauty of our business, at least with therapy selection and recurrence monitoring, is that there's enormous leverage as we continue to develop these products, the marginal investment we're making diminishes. And a lot of that floats to the bottom line, fortunately, in terms of the added revenue. It's the same thing with how we're approaching early cancer detection and early screening, which is CRC is certainly the first beachhead application. It's one that really today is the only indication that has a clear running path to the finish line in terms of regulatory, reimbursement, guidelines and so on. And we believe that business alone is obviously a massive business opportunity, massive opportunity to change really outcomes for colon cancer. But then as we add on more indications and make that a multi cancer sort of test, the leverage there is enormous as well. CRC kind of pays the bills, but every other indication essentially drops to the bottom line.

Just to stick with us for a minute or 2 or more, and I actually didn't write down the answer to this question, but I know I've asked you the question a few -- as recently as probably a few quarters back in terms of what's the balance of -- as you think about G360, for example, how much of the growth for G360 is a function of new account openings versus driving increases in same-store sales? I bring this up because, really, what I want to get at is how penetrated you are amongst list specialists? I think you told us your penetration rate is pretty high now, so that trick is detailing. Is that a fair characterization?

Yes. I mean I'm still surprised that we continue to add considerable number of new oncologists per month. You think as you're above 9,000 and there's an estimate of 12,000, you see it going down. But we're still adding a good number per month. But you're right, I would say the majority right now has trended towards going deeper into accounts, really trying to get the long tail of physicians who have ordered to order more the radar frequency, not order these tests just as a last resort where they have a more difficult case and they maybe need a little bit more information, and really move that up to the frontline setting. And that's really where we believe that having an integrated tissue offering that we're going to launch this year, I think that's going to go a long ways in terms of really moving adoption of comprehensive genomic profiling full stop to that frontline setting. I just think that there are current challenges with CGP, especially on the tissue side, that have really prevented full adoption of that modality in the frontline setting. Turnaround time, difficult specimens, other logistical issues, I think some of the reimbursement that some of the tissue tests have is somewhat lacking as well. And so being able to, I think, really handle all of that, feed that into a commercial channel, obviously. But even the quality of the medical affairs that we're able to provide, the thought partnership we're able to provide in the channel, I think it's going to go a long ways in terms of not just new opportunity with a new product but, frankly, we believe catalyzing adoption of a blood-first framework in oncology.

In terms of commercial investment, we talked a little bit about the specialty channel. You started to talk about CRC and how that can pay the bills over time. In terms of incremental investment, should we be thinking there's going to be more investment into GI specialty and then a PCP specialty sales force? Or is that still under evaluation whether you kind of build, buy or partner?

So that's a great question, one that we've looked at pretty intensely. And I would think if CRC were the only indication, I think that could be a good opportunity to actually maybe partner with other groups. But because we see ongoing leverage with adding more indications into that same channel, it absolutely makes sense to build that internally. There's just a level of efficiency, a level of clarity of messaging that you can't get when you partner with other organizations or you, frankly, buy it. And so we're essentially in the early stages of building out that largely primary care-focused commercial channel. We're putting in the leadership as we speak. We're very happy with the team as it stands now. And I think as we get closer to readout of ECLIPSE, we'll be really ramping up the investment and building out the rest of that team.

That makes sense. Last one of these kind of high-level but, I think, important questions. I mean I could see where folks like you guys would bristle a little bit when I kind of talk about how I think the space could evolve over the next 5 years, not necessarily because you disagree but it superficially contain a picture that this category is going to become increasingly commoditized. And the reason I could see why you bristle at that is, yes, there's going to be a lot of folks skating to the same place, but we're just getting going, right? I mean even G360 as a category is only about 5% penetrated across where it could be used in years. I mean is that the thing that you would want investors to not lose sight of that, yes, there are a number of companies going after the same opportunity and a lot of them look good, but this is still the very early days? I mean is that kind of the answer to this commoditization question?

I think there are a number of answers to that. That's also another area that has been a, I think, traditional concern for diagnostic companies is the risk of commoditization. I think the good news here is that innovation is alive and well. The biomarker space is evolving extremely rapidly. You tend to see commoditization in industries where the rate of change has slowed down. And you look at a lot of these health care test, diagnostic tests, there's plenty out there that haven't changed in 15 years. I can tell you that we're still committed to a rapid rate of change. It's why we have our at Guardant360 LDT alongside our CDx because we do see the pipeline continuing to evolve and grow. And physicians and patients aren't really going to stand idly and stand by and use legacy tests that aren't keeping up with the latest and greatest in terms of treatment options. So that's one, I think, saving grace of where I think our model and our agility and so on can continue to maintain differentiation and differentiated pricing. I think, too, I agree, like we're still scratching the surface. I think we've painted a picture of a lot of what we've been talking about, most of our revenue is coming from what I call the 0 to 1 moment for liquid biopsy, just standing shoulder to shoulder with tissue biopsy, using it maybe when tissue is not available or when it's more convenient. But the true power, obviously, is in monitoring, is in the longitudinal dimension. And that's where we're starting to see these applications of molecular response, longitudinal monitoring. And that's 1 to n, that's a huge multiplier in terms of where liquid biopsy can go. I think this question of comparing tissue and liquid will become a thing of the past because you'll have all of these time points where liquid is used. We're seeing that, obviously, in early days in Reveal where people are using that in the adjuvant setting. But I think even the case we highlighted at a competitor's conference earlier in the year of longitudinal monitoring of a patient and how it was very critical for her to really cycle therapies to something that was much more effective when the previous therapy stopped working. That, for sure, is going to be future. And it's just a matter of who wins, and I think we're very well positioned, both with the depth and breadth of our technology. Obviously, the immense amount we've invested in clinical evidence as well as, I think, the scale of our commercial channel to continue really leading the way in terms of these new applications.

