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

Everyone, thanks for joining us on the first day of our Healthcare conference. I'm Tejas Savant, and I cover the Life Science Tools and Diagnostics Sector here at Morgan Stanley. Delighted to have Guardant join us today. And representing the company, we have Helmy Eltoukhy and AmirAli Talasaz, Co-CEOs; and Mike Bell, CFO. So welcome, gents. Before we get started, just some important disclosures here. Please see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. And if you have any questions, please reach out to your Morgan Stanley sales rep.

So maybe just to get started, it's been over 3 years, Helmy and AmirAli, since Guardant went public in the fall of 2018 and even longer since you launched G360. What has surprised you the most on the upside and on the downside as you've sought to commercialize liquid biopsy, first in therapy and now, of course, in MRD and then screening as well?

Yes. No, great question. Thanks for the invitation here. Always great to present and always great to chat with you, Tejas. Yes, it's been an exciting 3 years since we went public, and it's really been interesting to see how the market has continued to evolve. One of the things that I think is very encouraging is that we talked about these large TAMs in terms of $4 billion in the clinical side of therapy selection. And there were a lot of assumptions that were made when we went public. I think our ASP back then was $800 or $900 for the test. And here we are sitting at $2,600. And I think in those projections, we had said that ASPs would get to around $2,900. We were getting paid for one test per patient only at tissue insufficiency. Now we're getting paid at every progression. And so we've sold a lot of, I think, big challenges, and we've actually executed in terms of really moving the field forward. And now it's just a matter of what percent of patients -- what percent of those 700,000 patients -- late-stage patients actually get tested. And so we've solved the reimbursement side. We've solved a lot of the clinical evidence side. And now it's really a matter of time to really grow into that $4 billion opportunity. I think -- and so I think it's always encouraging when what you say is when it happened actually happens and you look back and it's happened in a very short timeframe. I would say, the other piece that's interesting is that it seems like there's a lot more upside in the market today than there was back then. You look at some of the draft LCDs and where reimbursement is going around, molecular response as well as potential monitoring applications. I think we're going to see a future where patients get 4 or 5, even more tests per year in the liquid biopsy setting, both in the MRD space as well as the metastatic therapeutic monitoring space as well. And I think that, that is an upside that is much, much higher or that's a total addressable market or an opportunity that's much, much higher than I think anyone imagined 3 years ago. I would say, on the -- maybe on the negative side is just how much more work there is still needed to actually get to the types of penetration that could get to make sure that every patient is actually tested to guidelines. I think that's the part that's been disappointing is the fact that there are still patients that aren't being tested for FDA-approved drugs and that there are still some payers that are sitting in the sidelines in terms of this type of CGP testing, whether -- both tissue and liquid. That being said, I think the progress we may have made more than outweighs some of the slowness of some of the stakeholders in the field.

Got it. And maybe that's a great jumping off point, Helmy, into sort of G360, right? Because one of the questions we get is, what percent of cancer patients today are getting no form of testing? And what percent are getting hotspot? And what percent are getting CGP? And then the next layer is, off that CGP bucket, what's the approximate split between tissue versus liquid? So maybe, what's the latest in your mind in terms of those market-wide metrics?

Yes. So I mean, if you look at hotspot testing, it's -- it goes from anywhere from 60%, 70% to 85% in terms of patients getting some form of hotspot testing. Typically, high 80s or mid-80s, is the saturation point. There are a bunch of patients that go straight to hospice or there's other accentuating circumstances of why they wouldn't get tested. And then it's a pretty quick drop-off as you start going to more comprehensive testing. I think patients getting some kind of panel, maybe not very comprehensive or NGS testing, is probably a fairly large percentage now, probably 40% to 50%. Those that are getting CGP are still much lower, probably still in the 30% range, and that's both tissue and liquid. So there's still a lot more opportunity out there. We think, if you -- and then in terms of the split of tissue versus liquid, liquid is still, I would say, fairly underpenetrated, in general. I think in lung, we're definitely doing very well there. I believe, we're one of the leading companies full stop in terms of lung testing, even if you compare to tissue companies, volumes and so on. So we're doing really well there, at least on the CGP side. And we think that blood first reflects the tissue, or our TissueNext offering. Really having that integrated approach could be how most patients get CGP in the future. We just see it as very compelling. We get more information, much more quickly. It's really better medicine and better care. And we just -- it's from the early traction we're seeing, I think, it's resonating. And so it's something that, I think, makes sense that the majority of patients are getting liquid as part of their treatment regimen.

