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

Thanks for joining us this morning. My name is Tejas Savant, and I'm the life science tools and diagnostics analyst here at Morgan Stanley. It's my pleasure to host Guardant Health here. We have Helmy, AmirAli and Mike from the company. Maybe before we kick things off, I just have a disclaimer I need to read off. It's: for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales rep. So with that, Helmy, thank you for joining us.

Maybe just to kick things off, if both you and AmirAli can highlight what you view as key accomplishments for Guardant over the course of the last year? And what are you most looking forward to over the next 12 to 18 months?

I know there's a lot that I'm really proud of at the company right now. It's really a culmination of what we started 10 years ago, really bringing to the market these transformational tests in each of these 3 key areas in the oncology field when we think about late stage with the Guardant360 and the continued drumbeat of approvals that we're seeing with CDx, we estimate that probably like 25% of all lung cancer patients are getting our test now in the U.S. So just continued very strong commercial growth there. Obviously, the launch of our AVEO franchise and MRD. We're very pleased in terms of the progress we're seeing there. We just got Medicare coverage for colorectal cancer in that very large, obviously, indication of colorectal cancer survivors. And we just launched that test into breast and lung, which make up a significant fraction of all cancer survivors. Breast is the single largest indication with over 4 million women who really could be monitored with that test. And then finally, the goal that we set out to really achieve when we started the company, a simple blood test for early detection with the launch of our Shield test just a few months ago. And so, it's really been a busy 12 months and a great setup really for the next decade of growth at Guardant.

And maybe just to dive into the screening side of things. Shield has gone live in May. AmirAli, can you speak to the traction you're seeing in the market? What's been the early feedback on the experience so far? And how confident are you that the adherence rates can hover in that 85% to 90% zip code?

Yes. So actually, the commercial experience with Shield LDT as a lateral test has gone and continues to go better than we expected. We expected that we go in the field, and there's going to be a lot of questions about blood test, [AD] detection, [AD] colorectal cancer screening, but we are getting confirmed that really doctors were hoping this thing works. It's not that we have to do a lot of detailing for them to find a patient or a consumer that would be eligible for this kind of testing. It's on the top of their mind. We are seeing very high order rate per physician in these early days. Now, we are 3, 4 months into it. I don't want to get too much ahead of our skis by being so excited about it. But the level of ordering rate and penetration that we are seeing is far over what's ever been seen in stool-based colorectal cancer screening. Now we have processed thousands and thousands of cases and adherence rates we reported for the first 1,000 cases to be more than 90%, meaning when physician decided to order the test in more than 90% of the cases, we are getting the test in the lab, which is very important when you are thinking about having a highly efficient sales and marketing engine. Typically for a stool-based test out of these 3 tests that you sell, 2 of them ever show up after a lot of [actually] consumer engagement and patient navigation at the upfront. But here with kind of minimal kind of activities from our side, we are seeing very, very high adherence rate. And I expect that this would continue in these ranges that we are talking about, which is really the promise of what blood can do in the field of early cancer screening.

This actually just came in on email, which is also on my list, the obligatory question on ECLIPSE. Where do things stand on the CRC positive? As of 2Q, you were about 59 cases. And as you think about dispersing the button and reading out, you're already there, you can do it. But on the last call, you spoke about sort of deepening the competitive mode, making it a little bit harder for those to follow on screening. Can you just walk us through how you're thinking about that?

Yes. So we're at 59% during our Q2 earnings call early August. I'm happy that we are continuing to make progress there, very good progress there in these kind of mid-60s, more than 65 cases already identified. So we are there. So we -- in a very near future, we are going to actually start freezing the database and I'm seeing running the leftover samples, especially from the recently identified CRCs, go through quality control, what is the typical for wrapping up the study and this gives us confidence that we are really on track to get to the data readout in Q4, a 3 year journey, finally we are going to get there. I'm very excited about it.

