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

[Audio Gap] to the 2022 Bank of America Healthcare Conference, coming to you live in Las Vegas. Thank you, everybody, for being here. It's nice to see so many semi-smiling faces out in the audience. I appreciate everyone being here and joining us, and it's our -- I'm Derik De Bruin, the Senior Life Sciences and Diagnostics Tools Analyst, for those who don't know me. And our next company is Guardant Health. And we're happy to have Helmy Eltoukhy, the Co-Chief Executive Officer; AmirAli Talasaz, second Co-Chief Executive Officer; and Mike Bell, the Chief Financial Officer. Gentlemen, thank you for coming here. Thank you for being here today.

So a lot going on. You've been a busy couple of weeks. I guess first question out the gate, coming out of 1Q conference call, there was some confusion about why the readout for ECLIPSE was being pushed out. And could you sort of like talk about that? I think there are some concerns that -- the trial might have to be opened up again, that the PMA might pushed out. Could you sort of talk through that and help clarify the situation?

Yes. So thanks for having us. Great to see many faces actually. So -- now let's maybe I should talk about ECLIPSE and some of the fact patterns there because we are also obviously very confused with the amount of reaction we are saying with effectively very few weeks for pivotal study that we are running. It's not that we are saying ECLIPSE is failing, we're just saying for a study that's been a multiyear kind of effort instead of midyear, and now we are expecting actually the readout to be in the second half, probably like in October, September time frame. In terms of some of the, I think, reasons that goes into it, like if I go back 2019 October and November when we started this study, and we said like in 2 years, we are going to enroll 10,000 patients, but we are very happy December of 2021, effectively we enrolled about 13,000 patients while we didn't count on the pandemic effectively. And we -- there is some kind of a lag from the event that needs to come from the ECLIPSE in terms of the confirmation of CRC finding versus enrollment, which is getting the blood draw from the patients. So we are in that process in terms of waiting for a bunch of still patients to finish that process. The long kind of pull in the tent is that centralized pathology review, but there are some concerns, like what if you don't get to the CRC count that you're interested in. And when we had the ECLIPSE engine actually running and getting the samples for us, we continued that. We didn't actually ask the site okay, we are close, don't give us a sample because that's a great infrastructure for Guardant to continue collecting those samples. You solve those samples for this LDT validation when we showed our specificity for SHIELD LDT. And so far, we have, I think, over 17,000 cases all in all, and the engine still is running. Mainly, we are getting those samples for development purposes and versioning of this device. We are finding lung cancer cases and other cancer cases in the same patient cohort for our evidence generation for our next-generation SHIELD. It would be interesting, but if we need to tap into those samples from our biobank from the same, again, ECLIPSE clinical trial infrastructure, that would be a possibility, too. So we are going to get to the CRC count. Enrollment would not be an issue. The issue in terms of these delays and really the long [ goal ] in terms of our timeline is, we need to make progress on the centralized pathology review to confirm the CRCs, and we are on it. In terms of the PMA, which really -- when you think about long term, what are the value drivers for screening. It's FDA approval, CMS reimbursement and then USPSTF guideline inclusion. Still, we are keeping the time line for FDA submission -- last module submission by end of the year. Besides just ECLIPSE readout, there are a bunch of other stuff that needs to happen. So we kind of readjust our activity accordingly and still we are planning to submit the final module this year. We start our modular submission already. So conversation with the agency around this modular PMA package is already ongoing.

Great. Thanks for clarifying that up. You mentioned USPSTF, and there was a lot of discussion on the Q1 call about adherence of a blood-based CRC screening test likely being higher than either colonoscopy or stool. You also noted that because of this higher potential, we believe that the USPSTF will acknowledge this point and incorporate this into their models. Can you sort of elaborate on this comment and as well or any discussions you've had with USPSTF or other public health or patient efficacy groups to sort of drive this change sort of how it's looking?