Got it. In terms of the TissueNext launch, Helmy, that came as a surprise to a fair number of people, just given how you've -- strongly has passed the liquid force paradigm. But in a sense, in your mind, you've spoken about how tissue is actually a better way than just liquid or just tissue. Has that message resonated with clinicians, or has there been a little bit of clarification or a mudding of the messaging that's happened now that you're offering a reflex tissue test as well?

So we always -- I can remember when we published NILE, we got a lot of, I think, questions around, does this mean that we can do away with tissue? And we always were very, I think, careful in the response and in terms of how we message that paradigm as blood-first. We never said it was blood-only. And that's because we understand that neither modality is perfect. Tissue doesn't get everything, has a lot of logistical challenges that just make kind of fast and efficient medicine very difficult. And liquid is not perfect either. There are some patients that don't shed and so on. But essentially, having this integrated approach where we're able to sequence the two, one after another in a way that's extremely efficient where results come back in a timely fashion, and you're really not missing anything by reflexing when one is negative going to the other. And so it's something that I believe is going to resonate, and I think it is resonating right now. I think it does two things. It allows us to grow the CGP space faster because it gets, I think, more -- it's in line with the necessities of pulling the trigger in the first-line setting. So there's another element where if tissue testing takes 3 to 4 weeks to get results back, it's just too long in terms of the duration for when a physician feels he or she needs to pull the trigger on treatment. That's usually within 7 to 10 days. And so, there's been this impedance mismatch between this tool that is really important, it's critical, and some of the excision sees on how medicine is practiced today versus if we can essentially catalyze and grow the whole CGP pie faster because we're giving this offering that's in line with our medicines practice. We think that's huge upside there. And then two, we think it gets a lot of those physicians that have been on the sidelines have been -- have had this fear of missing out of the used liquid, have been stuck using tissue. It really gives them, I think, the confidence of trying liquid and knowing that they'll have tissue as a sort of safety net or a fallback. And so we think it really drives those two elements.

Got it. Switching gears to Reveal, one of the key advantages you've highlighted has been the rapid turnaround, and essentially an analogous workflow to CEA as well. In light of the fact that you recommend not using Reveal for at least a month for surgery to avoid sort of a false positive situation, how do you think the turnaround translates into a real-world advantage versus some of your peers who were taking a tumor-informed approach?

Yes. So I mean, I think all of these methods require essentially some clear out of the collateral damage that happens with surgery and so on. And so whether it's 2 weeks or 3 weeks and so on, there's some waiting period that's typically required. And if you think about kind of how medicine is practiced, even in the therapy selection setting, there are a lot of cancer types where liquid biopsy is preferred. But tissue is, I think, is available, it's sitting somewhere. But the key kind of operative word is, it readily available in a timely fashion? And so just because something physically exists, these are not theoretical exercises where you're kind of moving the chess pieces and you have full control of everything and you're sitting in an ivory tower. This is the realities of how medicines practice that someone's tissue somewhere else. Logistically, how do you get access to it? How do you send it out? Do all of these things coordinate that? Get a blood draw at a different time at a different site. And so it's not like you're seeing the patient, you're drawing the blood as you're doing the surgery or thinking about that. So you have to really map out that workflow in detail. And we just see that when you think about everything that is put on the shoulders of these physicians with pre ops or drugs and all the kind of cutbacks and the difficulties in terms of they're managing their own business in the -- especially in the community oncology side, top of mind is not how to put 20% of the resources and ordering one test that is going to give them some information. It's about what's the simplest way to essentially give the patient the best medicine they can within the bandwidth that they have. And that's where we found why 360 has been so successful, I think, is not just because of the technology, but it's really an ease of use, the fast turnaround time, the customer service we have, the medical affairs team we have and the reimbursement we have. And we think that's in line, that's what Reveal is tapping into is that the infrastructure we have. And the good performance and fast turnaround time are key elements and key differentiators, which I think, is going to lead to the same kind of success we've had with 360 before.