And do you have a sense of the anticipated mix for the CRC stages within ECLIPSE just yet or not really?

So kind of staging information coming in. It's very close to actually what we expected from the beginning and similar kind of studies. I'm not seeing kind of any specific trends, which we are not expecting, but typically, staging takes some time after identification of CRC. So still we are going for a good fraction of CRCs, we don't know even the staging. So as we go through, I expect even at the time, we [meet] the PMA, which would be by end of the year, there would be a bunch of CRCs that still we don't know at this stage until we go through the review cycle and we kind of update our application.

And then on performance, AmirAli, I mean, do you need to be better than Cologuard in your mind to be commercially viable? Or do you just believe that greater compliance with blood-only screening assay, even if it comes at a slight sort of haircut on performance is very compelling. And is mid-80s still the power outcome in your mind as you think about where the data might land?

So when you look at actually the current standard of care for CRC screening. First initiate by colonoscopies and then stool-based noninvasive tests, we're really reaching to the flats of what stool-based testing can do in terms of patient compliance from my perspective. Really like the -- with a lot of S&M kind of pumping, you are really having hard time to get more patients screened. And far below actually the CDC goals that they want to reach 80% CRC screening by end of 2020, we are still up 70% in 2020 to unfortunately. And then we have this new patient group of 45 to 49 year olds that got added to recommendations and the compliance rate based on early indications that we have is very, very low, in fact. So you are talking about a significant unmet need for a new modality of testing where patients really at here try and comply with. So when we are thinking about like what is that minimum [ VaR ] for the blood-based test to be successful, like the way I'm going to look at the ECLIPSE readout is, as long as, we are in a zone that we can get FDA approval, Medicare coverage and USPSTF recommendation down the road. To me, that's a success. That's the bar. What is that? CRC sensitivity of 76%, 77%. Anything above that, ECLIPSE would be positive in terms of FDA approval, CMS and USPSTF based on everything that we know. Now below 76%, it's ECLIPSE failed. I would be surprised that ECLIPSE would fail below that. Between 76% to 85% based on what we are finding in our market research, we believe we are talking about the profitable $2 billion brand in 10 years if our sensitivity stays in that zone. If we are in the 85% or higher, we believe we are talking about at least $5 billion profitable brand in 10 years and the preferred mode of CRC screening 10 years from today. The data that we've seen and we've reported are for early-stage CRC as symptomatic patients, we're in high-80s, low-90s. So we have few percentage gap between this 85% and a large gap relative to that minimum bar. This is the way I'm going to look at the ECLIPSE readout when we un-blind the database and see what's happened there.

On advanced adenomas, a couple of questions there AmirAli, one in your market studies, why isn't sort of -- why you are finding that PCP adoption isn't really predicated on AA performance? And then in terms of the implications of that for the testing interval, you've also talked about whatever the testing, and so whether it's 1 year or 3 years, it's not going to have any bearing on the reimbursement rate. So could you just elaborate on those 2 points?