So actually, we have advisers and specifically, one who may have USPSTF, and in fact, was part of the review of Cologuard, and in fact, the interface between that agency and the executive sponsor of Cologuard device. And the fact pattern that we are adhering is actually pretty encouraging for blood-based cancer's training. What we are hearing is -- what we are actually saying for long that the best test are the test that patient would adhere to at the end of the day. This is the top of the mind. So far in terms of adherence modeling, they look at accuracy in 2 different classes for scoping, colonoscopy versus [ other ] kind of scoping, stool-based test and blood test, is it going to be a new modality for the cancer screening with a total different experience in terms of potential impact. And in terms of like the interval testing and with a factor that goes into it, the fact patterns of like 1- to 3-year kind of recommendation and guideline inclusion by USPSTF, two factors went into it: recommendation by the manufacturer, which we can see it in the papers that got published after that review; and second, quarterly conversation that USPSTF have had with CMS in order to figure out actually the payment and the pricing and the interval testing by CMS. Our field now a few years after in blood cancer, it's even more clear. CMS took a position, the way they want to cover actually blood tests, interval testing for it and so forth. So in fact, the fact pattern in terms of CMS, still conversation obviously, with USPSTF, hasn't happened because there is no test today, which is eligible for that NCD that CMS has, but CMS position is clear. And I think the position of the best test for patients or to test that patient at the end adhere to get the screening done. That part is clear, too. So we are very optimistic about the future of guideline inclusion for blood-based cancer screening, assuming our ECLIPSE trial works out well.

And on the interval, so you're -- can we talk about -- I mean there's also some debate. I think people were worried about, "oh, my gosh, there's going to be 3-year, 1-year intervals." Can you talk about your confidence in the speed? I mean you've said in your call, 3-year interval is your expectation with it? And can you sort of -- is that sort of being driven by the higher adherence that you think you can do the 3-year or what?

So CMS position about this is crystal clear because it's in NCD. And as I mentioned, our understanding of the guideline inclusion for Cologuard, 2 main factors that went into it in terms of fact patterns is manufacture recommendation; and second, conversation with the CMS. I think on both sides, it would be clear in terms of our recommendation and what NCD is talking about in terms of CMS position. And listen, like low probably, this thing becomes 1 year kind of testing. Let's look at -- like I think at the end, what matters is the healthy P&L for the business. Our FDA-approved test is going to be eligible for ADLT status -- getting the ADLT status, and based on PAMA, the CMS rate is dictated with what PAMA dictates, which is based on some of the cash pay history collection that we're going to have. So in fact, it's not good for the system if we become annual testing because our pricing with the annual testing probably been higher than $500. So versus recent clinical relevant information with blood tests still is every 3 years, and we are building a P&L that we would have a good P&L with $500-plus ASP.

So one of the other things that was a question coming out of the your LDT data that you released last week. You had some advanced adenoma data for the first time as you showed. About 20% sensitivity, which was good and actually better than what we had sort of thought it would be 30 minutes low. Like 2 questions here. It's like what sort of changes did you make to the assay to sort of get there? Is the LDT assay the same one that was used for the ECLIPSE trial that you would sort of see the same thing with it? And then we're going to sort of like going to the next topic, which is going to be the debate about whether AAs are important or not?

Yes. So maybe I start from the end. So our LDT -- SHIELD LDT device is the same device that ECLIPSE device would be. So we added proteomic to both. We went through a fast cycle because that was a research asset we had in the pipeline. We were happy with some of the progress and proteomics looks like would detect a little bit more advanced adenoma. So we decided to incorporate it into this device. It's in our commercially launched LDT, and it's in our ECLIPSE in our IVD device. In terms of 20%, actually, we think it's a good start to be in the ballpark of the fit. So we believe if the ECLIPSE data in fact gets in the ballpark of what LDC validation showed for us in terms of CRC sensitivity and advanced adenoma, we believe this test would be a leading noninvasive actually colon cancer screening in long term. Now maybe talking about advanced adenoma, so let's look at some of the, I think, clinical facts, and they then just going too much. So we can continue this conversation offline if you guys are interested. Very few percent of advanced adenoma becomes CRC. It takes on average between 17 to 29 years for adenomas to become CRC. So for these kind of tests that we are talking about every multiple years in a slowly growing disease like CRC, the multiple kind of opportunity and [ shot on goal ] to detect an adenoma for a tiny fraction of them that, in fact, becomes CRC at the end of the day, that's why the most important parameter here is making sure you are not missing CRCs because that would be the main factor that impacts, obviously, the CRC mortality. So we think we are pleased with the starting position for advanced adenoma being in the ballpark of fit. And as we mentioned before, at this time, still PCPs based on what we are hearing from the market, the survey we've done, the main thing that they are focused on is the CRC performance. But in the mid- to long term, that could be a differentiator. That's why we worked on it. And I think it's a good start for this advanced adenoma about 20% sensitive.

