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

Thanks everybody for being here on day 3 TD Cowen's 43rd Annual Confrence. I'm pleased to be joined by Guardant Health with CEO, Helmy Eltoukhy and CFO, Mike Bell, who probably do not need an in-depth introduction. But maybe just to kick off, you did just report results. What do you consider the headline takeaways from '22?

Yes. So we had, I think, an excellent year, 42% growth in terms of clinical volume. I think overall 20% growth in terms of revenue and then obviously, making tangible progress in terms of these new emerging areas of MRD and obviously, a successful readout of Eclipse. And so I think '22 was a pivotal year with a 10-year anniversary from founding the company, and they had really brought to kind of tangible reality. There's a vision of really transforming the entire continuum of cancer care from beginning to end. And so now we have, I think, 3 franchises that are truly disruptive and have multibillion-dollar opportunities ahead of them. I think the other sort of things that got lost and I think the headlining around Eclipse and screening and the sexiness of that market was just our base business, which is, I think some people call mature. But it really is still in the early innings. I mean, you take our business and you shut down MRD and screening. We have a business that's doing around $500 million in revenue that's growing between 20% to 30% per year, and that is nearly profitable, it will be profitable in a few months. So we -- our investments are very strategic, and they're very discrete. I mean there's specific programs. It's not like it's part and parcel to the revenue generation we have. We have very healthy gross margins in our sort of "mature" business.

Yes. And -- but I would imagine that it's an option if you wanted to flex, but it's not viewed by the management team as the highest ROI approach going forward.

In terms of...

Discontinuing.

No. I mean, obviously, it's a hypothetical -- we have made those investments for a reason because we believe we are the first mover in a $50 billion screening market in terms of having an FDA-approved Medicare reimburse has -- and that's a bet that I think any kind of rational investor would make same thing with our MRD market, where we're really the only company that has a test that is a crew liquid biopsy that's blood only in a market that is at least $15 billion to $20 billion. So we would take -- we would make those bets any single day.

Yes. And we attempted to cover screening in a 1-hour panel yesterday, which was challenging. But at the end, we did ask a simple question. And the question was, do you expect the test to be FDA approved? And everybody said, yes, but there is acknowledgment that there could be limitations or it could be foreign intended-use population. And so maybe just to set the stage what do you view as the biggest risk to getting FDA approval?

I think the biggest risk is time may be back and forth and so on. But there's a -- we have tens of thousands of samples in our freezer, you could ask us to run more samples or this or that. But this is not our first rodeo. We've gotten complex tests, Guardant360 CDx with multiple SDMAs through the FDA. So we have a very qualified team, and we have very high confidence that, that's not going to be an issue in terms of getting through the process. But I think that is overblown, in my view, in terms of some of those fears. I would say that in terms of the label, there could be some discussions back and forth and around that. But I think the main thing we see is that I think people are underestimating how disruptive blood is in this market. There's somehow these conversations of blood versus stool versus colonoscopy being this theoretical construct that is somehow in a population that there's been some kind of other human being other than ourselves, that is this rational kind of decision maker and is willing to give up 2 days of their life or something with 1% better performance. And that's just not the case. I mean the case is adherence is part and parcel to the performing of a test. It's really 3 numbers that matter sensitivity, specificity and adherence. And a test that no one does is useless, has 0% sensitivity at the end of the day. And so this is absolutely disruptive. It's going to change the nature of screening in this country for colorectal. And it's just the beginning. As I said, it's a Trojan horse to getting to multi-cancer. And so this will get us to multi-cancer testing in the general population in the shortest amount of time.

So yes, I went back and I was reviewing the multi-society task force for core -- for cancer screening, the 2017 update. And it listed colonoscopy and FIT testing is first tier test and then FIT-DNA, Cologuard to be recommended only if first-tier tests were declined. And so I'm curious. I mean we had a conversation last night, and I think the consensus is that it's been great that we've been able to make a bit of a dent in the compliance, but we still need more modalities. So in terms of the potential recommendations that we could see out of guideline bodies and whatnot. Would it frame what people, I guess, consider one of a worst case scenario?

What do you mean?

Right. It would being only order that's passed you have already...