Yes, sure. So starting from advanced adenoma, we did a market research actually late last year that we reported early this year, and we did a refresher of that market research very recently. So I got to read out of that, I think, a month, 2 months ago. And effectively, they were very, very similar that adoption of the physician is a function of CRC sensitivity, an advanced adenoma sensitivity has very, very minimal impact on that adoption index, like I think it was just a 1% on one direction. And what we tested in this conjoint analysis, advanced adenoma sensitivity of 15%, all the way to 40%. And really, we didn't see any kind of dependency there. Now the reason which behind the story is from my perspective is, number one, it's not the top of the mind of physicians right now. They want to reduce CRC mortality. That's why they want to find CRCs. Second, they know that they are dealing with patients who are not compliant. They're getting the stool-based kits, never the tests are getting done. And this is the top of the mind that they are looking for options to really increase the screening rate. If you look at the scientific aspects of which I'm not sure, how well they are aware of it, we've not -- we haven't done research. But when you just look at scientific literature, 5% of adenomas ever become CRC. And in a time span of between 17 to 29 years it takes for an adenoma to become CRC. So when you look at clinically, although it doesn't -- it's good to detect advanced adenoma, but the most important thing is once it becomes CRC, you need to be able to detect it. We ask about pricing and the reimbursement rate. We are going to route of ADLT, which is Advanced Diagnostic Lab Test, which once we have the Medicare coverage and FDA approval, we are going to be eligible. We are going to get ADLT status, and the pricing of ADLT tests by CMS is not based on negotiation or it's not based on what I think or other people think. It's a process. It's well-documented process. You can figure out what your pricing would be. So for a few quarters, it would be your list price after that it would be average market-based kind of pricing. And that's why the cash pay price is very important when you commercialize the test. That's why we launched the Shield LDT with cash pay price of 8.95. We are trying to [anchor] ADLT pricing around that to hopefully have a pricing, which would be future-proof when this device goes beyond CRCs from CRC as the first indication, but becoming a multi-cancer -- a true multi-cancer early detection test in the years to come.

And the ultimate goal is obviously to move to a multi-cancer test over time, AmirAli. So, what tweaks do you need to make to the assay along the way to optimize for that performance? Or is it essentially the same test? And on a related note, how do you think about the optimal time for the testing interval for a multi-cancer test is still 3 years? Or do you think it's annual?

So last year and throughout this year, we should -- some data feasibility data with our next-generation Shield test, which is the next version of the test, which we have in our R&D pipeline. We haven't launched it. And that's the multi-cancer version of the Shield test that we are talking about. We are reporting like very high sensitivity, early-stage CRC similar to the current generation Shield, like 90%, very high sensitivity, early stage lung, 87% pancreatic, bladder we showed data like for…one of them was more than 70% for early-stage pancreatic, the other one was more than 50% bladder. That's what you need for early detection. Like I'm amazed how much -- some of our peers in the field are excited by detecting between 15% to 30% early stage like Stage 1 test, lot can do a lot more. And we want to have a multi-cancer early detection device, not a multi-cancer advanced stage cancer detection device, which time after time, in fact, we are just learning about harms associated with those tests, okay? It takes like 160 days from for false positives to get educated. So we are learning about the harms and not really about the benefits of reduction of mortalities, which I guess would be minimal with that level of early-stage detection. So I'm very excited about what we can do with next-generation Shield, lot scientifically and clinically has that capability. But you need to use the right technology if you're hoping that you just use for reagent off the shelf and you're going to get exciting data. Yes, maybe we can't get excited yourself, but I'm not sure if it's going to make any impact on patients down the road.

And on that point, I mean, how should investors think about benchmarking performance for a multi-cancer test. I mean Exact has some data that now about sort of 60% sensitivity over the weekend. Is that sort of, in your view, good enough or does it need to be a lot better?

Again, I think it's kind of a risk benefit analysis like a test that for cancers that we know utility is high. More people life is going to get saved, like CRC and lung, just for as an example. When -- I'm waiting for exactly to show their blood data performance in CRC, I not sure after all these years, why they are not saying anything. So -- but if they can detect like 30% to 40% Stage 1, Stage 2, I'm not sure what kind of shape they would be. But like in general, like your test that for first mortality cancer lung, second mortality cancer colorectal is missing majority of cancers at early stage. I think the utility of that from my perspective would be limited. Then you go to other cancer types where again, early stage detection is very important. And for cancer types that the diagnostic pathway is clear. Just look at the adverse events that actually some of these studies are finding in terms of unnecessary biopsies, unnecessary surgeries. And really, again, 160 days' time line from finding a false positive to confirming that patient was false positive. From my perspective, these are all angles that private payers are going to just hold on and say, why should I pay for such a test. You need a test that you can [comment] -- guidelines to include it. You need to make sure actually the benefit would be there in terms of saving lives with the right balance of the risk and pain associated with the follow-up diagnostic test. That's Guardant perspective.