And potential deterioration from the LDT study to the actual ECLIPSE study?

So our normal samples and advanced adenoma came actually from colonoscopy cohorts. Majority of them came from even the sites which are part of the ECLIPSE trial. Like I mentioned some of the samples, which are just going in our biobank for future, you sell those samples be using the LDT validation. So our -- the samples cannot be closer than that to ECLIPSE in terms of the advanced adenoma normal. Even same -- almost same sites of ECLIPSE, patients who are going through colonoscopy, so it's really the same kind of clinical indication. I think the variation of advanced adenoma is more a function of number of samples that we process in that variation -- in that validation. There's a confidence interval around it. It's just lower number of samples that we got access to in terms of device characterization. On the CRC side, always the data that we've shown, our case-control biobank studies across different stages, symptomatic versus asymptomatic. So we have to see actually what ECLIPSE finding would be for CRC performance, but like we can't be happier than this in terms of the data that we've seen from retrospective by a bank in early stage and CRC.

So I'm going to go off the data and just -- I'm going to move on since where we could basically spend the next 15 minutes from like [ hammering on ] this one, but there's a lot to cover here. So I think where -- one of the reasons -- the clear value of having -- there's a lot of people that are not going to get screened. There's a lot of been screened people there. They want to colonoscopy. They want to Cologuard. They may do a blood test. So I think we've had real issues in just trying to understand how to build that model because, obviously, you need -- I mean you're going to launch as an LDT, but that's not going to have a big revenue tailwind in the near term. You need FDA clearance. You need CMS. You need USPSTF. So how should we think about modeling this and sort of like the balance between what you're going to have to spend on infrastructure to sort of market the test versus like waiting for like this for all these things very thing? So help us understand how to model it and like that because it's like -- yes. People -- will people -- will the sunscreen population use it, but how do I, as a financial analyst, put that my numbers?

So maybe I'll walk you through the base case modeling in terms of the reality of this business. I mentioned some of the potential growth drivers to go beyond this base case. Maybe we can start with that. So the FDA approval is very important. We expect that to be by end of 2023, and then we expect CMS because of this NCD would be shortly after. It's just very few months right after FDA approval Medicare reimbursement would come, and following Medicare is Medicare Advantage. So you can have some kind of models based on the percentage of Medicare patients, Medicare Advantage patient. We are going with the Medicare pricing in terms of base case story of $500 every 3-year. And then some of the early adopter payers would jump on board both Medicare approval. Some of them would jump on board after ACS guideline inclusion. But the vast majority of the payers would probably wait till USPSTF guideline inclusion. And then after that many of them would basically jump on this train, again, with the pricing of $500 because pricing conversation is going to get anchored around Medicare payment with the same interval testing of 3 years. So in terms of revenue model, that's the base case. Some of the potential event that could change that in a favorable way is, we are working to see if we can accelerate USPSTF review cycle, for instance. Other factors that can come in is, we believe this test would get ADLT status, and as a result, pricing would by Medicare is going to be PAMA driven. So it's more based on our cash pay price more than cross-working to other kind of similar kind of tests. That could be another potential driver of higher upside, but none of those we can't -- we should consider in the base model. In terms of the OpEx and the gross margin, we believe based on the technology that we worked on and the internal progress that we made, we believe at scale, we are going to have over 60% gross margin with ASP of $500. At volumes -- probably at the volumes of about in the range of $0.5 million annually over. We can hopefully get to that gross margin also pending the USPSTF review cycle time. In terms of R&D and S&M, we believe actually there are a bunch of learnings from the field that we can have much more efficient S&M. One big factor of delta between blood-based S&M kind of investment versus stool-based S&M is, there is a lot of waste and the fact that you get a doctor order, but in 1/3 of the cases, you don't translate that into a B-level case in the lab. Never sample shows up versus blood, it's just 1 week of commercialization. I can tell you, a huge fraction of the order cases of SHIELD LDT, we are receiving blood in our door, which gets connected to adherence, which gets connected to S&M efficiency, right? And then when you look at like the follow-up at 3 years, I think it's clear the low percentage of follow-up again for a stool-based test. And again, like definitely, we don't have that data, but in terms of promise, a lot should have potential for a much higher compliance rate than stool-based test. That translates into S&M efficiency in the P&L model.

