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

Good morning, everyone. Thanks for joining us. I'm Matt Sykes, the Life Sciences Tools and Diagnostics Analyst at Goldman Sachs. And this morning, we have the pleasure of welcoming senior management from Guardant Health, Helmy Eltoukhy and AmirAli Talasaz, the Co-Chief Executive Officers; and Michael Bell, the Chief Financial Officer. Gentlemen, welcome. Thank you for joining us today.

Maybe we could start out by just by having you set the stage for some key highlights in the first half of the year and maybe what investors should be focused on for the balance of '22?

Yes. Thank you for having us here. It's always great to be in this wonderful venue. This has been really, I would say, instrumental and pivotal year for us in terms of Guardant's history. We've founded the company 10 years ago with this vision of essentially having tests that span the continuum of cancer care really culminating in a simple test for early detection of cancer. And if you think about 2022, what we have accomplished in this first half, we've really brought that vision and that dream to fruition. We have now the leading liquid biopsy and therapy selection that continues to really grow very nicely in the market. We have the only true liquid biopsy in MRD and recurrence monitoring in terms of a blood-only test. And just a few weeks ago, we launched essentially a screening test for colorectal cancer. And it's really exciting that we are the first company to really have commercial products in each of those 3 areas. We're making progress in each of those areas. We launched a tissue test last year. We just got Medicare reimbursement a few months ago. We just got regulatory approval for Guardant360 test in Japan. So there's been a number of very, I think, important milestones we've achieved over the last few months.

Great. And we're, of course, looking forward to the ECLIPSE readout in the fall in the second half of this year. Maybe kind of any updates on the progress there and the work that the central pathology lab is doing to process the positive samples. And then maybe how should we be thinking about any degradations in move from some of the early data to respective?

Yes. So we mentioned in our last earnings call that we are expecting ECLIPSE trial readout to be in the second half of this year, likely a story would be like October, September time frame. And it's anywhere between very few weeks to maybe very few months kind of delay in this 3-year kind of trial operation process that we are going through for ECLIPSE, but we are very excited and waiting for that database get on like and see what ECLIPSE readout is going to have for us. There's been some kind of hurdles in the QA/QC step, which is happening in the centralized pathology review when there are 200 sites, many pathologists, local pathologists involved to just make sure the quality control is in check based on some of the FDA requirement for regulatory grade studies. That was taking longer than our expectation. But even since then, we've been -- we've done some kind of improvements in the process. So we are happy with the progress. And in terms of degradation, this is a question that coming up very frequently. And when you do actually pattern matching based on what has happened historically, like it looks it makes sense that whatever is the kind of your retrospective data that you've seen, maybe when you go to pivotal, there should be some kind of maybe lower performance. With the scientific hat, I think the performance going down or going up is really a function of the type of samples that we have processed before and during the retrospective phase. When you think about it, our pivotal ECLIPSE study is by itself is a retrospective study. Like for 3 years, we are kind of collecting these samples. We are buying them, and then we are going to -- we are running them all at the same time now. So just a matter of like how closely is the clinical indication of the patient that you enrolled versus clinical indication of the patient that was part of your initial retrospective studies. Like it's obvious if you are just using, for instance, symptomatic patients in your retrospective studies. Maybe you're going to see a sensitivity when you do your pivotal study, you see lower when the patients are symptom-free. The data that I always latch on is the patients who have been diagnosed with early-stage CRC and they were symptom-free. When we even looked at the smaller kind of a cohort of patients who have early-stage symptom-free and they have small tumor size of less than a [indiscernible]. We are saying that sensitivities are holding up. So all this, I think, gives us a good kind of a feeling to go to the ECLIPSE, and we are excited to win online that database and see what the readout look for Guardant and I think the whole field of liquid biopsy.

Great. Maybe any thoughts on your plan for marketing and ramping up the distribution of SHIELD over the next few years. There's obviously some inflection points along the way, FDA approval, CMS, et cetera. I just want to get a sense for the potential ramp of the product. And has the delay in the ECLIPSE trial pushed out any of these timings for you?