Helmy, turning to you on MRD, with sort of the tumor naive versus tumor-informed approaches out there. Could we see physicians develop a preference for one versus the other over time depending on the cancer type in your mind?

Yes. I think there's no doubt from a product market fit, having a test that's easier to order, you don't need the sort of balancing act in terms of logistics of finding tissue samples, drawing blood, getting our results back in few days. There's no doubt that's just a better form factor, better product in general. And I think the question is, can a test -- that doesn't have that tumor information prior do as well or better. And that's the sort of, I would say, the science fiction that we have to get over. There's always been an element of technology that we produced at Guardant that make people wonder how is this possible? And does this even work? It sounds like too good to be true. And I think that's what we're seeing in the sort of consumer naive space. I mean we have peers that boldly claim they're going to launch a test in the tumor naive space, and now we're saying it's too hard, it doesn't work. Just because someone can't make it work, doesn't mean that's proving the null-hypothesis. And so, I would say that it's just really fascinating like why this technology works so well in terms of methylation, when you think of these tumor-informed technologies, they look at maybe 16 mutations or if they're really sophisticated, 48. And so you're just looking at these 48 sort of hotspot points or 16 hotspot points in a sample, very simple technology in for around 30 years, PCR. And you're just following them over time. When you look at the epigenomic space for almost every patient, you see hundreds, if not thousands of discrete features that you can track. And the beauty of all the analysis and the work we've done at Guardant is, we know how to detect these with extremely high specificity. And so, we don't need that tumor information prior. So it's literally like looking at hundreds of features per patient versus just 16. And that's the part that I think needs education. But once we've educated pharma and clinicians, it's pretty clear that this is an approach that I think is really going to win out in the space.

And as you start going after some of these [low] sharing cancers in MRD. Helmy, do you expect to add more markers over time to the panel?

Well, we're going with the technology, I think we just announced GuardantINFINITY for the research market. And what we look at in terms of the methylation side is nearly whole exome. So it's extremely broad. We're pretty much looking at everything in blood that could potentially release a signal. And that's really where, I would say, the oncology portfolio is going. And that's another, I think, underappreciated feature what we've developed is, as AmirAli alluded to, not just informatics, it's really often the chemistry that allows us to do some of this stuff. When people say that epigenomic analysis or tumor naive as low as specificity doesn't work. Yes, it's true. If you use off the shelf technology, if you don't do anything very sophisticated. But when you put 4 years of R&D and really take your specificity from 99% to 4 or 5 [9s] through all of that hard work, then you can get to something that is truly transformative. And so, that's what we have done. And now we have this platform that not only is extremely broad, but it's extremely sensitive to and low cost. So it's kind of less impossible optimization problem that we figured out, which is why we're very confident in terms of where we're going with the space, where the platform is going in oncology. It's going to be very hard for -- at least from what we've seen in the field for some of our peers to catch up to where we are now.

And then you recently got CMS reimbursement for Reveal and CRC. But do you have this sort of restriction around within 3 months of curative intent. I was just curious as to how you view that versus the way the policy seems to apply to some of your peers? And what drove that? Was it essentially something about the data package? And is that something you're planning to address down the road?

Yes. As I am sure, we got sort of half the population with this reimbursement indication. And then we're working on the sort of other half now with subsequent data that we have. So we have that data, it's a matter of getting it published and expanding the policy, and we'll expand it in colorectal and then hopefully, other indications down the road, such as breast and other cancers.

And then the base business or G360 doesn't seem to get too much out of time these days given all the focus on MRD and screening. But it's been an interesting sort of 12 to 18 months there development services has obviously outperformed the rest of the business because of COVID, et cetera, has been a little bit sort of hit and miss. In your view, I mean, is there anything that's going on as it relates to the competitive dynamics? We've had [indiscernible], a bunch of these others getting into liquid biopsy [of flat]. What sort of underpins your confidence that clinical revenue can grow at that sort of 30% clip volumes, perhaps even faster over the next few years?