Got it. Are you seeing sort of more new to MRD customers for Reveal at this stage, guys, or is it sort of customers who are switching from a competing product?

Yes. I mean, it's hard to map out when it's really early innings right now in terms of how kind of -- how low the penetration is in general in terms of the overall market opportunity. I would say that we're not seeing, I would say, any big differences in those two populations. I think we're seeing similar traction and similar, I think, ease of ordering, whether it's existing users or new users. I would say that the area that we have asymmetric advantage is that we can really enter self-patients at any time of their journey. When you think about someone who's had a curative reception, that's where tissue is most likely, most top of mind and most available. But as you go a year out, as they move to different centers, see different positions, becomes harder to access some of that tissue. And because we have a tissue independent approach, it's much easier for us to kind of intercept patients and get patients to come into our platform and our workflow than the other way around.

Got it. And then the other question we get, and this is more of an industry-wide question versus specific to Guardant is, does MRD drive demonstrably better patient outcomes? And AmirAli, I want to pull you in over here in terms of sort of the PEGASUS trial and the COBRA trial and so on. In your mind, I mean, the initial readouts are obviously going to take some time because you need to follow up these patients. How much of a gating factor is that to driving broad adoption of MRD as a category in your mind?

So I think it really depends on what we -- how we define broad adoption, right? If the market opportunity is so big that even like a 10% to 20% early adopter segment of the market by itself could be big. And as long as you have clinical validations and data to support give you a chance, give the test a chance, the early adopters want to, in fact, get access to the test. And that's what we are seeing in terms of marketplace, there is a lot of interest into it. But once you go beyond that 10% to 20% of early adopters, you start talking about like the mainstream. Those are the people who are asking about, show me the clinical utility that acting on this information would, in fact, give the patients better outcome. And we believe in, unlike the CGP using liquid that everybody knows, you know EGFR mutation, what's going to happen if you treat the patient. In this seg, we prioritize developing the clinical utility side. That's why a year, a year plus before commercial launch, we got ID exemption for our device. We started multiple kind of clinical utility study to get to that point sooner than later. And February of this year, we launched the test commercially, mainly towards the early adopter segment of the market.

Got it. In terms of follow-on indications, AmirAli, I mean, obviously, you've shown data in certain other cancer types beyond CRC. I want to specifically ask about breast because it's a large market, patients tend to live for a longer period of time versus other cancers. When do you expect you'll have something to share on that front? And would you consider sort of prioritizing that versus some of the other smaller indications for MRD?

So there are a few cancer types that we've been actually actively working on the assay development and clinical validation and clinical data generation. And in fact, as always, we mentioned, like colon cancer is our lead indication, not the only indication. I mean, definitely breast cancer, bladder cancer and lung cancer. The obvious ones are our top-tier activities that we've worked on for a while. And the assay is going to become multi-cancer MRD assay within the next few quarters. So those days are not far from today.

Got it. Switching gears to Response. Should we expect sort of reimbursement for both Reveal and Response under the same essentially umbrella LCD once that goes final by year-end? Is that the right way to think about it?

I think, Reveal will piggyback under the CRC, LCD that's been finalized, and then, yes, Response would go under the new umbrella, one that hopefully will be finalized soon.