So now we have actually a commercial, like 100 strong people. I'm very happy with the quality of the people we hired and we trained and we put them in the field. We are seeing actually very good kind of early success in commercialization of the SHIELD LDT. We think at scale at the time that we have USPSTF guideline inclusion that commercial team would go to about size of 700 people. In terms of scale-up, we are guided based on milestone and derisking of this business, obviously, like as we get closer to FDA approval, as we get closer to, for instance, guideline inclusion by ACS, by USPSTF. Those are some of the derisking kind of moments for this business that we are going to actually use in scaling up this organization. So it's kind of a milestone based and really thoughtful in terms of when the investments would make sense.

Got it. One question. You brought up an interesting point at the breakfast this morning about ACS versus USPSTF in terms of the 17 states for ACS. Just talk about that dynamic. And obviously, there's a long time period for the USPSTF, but for ACS also.

So there are a lot of conversations in the field around the task force, USPSTF and the impact of that guideline inclusion and the default plan for them is to meet and render a decision about potential guideline operates in 2026. There's another body American Cancer Society, or ACS, that 17 states as of now that they are asking payers to follow the recommendations of ACS. And those 17 states by itself, they cover about 20%, 25% of the lives in the United States. So when we are thinking about the ramp of the commercial payer coverage post FDA approval, like we expect both post FDA approval, obviously, CMS coverage would happen since there is NCD. Then on the commercial side, Medicare Advantage claims would follow quickly. And then these 17 states, we expect actually ACS guidelines to get updated right after FDA approval, the guideline and recommendation updates by ACS is much more frequent than USPSTF. Then there are some precedent that when the pivotal trial readouts are very successfully than before FDA approval, they included some stuff in their guideline inclusion. But we are very excited about this ACS, and we're talking about 20%, 25% of the lives that well before USPSTF can give access to this test in terms of coverage policy.

Got it. And maybe in terms of sales and marketing support that you feel you need to have for this product, is there a difference in either the spend, the amount of sales and marketing support for blood-based versus, say, stool-based test in terms of how you have to approach that?

I think that there are some lessons, the whole field learned by the commercial engine that exact field and good and bad that engine, what's working, what's not working. But there's a big fundamental difference for the S&M engine, a blood versus S&M engine of stool-based tests. And that's around the efficiency of your commercial program. Effectively, for stool-based tests like Cologuard testing, for instance. For each 3 tests that the commercial engine sells, even for the first time point of testing, one of the samples never show up in the lab and 2 of the samples become billable. So when I look at that S&M efficiency and thinking about unit economics, like obviously, I would reduce the S&M kind of OpEx by 30%, 35% at least when we are talking about highly compliant blood-based testing because we are already seeing just 1 month of commercialization. The vast majority of our orders translate into getting the samples in the past. So that's just the promise of patient preference and blood-based testing. So I think that would make a fundamental delta in P&L and path for profitability for a blood-based brand versus a stool-based brand.

Maybe if we step back for a minute, there's obviously been a debate in the past just about the merits of multi-cancer versus single cancer screening. And you're going down the word building multi-cancer portfolio of single cancer test. What are the advantages and disadvantages of the strategy versus multi-cancer to start?

So we always -- what we are talking about in terms of our screening assets at Guardant is the outcome of last 7 years, we are reaching to this point. Like since 2015, we've been working on some of these initiatives. And we always want to build this brand as a multi-cancer screening brand. CRCs are anchor indication to get FDA approval, CMS coverage, setting up the pricing. But CRC is not the only thing that we are paying for obvious reasons. And we've shown data across other cancer types. Our approach is very unique, and we have an innovative technology that enables early-stage cancer detection. I don't believe the future of the care is doing cancer screening through multi-cancer late-stage detection, like people call, for instance, some of the commercially available tests as MCED, like multi-cancer early detection, but effectively, they are MCLD because they are multi-cancer late detection. They can't just detect stage 3, stage 4 and heme cancer. You go to early stage where sensitivity drops to less than 20% for stage 1. That's not the future. The future is a test that can detect early stage with high sensitivity and making sure patients have access to that test. So that's the technology we build, data that we presented, CRC is obvious. We've talked about long performance now for some time. Also, we presented data for pancreatic cancer, bladder, all the above, we are showing pretty good sensitivity in detecting early-stage disease.