Yes. No. I mean we're still seeing tremendous strength in the Guardant360 franchise. It's still very much -- there's room to [range]. I've said that maybe 1 out of 4 lung cancer patients getting Guardant360 now. But the other indications are still very, I would say, underpenetrated in terms of where they need to be at steady state. And this is still that sort of 0 to 1 moment of just getting patients one test at diagnosis or at some point in their treatment journey. But essentially, these patients are going to need multiple tests. They're going to need monitoring. And so, we see this space as one that I think has a lot of room to run. And I would say that it's not just where we are today. I mean we're seeing the hands that are being played by some of the competitors that are coming into the market with larger panels and so on. But I can tell you, there's not much clinical utility there from a clinician point of view, looking at gene that determines eye color for cancer diagnosis or cancer treatment is not that useful. But for instance, looking at some of the things that we're going to be able to do with our technology in the methylation side or immune side is very, very exciting, really thinking about understanding the wide metastases, happens or where the tumor is coming from or promoters that are methylated where patient could essentially be given a PARP inhibitor as a result, like things that really affect clinical decision-making is going to be possible with this platform. And so, we see 360 is one that has taken us to this really exciting point, it's basically a breakeven or a profitable business, if you just took that by itself in terms of where ASPs are in terms of the overall cost that -- in terms of promotion. And it's one where we think, as we get these larger payers on board that we still don't have that there's potential upside on the ASP side. And as I said, tremendous growth still ahead of us. So it's a very powerful franchise that I think will help fund the rest of the organization for many years to come.

On INFINITY, which you just alluded to earlier, Helmy, how are you thinking about sort of pricing that product relative to OMNI, for example?

Yes, it's really interesting. It's a very modular platform. So from a single tube of blood or a single test, we -- there's aspects of it that are more powerful than OMNI. OMNI looks at 500 genes. We can look at over 800 genes with this platform on the genomics side with the same or even better sensitivity. But let's say, a pharma company wants to come in and now look at immune markers or look at epigenomics in the same patient, there's a modularity to it and you can sort of up-charge in terms of these different additional layers. And so, there's an [allocate] aspect to how we priced it. And that's very, I think, exciting to pharma companies because these are precious samples that they have from their trials. They often only have limited amount of blood. And so, being able to come back and repeatedly and do further analysis with this platform is something that we're finding is resonating quite a bit with our pharma partners.

And in the last couple of minutes here, can you just comment on your U.S., strategy now that you've bought the rest of the equity stake from SoftBank here. How large do you expect international revenues to get over the next couple of years as a percent of your total?

Yes. We think this is a really interesting inflection point right now in terms of that business, which is why we acquired the rest of it. We're -- we just got PMDA approval in Japan. We're waiting for essentially reimbursement pricing there. And once we have that -- as we speak, we're building out the commercial infrastructure. We have a lab that is nearly up and running in Japan. We're one of the few outside companies -- foreign companies that actually has a physical presence in terms of a lab and Japan, which is very much appreciated by the cancer centers there. So yes, that's a market opportunity that we think over the long term could eventually rival the U.S. opportunity. We just launched -- we just signed a partnership with Adicon in China, and so we are building that lab there, another big market opportunity -- and then we launched our lab in -- with Vall d'Hebron in Spain. And early next year, we'll have our lab up and running at the Royal Marsden in the United Kingdom. And so, we're taking this approach where we essentially have physical presence in the countries where we think there can be a very good public reimbursement or a lot of pharma business like in China. And it's going to take some time to really get into kind of swing of things. But it can be extremely large percentage of our business over the long term. There are obviously many, many times more cancer patients outside the U.S. than inside the U.S. So there's a big market opportunity globally.

Fantastic. We're just out of time. So thank you so much for doing the [indiscernible] and hope you enjoy the rest of the conference.

No, Thank you, Tejas.

Thank you.