I want to pivot, recognizing we only have a little more than 5 minutes left in our discussion and there's always so much to talk with you about, Helmy and Mike. But on LUNAR-1, let's start there, and more specifically, thinking about the launch of Guardant Reveal, which is, as we've talked about, a liquid biopsy assay for monitoring MRD. You launched this a little sooner than I would have expected. Maybe this was always the plan. But I guess my question is, one, why launch now? And then kind of related to that, is this at all influenced by your conviction that you're going to be able to -- even though it's not in your financial outlook, you think there's a path to using some of the codes that are in place from a reimbursement standpoint?

Yes. So maybe I'll tackle the second part. We're, I think, in discussions with Medicare. I think those have been fairly positive. And I think we do expect that, certainly, by end of the year, we should be able to really leverage the existing LCD that exists. And so that, I think, we're fairly confident around. Two, in terms of the launch date, I think it's something that we've messaged now for some time, but -- for over a year that we could launch this at a moment's notice. We have a CLIA-approved test. We have the commercial channel that is already calling on these accounts that would order this test. And I think we were pleasantly surprised, frankly, with how the space has continued to evolve. I think the, what I call, perceived clinical utility has moved much more quickly than I think we had initially expected. I think there's still many in the sidelines waiting for some of these larger trials. But that being said, I think there's a sizable population that uses CEA right now, most of these physicians do in colorectal cancer. And CEA is just abysmal, frankly, in terms of the performance. You look at these numbers that are in the mid-60s on sensitivity and specificity and slightly better than flipping a coin, and I think physicians understand that and are really yearning for something new. And so that, I think, was one of the big learnings we found in the first few days of launch was having something that is plug-and-play to how -- to the habit that has already been formed in terms of ordering CEA, it's a blood draw, you get a result a few days later, and having something like Gardener Reveal with that same user experience, I think, is a big advantage in terms of really the form factor of this test. And certainly, the fact that it blows away CEA in terms of performance, I think, is obviously something that is -- we're seeing is resonating with physicians.

Is that also -- real quick follow-up to that. I mean I think a lot of times when we talk to investors and we talk to KOLs, a lot of the focus is on bespoke versus nonbespoke approaches in this indication. Do you think the goalpost are in the wrong spot and we should actually be thinking about how this test performs relative to CEA?

I mean I think you're always going to compare classes of tests to one another, and so I think that's fine to compare the 2. But in the early days of defining a new category and a new product, it's -- the competitor is what's used, not necessarily what's up and coming. And that's what we found in CGP as well. The competitor still is lack of ordering, doing hotspot testing. It's not really CGP -- other CGP tests for the most part. And it's still early days for this adjuvant setting for MRD. And we do believe that the biggest opportunity, by far, is converting CEA users to this new modality.

All right. I know we were going to try to do a couple of LUNAR-2 questions in like 2 minutes, so we're not doing justice to this. But real quick, I think as most folks know, Guardant launched its likely to be a 10,000-patient or maybe a little bit more study called ECLIPSE to validate the company's assay for colorectal cancer detection in blood in individuals that are 45 to 84 years old. Study, I think, continues to enroll at around 100 sites, and primary completion is expected in very early 2022. I didn't mess any of that up, did I, Helmy?

We now have over 150. We launched with 100 sites, but it's over 150 sites.

150. And those time lines, I got the time lines right, right?

Yes, yes. And 24 months from when we started in November of '19.

So the questions are -- and there's been some movement within CMS and FDA on this category. What do you think -- what's the level of sensitivity that you hope to see and kind of need to see for this to be a viable product?

I mean certainly, MCD is -- the MCD is one bar, 74% sensitivity with 90% specificity. So that, for sure, is a lower must-have performance level for the test. I would say that I think we're hopeful that we'll see something that's similar to the data that we've presented before at AACR, which was in the kind of 90% sensitivity with 95%, plus or minus, percent specificity, so in that range, which we think -- obviously, if it's anywhere close to that, it would certainly meet the NCD minimum requirements. But we think it would be a game changer for the field in terms of really having a high-compliance, high-sensitivity test that can really address the fact that 30 million to 40 million Americans still aren't being screened adequately and, frankly, we think take a good amount of share from those who really are not looking forward to a follow-up colonoscopy or another stool test.

All right. Unfortunately, I have to leave it there. But we covered a lot. Thanks, Helmy. Thanks, Mike. We always appreciate the time, and we look forward to catching up with you both at some point real soon.

Likewise. Yes, thank you, again.