Got it. In terms of just the future competitive landscape. And I think the investing market at times like to assume that sort of a new test comes to the market is introduced, and they take 100% share and the company immediately goes to 0. And we know in reality, it takes a lot longer market share shifts take time. But just talk about your expectations assuming sort of the positive data, the 85% plus [ OE ] per ECLIPSE. And how do you think that CRC screening market will evolve over time in terms of market share for liquid?

I think there is a segment of the market, which is really unscreened patients or new to screening. New to the screening, I mean, this age of 45 to 49. There's just a report that came. I saw that -- the experience with this younger patient population is the rate of colon cancer screening by colonoscopy is just 12%. So lack of like to almost know that is complying to any kind of screening program. So I think we're just new to screening. And on the screen patient population, blood can offer very high value and quick adoption. But even like quick adoption takes some time, especially like we need to wait for the FDA approval, and FDA approval would become as a catalyst for kind of adoption of these kind of tests. When we get into the landscape of kind of muscling through with a bunch of stool-based tests based on a modality, which is really patient preference, I think that would take time. But patient preference would be a strong driver of adoption for this test, I believe in 10 years. And it looks like actually, there's consensus finally about some basics of this business. So if we have a blood test with fit like performance, we are talking about 3 million to 5 million annual testing in 10 years, and that's about $2 billion, $2.5 billion profitable brand. If we go to that 85% was kind of a zone, which all of our data is even better than that, what we presented, we are talking about at least more than $10 million annual testing, and that's $5 billion to $7 billion brand. I think patient preference would really drive some of those adoption, but we need to wait for FDA approval. Patient out of collection is an important factor. So reimbursement, we need to show some of the gains. So it's going to take some time.

Got it. There's obviously been much debate about the importance of events [indiscernible] and CRC screening. Any studies you can reference to the simulated adenoma histology. And what's your view on adenoma histology impacting screening and malignant potential?

So we've done actually some surveys and now just a few weeks of commercial and conversation with physicians. So we are pleased with what we are hearing. It's an alignment of what we thought always. Like really, the conversations are, first, around CRC performance, sensitivity, specificity then goes to the logistics of the test, patient out of pocket, how am I going to order? How are you going to show me the data and so forth, really advanced adenoma [ rarely comps ]. And when you look at the clinical science of it, maybe you can connect the dots, 5% of advanced adenomas ever come CRC. Nobody dies as far as I know with adenomas, like people mortality CRC cost. That's why the main [indiscernible] lifesaving in terms of life year gain is reduction of CRC mortality. So 5% of these advanced adenomas ever becomes CRC. And the lifespan of an adenoma to become CRC is anywhere between 17 to 29 years based on some states. So you get multiple shot on roll to detect these adenomas. So I think maybe in that neighborhood of what we've seen, like 20% in the kind of ballpark of fit, from my perspective, is a very good number to start with. CRC sensitivity is very important, though. So -- and that's the one which would really define. Is it a failed study less than 76%, let's say, profitable $2 billion to $2.5 billion brand and like 76% to maybe low 80s, or $5 billion to $7 billion brand if you are in that mid-80s or higher? So that's, I think, from our perspective, all is a function of CRC performance.

And the other debate we engage a lot on is around testing intervals for CRC screening. How are you thinking about testing intervals for this test and then also in terms of pricing?

So for the leading initiation of CRC, our recommendation just based on slowing growth of CRC is similar of like every 1 to 3 years, we are kind of marketing it every 3 years. If we have high-performance CRC detection, we think every 3 years is more than enough in terms of catching and cutting the CRCs early. I think one may be misunderstanding in the field these days is pricing and interval testing is 2 different things. They are not necessarily correlated. In this environment, that if they approve tests, which are addressing an unmet need, can get ADLT status, advanced diagnostic lab test status. Pricing of ADLT devices is a process. it's a formula based. You know what's going to happen. It's not a negotiation behind and somebody says it's a $200 test, $500 test, $900 test. You're going to get pricing initially based on the list price and after that based on the cash price that we're pulling. We have that experience, some of the companies have got pricing enabled by ADLT. We know exactly how it works. Our pricing strategy is really empowered by that ADLT. Really, the risk factor for us is FDA approval. After FDA approval, I think a bunch of Domino's would just falling to place back-to-back for us.