So just one other question on this area. So where is the competitive landscape at this moment for blood-based CRC screening? I mean you had some stops and starts with some other companies that have gone in the space, and there's other people going down this. And obviously, we're going to segue into multi-cancer detection at some point on this one. But what's -- how far ahead do you think you are? And when you look at what you know about the competitive landscape, what do you think about the potential there?

So maybe I'll start and maybe Helmy can add a few points about this too. So this SHIELD experience for cancer screening experience at Guardant is the founding vision since 2012. So this is not a company that just got formed like in the last few years, and let's figure it out and jump on the under railroad. So this has been a 10-year endeavor that we are just very few months away from getting to actually that point of hopefully a positive readout by ECLIPSE. And seriously, we went after it since 2015 and even like a lot more investment in this field since 2016. So what we are talking about is the outcome of, if not 10 years, at least 6, 7 years of investment and pipeline activity for Guardant Health. As a result of it, if I tell you, we believe, if not years, at least we are several quarters ahead of anybody else in this game or in this business, that should be the expectation because like we've been working on this thing for 7 years. Like if we're not ahead of them. We are doing something wrong, right? So I think we are at least a few quarters ahead, if not years, in terms of having a high sensitivity test that can take CRCs with high performance. So we have time advantage. I believe we have performance advantage in terms of CRC sensitivity. So waiting for some of our competitors who are making a lot of actual noise in the field to show some data that, okay, like what are they doing in this field? We are presenting data since 2019, right? So I think we are, if not years, at least several quarters ahead of anybody else in this game. And we would use it to get the first FDA approval CMS coverage then this does potentially could become precedent for other blood-based tests in terms of bar for having an inferior test at FDA approval. I think that would be a high bar ask. So this is the timeline advantage that we have. Do you want to add, Helmy?

Yes, I'll just add that we've been in this space for 10 years. We've seen these cycles of competition. We've seen lows and highs from a macro perspective in terms of the diagnostics market. 2015 was a challenging year as well. And we looked at essentially what happened in those cycles incumbent technologies are always trying to counter detail and say, the new thing is not sensitive. It can't compete, while they're secretly working on it in the background as well. And it's because everyone knows this is where the paradigm is shifting towards, and there's been a lot of apples to oranges comparisons in each of those chapters. With Guardant360, when we had our first liquid biopsy, we were comparing the tissue biopsy sequencing with Foundation and other companies that were there. And what people missed was that we were completely changing the paradigm from one modality of testing, a single time point diagnosis of a patient, and they were just looking at that same single time point and saying, "Oh, can liquid biopsy [indiscernible] that?" That's not the point. The point was that we are changing the paradigm to adapt the management of disease to longitudinal testing to actually seeing cancer in real time. And now you can see 7 years later, that's what's happening now with the response and multiple tests for patients. Same thing with the Reveal. People tried to jump in with very simple PCR technology. What we have with Reveal is a complete order of magnitude, more sophisticated than what's out there. It's the only blood-only test that's out there. We have one function that this test enables now, which is cancer detection. This test, though, looks at thousands of different regions across the genome. We're going to be able to populate that with other applications, understanding the organ system, understanding what the recurrence means and so on. So you're just seeing the beginning of the technology s-curve that we're on in terms of where Reveal is. And the same thing with screening. The test we have is one of the most complicated diagnostic tests ever created. It looks at tens of thousands of regions in the genome and the amount of data that we're going to be able to collect and refine and improve, there's no comparison to a 5 market test that people are comparing this to. And so that's where we're kind of missing the point here is that when we launched 360, we had 12 cycles of improvement that we went through from when we first launched in 2014 to where this test is now. And it's an order of magnitude, more sensitive, faster, more efficient, and we're going to see that same technology S-curve with all of our different franchises. And so when you talk about competition, it's a lot more noise in our perspective than reality.