Got it. And as you think about sort of traction for MRD in the biopharma setting, where are those conversations? And are you starting to see any uptake there?

Yes. No, a lot of excitement there, a lot of huge uptake, very big, I think, potential trials, and some fairly large ones we're involved with in terms of studies. Yes, it's a space that you talk about, you start off with areas that things are moving faster than we expected. That's certainly an area that we knew how big this type of testing would be in the adjuvant setting in terms of really moving the pipeline of breakthrough drugs and targeted therapies and immunotherapies earlier in the disease journey. And it's really encouraging to see that's finally happening and happening in a big way across many pharma companies.

Got it. And then before we get to screening, on that biopharma market, Helmy, I mean, can you give us an update on GuardantINFORM. I mean, in terms of -- you've got the genomic data. Some of your peers have moved towards either integrating sort of their tests with EMR or perhaps aligning themselves with folks like Science 37 and Foundation Medicine's case recently. Is that sort of the next logical step for you as you seek to not just increase the samples in GuardantINFORM, but make it a more potent and monetizable asset?

No, that's exactly what Guardant -- I mean, GuardantINFORM without outcomes data would have very limited utility. And so what heading has led to the traction and has made it really compelling, we think it's actually one of the largest databases out there that has outcomes. And we have things like overall survival and inferred progression-free survival and some of them that we can pull out of the database. We are approaching now 200,000 patients where we have that. Under these other databases, when you actually look at the overlap and the intersection start getting very small, even though some of the individual data sources can be large. And so yes, this is an exciting kind of platform we have. And the way we've built it -- so we've partnered with a number of different organizations to sort of marry up the data and you get some of the drug information, get outcomes information and so on. So it's pretty comprehensive. But the way we've built it, as we launch Reveal and even as we launch screening, it's scalable. So we're running millions of screening tests per year, we're going to get that same kind of outcomes data as well on each of those tests, obviously, in a de-identified way. But it's something that I think we're going to see sort of geometric growth on -- over -- especially as we become more successful with our testing franchise.

Got it. So on screening, I mean, beyond just the metrics, I mean, sensitivity, specificity, PPV, et cetera, what do you think will decide who wins and who loses in a commercial sense? A couple of things that you've talked about recently include sort of the capability to catch advanced adenomas, potentially an off-cycle review for USPSTF. What else, AmirAli do you view as like critical success factors here in terms of real-world adoption?

So a bunch of the stuff are around the product space, right, which we are trying to validate as part of our ECLIPSE trial. But there is a lot of like front-end and back-end that goes into the patient journey and the provider experience to make sure the screening journey would be as streamlined as possible. At the end, the goal is to make sure we are screening as many eligible people as we can as a whole community. And there are a bunch of hurdles to reach to higher compliance to screening. We believe blood-based screening has a lot of potential. But if we just have a blood test and imagine the problem is going to evaporate the day after, it's not going to evaporate. Hence, we are actually building a bunch of infrastructure to really handhold the patient through the experience from beginning to the end. So to answer your question, beyond the product performance, I would say, a winning company is the company that really can show that the compliance to screening would increase, and that's beyond just the product.

Got it. This is a question that I'm sure you get sort of every couple of weeks around what's the bogey for ECLIPSE. So I'll try coming at it from a different angle. So let's assume the specificity is around 90% and the sensitivity is somewhere between 74% and 91%, all right? If that's the case, one of the things you mentioned, AmirAli, which I thought was really interesting was that you should think of different markets being opened up at different sort of sensitivity thresholds. Can you just elaborate on that? And how to contextualize those ranges, if you will, from 74% to 91%?