All right. So given all the focus on ECLIPSE, I think maybe what gets ignored a little bit in market environment is the core business where you've shown strong growth, high gross margins. How should investors value the core business? And what do you think the market may be missing here?

Yes. So I mean, it's something we're -- we often -- I think one of the big, I think, takeaways we see is that investors are either focused on the core business or one of the new areas, but it's very hard to kind of, I think, give proper weighting to both of them collectively. There's just kind of a one -- there's a certain mindset whether they've grown the one or the other. But our core business is growing rapidly. We have I think last quarter, 47% year-over-year growth in terms of volume. And a lot of it is driven by even our flagship products of Guardant360. And so we're in a market where not only are we still very underpenetrated in terms of comprehensive testing, but the use cases and indications are expanding rapidly as well, which is very exciting. So the way we think about our business are these sort of overlapping S-curves essentially. And we have the first S-curve in terms of adoption of liquid biopsy and therapy selection. And a lot of that today has been mostly the 0 to 1 moment, essentially. Liquid biopsy trying to stand shoulder to shoulder with tissue biopsy sequencing in terms of determining the best treatments for cancer patients, about 1 million late-stage patients. What's happening now, and it's very exciting, I was just at ASCO last week. And we're seeing this kind of new way of managing patient treatments, managing patient care. This adaptive management of disease where they're very excited now about using liquid biopsy multiple times during patients -- of course, if treatment really understand once you select the treatment, a few weeks later, a second liquid biopsy test can determine if that treatment is working or not. And then switching that patient off to another treatment or keeping them on, and that's actually starting to happen. It's a vision we had many years ago where this could go, and we're finally seeing essentially that games team. And so rather than just one test for lifetime per patient, we're seeing a future where we could get to 4 or 5 tests per year per patient. So it's a huge multiplier just in that first market we're in right now, and that's without even talking about the enormous opportunity that sits before us in terms of recurrence monitoring and 15 million cancer survivors.

Got it. There was a lot of strong data supporting the use of MRD that was presented at ASCO. Could you tell us a little bit more about how this you think increases your ability to educate physicians and increase adoption over time?

In terms of the MRD data that was presented. Yes, there's a lot of excitement there. I mean this idea of being able to essentially in earlier-stage patients determine whether truly that curative intervention, whether it's surgery, adjuvant therapy was successful. And I think many of you had seen that trial from MSK that made a lot of headlines in rectal cancer in terms of MSI high patients who are given immunotherapy and essentially, everyone was cured. And I think that's an example where when you -- and those were earlier-stage patients, where when you bring these breakthrough treatments earlier, you have a potential for much more dramatic outcomes. You have less disease person -- less disease burden of healthier patients. And so bringing those therapies to bear sooner, I think, is -- seems very promising. So there's a lot of excitement by clinicians in terms of having these tests for the first time that can determine much more definitively whether these patients are cured or not or their disease at is at Bay. One of the challenges, though, has been establishing clinical utilities. So there's a lot of very compelling data now in terms of what we define as clinical validity, that when we detect these circulating DNA signals in blood after curative intervention. There's almost 100% probability that those patients will recur. So we know that it works. The question is, is that just lead time bias? Are you just basically detecting recurrence sooner than a CT scan would, but not really changing outcomes? And the outcomes in this case are often what we defined as disease-free survival. So how long can an intervention in terms of escalation of therapy push off disease. So that's where a lot of studies are underway. We have a number of important studies, randomized controlled trial that we're doing with the NRG, which is one of the top cooperative groups in the U.S. It's a 1,400-patient study called COBRA, and we're halfway through that study right now. There was another study that was done with a very simple technology many years before in Australia, that read out at ASCO, the dynamic study. And that study essentially, I think gave some nice, I think, feasibility data further the converse basically or the inverse, essentially, can you deescalate therapy, essentially avoid therapy in patients when you have a negative test result. And what that study showed is that, essentially, you didn't see any deterioration in outcomes if you delayed chemotherapy, which is an exciting end point as well. So I think these are going to be very important tools for management of care in that early-stage disease setting.