I mean but you -- I mean there's a lot of competition obviously come in for Guardant360, and at least from our surveys, you still have a dominant market share in that area as well. So...

Yes. It's because we're not stuck at where we are now. We're not afraid to cannibalize our own business to kind of move on to the next paradigm. We're doing that with the smart liquid biopsy where in our view, we're really redefining what liquid biopsy means in that field. We're in other -- the classic diagnostic and therapeutics model has been put a test out there and just reap the rewards for 17 years without evolving it. That doesn't work in this market. It's why we structurally want to have high gross margins so that we can invest in R&D, continue improving things, continue moving the needle, and that's a very different philosophy than companies that are confused of their research companies or commodity diagnostic companies that have low gross margins. And so we're very clear minded about our vision and our 10-year roadmap in terms of what we're trying to accomplish and change in cancer care.

Any questions from the audience? No. Then I'll move on. So going on to more mundane things as in -- you had a -- your first quarter was great, 47% increase in volumes despite COVID headwinds in the first couple of months. Just how should we think about the recovery in the business and sort of like growth in the core business for the remainder of '22?

Yes. No. I mean we were very pleased with Q1. I think it just shows that in our fundamental core business, we're still seeing pretty tremendous growth. We're about 47% on the clinical side and 45% of biopharma. And a lot of that is really fueled by our core business, Guardant360, with the new products really starting to gain steam. I can tell you all of that despite January and February being challenging due to the Omicron surge, but March was really strong, and we're continuing -- we're seeing that trend continue. What we're seeing now is that physician offices are opening up slowly. We're getting to 50%, 60%, I think, open in terms of access. But we're really, I would say, outcompeting on multiple metrics. We've seen data in terms of IQVIA and somewhere we're seeing that about 30% of visits in the oncology field are in-person. We're seeing about 45% to 50% of our reps have face-to-face meetings. And so we're -- we feel like we're doing much better than what the standard is out there, and that's going to, I think, lead to this very strong, I think, 50% year-over-year growth that we're projecting for this year in our clinical volume. And we feel right on track to be able to meet that.

And so could you provide any incremental color on Reveal and sort of how that's tracking? I think we get -- once again, we just sort of slap something to our model without really knowing what we're doing. Sorry. Look, I sequence DNA. I'm not a financial model. The -- but could you sort of give us some color on that and also just on the -- sort of think about how that whole market works? Because I mean there's still a lot of investors who are like, well, no, tumor inform, tumor naive and sort of going back with it. The tumor naive approach simply makes more sense to me just from a workflow perspective. And as you said, you're looking at many member markers, but I'd love some make of color on that.

Yes. I always appreciate you never afraid to call us spades, but it's -- yes, that's a great question. So like with the Reveal, we're right on track in terms of where we want to be relative to our launch, we're seeing really good customer feedback. What we believe is the right product market fit in terms of ease of use, simplicity, high performance. And we're really starting to see those trends really accelerate. We're seeing good traction with pharma as well. One of the challenges with any kind of advanced technology is that there's a little bit of suspended disbelief. There's kind of -- can this really work with blood-only. We had that same issue with Guardant360 when we launched liquid biopsy. But once you go through those learnings and people have that confidence, there's no question in our mind that the absolute winner in this MRD market will be blood-only, if it's -- even if it's not Guardant Reveal. And that's -- the reason for that is, when you think about these 15 million cancer survivors, 14 million of them are more than a year out from their surgery. Most of the population are these prevalent patients that are far removed from their sites of surgery and access to that tissue specimen. And that's really where we believe for that reason, that's going to be the absolute winning combination and winning product profile for this market is having a tumor-agnostic approach. But then it's for some of the other reasons that I mentioned is that when you detect cancer, that's not the end of the story. It's then what -- it's like what do you do next, what does it mean? And that's the beauty of this rich platform that we have and this rich ecosystem that we have is that we'll be able to shepherd that patient from beginning to end. And so we're already seeing that in our business, the sort of synergistic effect of having all of these products work in tandem together. Our patient story from this quarter was essentially someone who had a Reveal test and then essentially was able to reflex into Guardant360 to get that patient on to a targeted therapy.

And with that, we're out of time. Gentlemen, thank you for participating. Audience, thank you for being here. We appreciate your support. Have a great conference. Stay healthy, everybody.