Yes. So I can tell you what we believe in. It's kind of unproven until really what happens in the marketplace. But think about it this way, like in the colon cancer screening, there are tens of millions of people who are not complying with any kind of screening methodology. And we are offering a blood test that's going to have [indiscernible] and when you look at some of the comps in terms of other blood tests in wellness programs, if it's implemented properly, you can increase compliance significantly. So theoretically, any performance is much better than these people who are not getting screened and effectively, you have 0% sensitivity. So starting from that base point that liquid is going to have a major contribution. Now in terms of performance, I think once we -- a blood test shows that at least you can be FIT in terms of performance, in terms of the minimum bar, right? So then, you start talking about some of the conversion of, besides the compliance of blood test, besides the people who are not complying with any kind of screening methodology, starting tapping into some of the FIT opportunities. And when you look at actually a bunch of market adoption by other stool-based screening, [ I find ] is coming at the expense of actually FIT testing, right? So once you have a blood test that even outperforms FIT, not only you go beyond noncompliant issue, you can tap into that basically segment of the market. And all the data that we've shown, and not just Guardant shown, our partners, our scientific collaborators who got access to our test presented in different kind of venues, gave us actually a lot of positive signal and enough hope and excitement that it could -- like it would be way above FIT performance. And now, are we going to be better than Cologuard? We are going to be similar than Cologuard or slightly less than Cologuard? All this stuff, you have to see what ECLIPSE data is going to be. And I think based on the performance that we are going to show, beyond the compliance of blood, beyond the FIT conversion opportunity, you can consider other kind of segments that would convert to blood tests over a period of time. But again, we have to see what the ECLIPSE readout would be.

Got it. Given your investment in Lunit, how are you thinking about a multi-modality approach to cancer screening? And in your mind, do those tools sit upstream or downstream to a blood test, or could potentially may be used concurrently?

So I refer back to my earlier statements about streamlining the patient and provider journey because just the blood test stand-alone in a multi-cancer setting cannot be the start and end point of the diagnostic journey of the patient. And we believe, actually, there are a lot of opportunities to streamline that journey, and radiology is definitely a big player there. Complying to those radiological actually procedures, in fact, is another issue. So it's not just radiological readout, it's radiological procedure that patients follow-through those kind of procedures without generating too much overhead and hassle for the health system providers to make sure the patient navigation works very flawlessly. That's what we are going to do. And please stay tuned as we make more progress through these partnerships. We will talk about it more. But we can look at those radiology AI plays that we talked about. And some of the strategic investments we've done is in line to invest to make the cancer screening journey as streamlined and as smooth as it could be for the system.

Got it. And quickly, on the commercial channel build-out ahead of the LDT launch in the back half of next year, AmirAli, what's the latest thinking on build versus partner versus buy?

So as we speak, we are building that. We mentioned that we are going to have LDT launch first half of next year. And by that time, we are going to have the first phase of our commercial team screwed, train and ready to go. And it's a sizable team. Although it's going to be mainly for market-shaping versus like driving huge adoption before FDA approval, we are building a sizable team. So as we speak, there are a couple of layers of senior leaders, which are already screwed down and they are in place. And if you look at our job openings in Guardant, you see there are many commercial openings on the screening side. So we are building that team as we speak. And they would be ready by the time that we are going to have the LDT launch of our CRC screening assay.

Got it. Switching gears a little bit, just on the business model. I mean, obviously, you announced a new leadership structure here at the last earnings call. What's changed on a day-to-day basis versus prior to the announcement? I mean, have any internal teams or functions being realigned to reflect the division of the businesses into sort of oncology versus screening?

Yes. No, I think there's definitely been a lot more, I'd say, separate focus on each area. Certainly, my day-to-day is much more focused on oncology and so is AmirAli's on screening. And I think that's giving us, the organization, the reinvigoration in terms of the undivided attention and single-minded focus we had when we launched 360, but now in two separate streams. And so we're -- we think this is a good thing and something that will allow us to move even faster and pursue these enormous market opportunities in a way that leads us to a very successful outcome.