Got it. And I mean, when you look at the MRD market, what are your expectations for the opportunity for blood in your potential place in that market? It's clearly some other competitors in there and getting in eventually, just love to hear your view on how Guardant can differentiate yourselves in that market.

Yes. No. I mean we're very pleased where we're sitting right now. We are really the only blood-only liquid biopsy in this market. Every other approach requires sequencing of the tumor tissue, looking for mutations that are driving that and then developing these essentially glorified PCR assays for detecting those mutations. And there's not a very big technological hurdle in terms of doing that. You essentially see dozens of companies jumping into that space, even companies that aren't really able to produce a liquid biopsy in the therapy selection market are jumping into that part of the market because it is kind of a very simple technology. And you see tools companies, reagents companies developing kits and order procedures to be able to do that. So that's really where most of the competition is in the tumor and form side of the market. I can tell you what we're doing is often compared sort of apples-to-apples, but they're very different frameworks. I mean the technology we've developed looks very broadly at many kind of epigenomic signals, it looks across the genome. And so to be able to have the performance we have in a blood-only approach without any A-priority knowledge is very complicated. It's not easy. But why is it important? If you look at the specs of the 2 approaches, we're talking about 4x faster turnaround time, 7 days with a Guardant Reveal or MRD test versus 4 to 8 weeks with these tissue-informed approaches. You're talking about essentially being able to access and intercept the patient at any point after surgery. There are 15 million cancer survivors, 14 million of them are more than a year out from their resection, 13 million of them are 2 years out. And so when you think about an indication like breast cancer, where there's 5 million women who are cancer survivors, it's very difficult to access those individuals who are many years out from their surgery. And so we see that, ultimately, the winner in this market in terms of the lion's share is going to be a blood-only approach. And I can tell you the technological hurdle of being able to accomplish that with the performance we have is very high.

Got it. And Mike, maybe turning to you, I'm sure this is not going to be your first question on path to profitability so far this week. But you've built out a pretty substantial commercial team, but you're going to be expanding into the PCP market, there's some spend there. But you also have a very well-funded balance sheet at this stage. How are you thinking about time lines to reach this goal of profitability? And how are you thinking about toggling that spend to get there? And how flexible is that?

Yes, we get asked quite a lot about path to profitability these days. And I think the way that we look at the business now is we really look at it from the oncology side and then from the screening side. And I think what's underappreciated is really the financial strength in our oncology business. And there, I mean, the therapy selection and the MRD business. Helmy mentioned the very strong growth that we have on the oncology business. And coupling that with very strong gross margins that we've got in the sort of the mid-60s. We have got good gross profit there. And then if you look at the investments that we've made over the last few years, we've really invested heavily in that side of the business. And those investments have now got us to a place where we've got very well built out infrastructure on the R&D side and a very well built out infrastructure on the commercial side. And we're not going to have to have those heavy step-up investments on that side of the business going forward. So we look at oncology as really driving towards profitability, adjusted EBITDA profitability within the next 2 years. And then post that, that's going to really start to contribute positive cash flow for us and help fund the screening side of the business. So I don't think people really understand the strength of that business and where it is and the near-term profitability. Screening is different, and we know that we need to make heavy investments on the commercial side. And AmirAli was mentioning before, we're doing that in a very thoughtful way. It's milestone-based. We built out the initial commercial team for the LDT launch. And again, as we get closer to FDA approval, Medicare reimbursement and then private payer reimbursement, we'll step up the investments on the on the commercial side. So timelines, oncology again within the next 2 years and get into adjusted EBITDA breakeven for the whole business, probably 1 to 2 years post being in the guidelines. But a lot of that is within our control on how much we want to push the investment on the commercial side.

Got it. And then I just want to make sure that -- open the questions up to the audience. [Operator Instructions]. Maybe you've spoken in the past about your plans lower COGS at current sequencing costs. And we obviously had some announcements about the potential for companies pushing down the cost of NGS. How much cost do you think you could get out of COGS when accounting for more efficient sequencing costs in the future? And I know the time lines of that are uncertain. So it's probably not something that you're currently budgeting, but just asking you to kind of think forward in terms of the benefit it could be for your business?

Yes. Again, we get asked that a lot. I would say, first, any reduction in the sequencing cost is obviously going to be a benefit for us, and it's going to help with our gross margins. But there are -- it's only 1 component of our overall cost of testing. There's the kit cost, there's the shipping of the kit, there is the getting the book back into the company. There's the building costs, the instrument cost. So it's 1 component. And we look at as we grow and scale how we can control or reduce all of those costs. So I think if we can -- if there's reductions in the cost of sequencing, that's obviously going to help us. But we shouldn't overestimate in. I think our focus all the time is trying to achieve these gross margins of 60% or over. We do that on the oncology side of the business as well. We've talked about on the screening side of the business. If we get to something like 500,000 tests per year, again, we're at that level of gross margin. So yes, we'll take reductions in sequencing costs, but we're focused on many of the areas across those costs.

And then in terms of capital allocation, obviously, the well-funded balance sheet, but there's a time line that you have to get to profitability. In terms of allocating that capital organic versus inorganic, I mean a lot of it has been organic and might stay there, but just love to get your thoughts on if there's certain segments or certain pieces of the puzzle that you fill? Could it be organic? And is that something you guys sort thinking about?

Yes. I mean I think a lot of our investment and when we look at the balance sheet, it's -- a lot of that is organic. And we've built this business organically over the last 10 years or so. And again, on the screening side of the business, we're in investment mode on the oncology side of the business, again, focusing on the profitability. We've always said that we're always looking outside of the business. And if there's areas that can help us on the technology side, if there's areas that can help us accelerate on the commercial side, then we look at those. And valuations are interesting at the moment, and there's a lot of -- so there's potentially a lot of opportunities out there. But we'll just -- we'll have to see if something is the right fit at the right price, we might look at doing that. But yes, I would say a lot of our focus though is really on the organic side of the business at the moment.

Got it. And how many you've talked in the past about smart liquid biopsy and sort of the path, and you've got that slide that China shows the iPhone and Russian onwards? But maybe just help kind of anecdotally or somehow provide some sort of tangible view as to what smart liquid biopsy could look like? And how could that impact growth over the long term?

Yes. So with smart liquid biopsy are building this platform that is extremely broad in terms of the sort of hardware that's there, looking into full methylome and looking at much of the immune system. And obviously, wide swath of the genome. So a lot of the hardware is there, and we can do it in a very cost-efficient way, which is one of the breakthroughs in the business technology. But what's important is, in terms of the features we have, our North Star Compass has really been about providing clinically differentiated kind of meaningful utility to physicians like essentially information that can change a patient's care on day one. So I'll give you an example with PARP inhibitors, they're obviously a very important class of therapeutics. We all kind of index on BRCA mutations as being the sort of biomarker of choice for PARP inhibitors. It turns out though that there is this dark matter. There's a bunch of patients that have this other alterations that we're all blind to right now in terms of the technologies that are out there they are twice as prevalent as BRCA mutations, and that's promote methylated promoters of those BRCA genes. And so you can only see that with seeing the methylation side of the picture. And that's something on day 1, we're going to be able to see once we launch our smart liquid biopsy. And so rather than going to whole exome and looking at 20,000 genes have nothing documented to do with cancer, we're looking at the areas that are hot and kind of very related to tumor genesis and clinical decision-making. And so that's what's going to be very exciting about this is it's really paving this whole new future in terms of what's possible with liquid biopsy.

Got it. Exciting stuff with that. We're out of time, really. Helmy, Mike, thank you very much for the time.

Thank you.

Thank you.