Got it. A big picture question. At an industry-wide level, I mean, two themes have stood out to me over the last sort of 12 months or so. I mean, one is consolidation and the other is this need to not be sort of a one-trick pony, if you will, right? So first, I mean, is that a fair characterization? And second, on that latter point, is there a merit to the view that a patient or a physician who stays captive within one company's testing ecosystem will benefit from that by directly comparable, longitudinal data points essentially? And so, I guess, what I'm trying to get at is how fungible are these platforms, or not?

Yes. No, I think if you think about even in the tech space, one of the most stickiest things that you can build is really a data moat, really having so much data, longitudinal data and so on, that it becomes very hard to migrate that over to another platform. And that is a vision behind Guardant from the beginning. While we've always been -- initially, we're the only company for almost a decade that said they were going after the continuum of cancer care from late-stage MRD to the screening. And obviously, a number of companies now are sharing that vision more recently. But we believe there's power in how these products work together that these -- the traditional diagnostic companies were discrete elements of disconnected tests. If you think about how a Response works with 360 and Reveal, as long as -- or even TissueNext works with some of the products we have, this is the first time you have these connections between these different tests where you get synergistic kind of relationships, you get additional information potentially and that longitudinal information, and really changing how medicines practice, potentially on the oncology side in terms of really giving oncologists a real-time informational tool to adaptively make decisions. So I think this is a big paradigm shift in not just oncology, but I think this will create waves across precision medicine.

Got it. Mike, I'm going to bring you in for a lightning round. Just two questions really. You have the ADLT update. You kept the average selling price sort of flat at $2,600, given some of the offsets you mentioned. Is that essentially how it's played out in August and then into September here?

Yes. No, exactly, and I think that's how it's playing out. We had the ADLT uplift back in April. And I'd say, we've been very successful in getting all of those payers that have positive coverage to accept the new code and they're paying us well. So I think we've seen it go well. Of course, there's still lot noise we talked about with those payers that don't have positive coverage. And that will take a bit of a longer time to sort of flow through and we'll see how it goes. But I think, yes, as we look at Q3, we're on track with where we thought we would be in that $2,600 ASP for 360 is probably where we're going to end up.

Got it. And then on the COVID resurgence and the impact it's having on office visits and sales force access, anything in terms of incremental color to share there? And to what extent is this being mitigated by social distancing protocols that clinics have essentially grown comfortable with and patients are now tapping into mobile phlebotomy, et cetera?

Yes. I think the story is probably similar to when we had our earnings call and we talked about that, probably about a month ago. I think from the physician office point of view and seeing patients, there's a lot of resilience there now with telehealth. And I think they've sort of got used to how things are. And so we've not seen any impact with the sort of delta resurgence making a change on that. I think with the sales force access and having in-person visits, we talked about, about a month ago of sort of 50% in-person visits. Maybe that's dropped off a little bit, and we've seen a bit of a reluctance to have those in-person visits. But it's nothing like it was 12 months ago when COVID started. So maybe a little bit of impact from that Delta variant and that resurgence, but not really having a huge impact the way it did in the past.

Got it. And then just to sum up, Helmy and AmirAli and Mike, feel free to chime in as well. What part of the Guardant sort of medium- to long-term story do you think is most underappreciated by investors today?

Do you want to take that, AmirAli?

I think there are many different kind of models looks like out there. And different people have different perspectives about different segments of our business. But I think this journey that we have committed to in terms of a diagnostic company that really commits to this patient journey from screening to MRD to advanced cancer and be the major player in the field, I think we have to show that we are going to deliver on that. And we have full confidence that our appetite and our passion is not going to get satisfied until we really reach to that point. And then I would be surprised if we would just end at cancer, and potentially other kind of diseases could get added with the same kind of mentality, but step-by-step.

Got it. That's a fantastic note to end on. So thanks so much for joining us, all of you. We appreciate it, and I hope you have a productive rest of the conference.

Okay. Thank you, Tejas.

Thank you.