Yes. So look, I think we're very optimistic in terms of label that we can get for this device. We think the performance is absolutely great. It's better than FIT. It's detecting 83% of cancers in the general at-risk population. And so we think that merits certainly a first-line label, but let's take the worst-case scenario. What matters is essentially reimbursement $0 co-pay. Those are the elements that can speed up or slow adoption. I mean let's not kind of -- let's not dilute ourselves that colonoscopy is not going to be the first line action for physicians that they offer. Like colonoscopy is the gold standard. You can go in, you can cut polyps out, it's visual inspection, which is the gold standard. So that's always going to be even if you have a perfect diagnostic , you're going to essentially promote the colonoscopy. If you want to do advanced adenoma detection, you get a colonoscopy that by far is much better than any type of study does. But colonoscopies are hard to do 2 days of prep and so on. So a lot of individuals that aren't getting screened that are going undetected because they're not getting colonoscopies. And so that's the framework we have to think about is that there are the sort of 2 buckets, colonoscopy and not colonoscopy. And once you're in that not colonoscopy bucket, it's about how do I get this patient screened in the fastest way possible that they're not going to refuse and that's why blood is so disruptive. There is no conversation that needs to happen between the physician and the patient when it's a blood test. Blood is the lingua franca modern medicine. Stool requires an uncomfortable conversation. It requires explanation of the specimen collection methodology that is not standard. So that's why this is sort of disruptive. We've seen it already in our Shield LVT. We've seen depth of ordering that is significantly higher, multifold higher than what we've seen in the field from stool and the numbers are going to play out, and that's why getting up the approval, getting Medicare coverage and then getting private payer coverage early the major inflection points, frankly, regardless of labor.

Yes. And another question would be if -- is there a chance that the label does not include AA detection. It's just, this is a test for CRC detection. And if that's the case, does that really matter given that it's the real impact they can have a mean currently on the screened population.

AA is really about cancer prevention versus -- we're talking about screening here even from the task force point of view and from what we're trying to do from a sort of catching disease early. And so that's the important aspect that we're focused on is essentially how can we have a test that can catch people early in their journey, where it's curable and so on. And like I said before, advanced adenomas, if you want to catch them, get a colonoscopy because they tested out there are fairly low. But -- so we don't see that as a risk in any means regardless of how the label comes down.

Yes. In the USPSTF criteria has been what we would consider somewhat rigid in terms of the transformation of the diagnostics industry. So can you just remind us of the adherence language that's included in the USPSTF update And what gives you confidence there?

Yes. For what I understand and the latest guidelines basically speak to the fact that the existing methodologies for screening suffer from low adherence, stool testing, colonoscopy, and so that has, I think, multiple issues with it. Obviously, there are 30% to 32% of the population that is not up-to-date in terms of screening and maybe even more than that, like some of like 49 million Americans. And again, you're not catching disease and the very significant population of Americans that may have colorectal cancer because that's a big problem when we think about population health. Secondly, it's likely that, that lower adherence impacts individuals and sort of lower economic groups and so on, those that can't take days off work or don't have access to the same kind of medical professionals that many of us do. And -- so those are big concerns that we believe adding a new modality to the sort of arsenal of screening would be a huge game changer. And it's -- those areas of further research and further exploration called out in the guidelines, which is why absolutely, we think that compliance and adherence is it's a major element. It's not just a major element from a single time point of view, but from a longitudinal point of view, you guys are all investors, the power of compounding, same thing here, if you have multiple tests and you only have 40% compliance and we see with stool testing this is in corroborated by multiple data sources that about 7 out of 10 individuals don't take another stool test that have had a stool test. When you think about that churn rate, I mean in the tech industry, that kind of churn rate would be disastrous, and it clearly is from the whole population point of view as well because not just about catching it once, you have to be vigilant. You have to continue to monitor and that's the biggest challenge is when you only have a 30% reorder rate. That's a disaster from population health screening point of view. And so that's why that third number adherent, having greater than 90% like we expect, we will and we see we do with Shield is a big game changer.

And the term effective sensitivity as a metric, it's intuitively quite logical, but I'd be curious to hear if you've spoken with the FDA, CMS and guideline bodies specifically around that metric of effective sensitivity? And then what their acceptance or acknowledgment has been of it's important.

So I would say that it's used in the field and it's a metric that is similar in the drug space to the intent to treat or intention to treat population in randomized studies. And when you think about a drug that may save lives, but people get grade 3 or 4 diarrhea or nausea and they can tolerate it. It's no use because it can't save people unless it's useful. So we often in the drug space and this is the same. There was a Nordic study not too long ago that essentially said that the value of colonoscopy may be suspect in terms of actually improving mortality and that was a sort of intention to treat study. They looked at essentially the patients that were offered colonoscopy and looked at the end result versus another population that wasn't. And because colonoscopy only 42% of people or 40% of people actually went through with it the performance was heavily compromised as a population screening and that is effective sensitivity. So it is a measure that is well accepted use in multiple fields in health care under different names, but it's absolutely important because you don't catch cancers unless the test is done.

Yes. And in the -- some of the recent presentations, you've provided a dollar amount value of the screening franchise in terms of revenues at different levels of sensitivity. And so I just want to clarify or as we like to call it, de talk the TAM and understand that number that we see in the presentation, which you can maybe remind me of, does that assume that Guardant holds the 100% market share in the blood-based CRC screening market.

Yes. So I think those numbers -- the testing number 5 million or 10 million tests at scale, that's a garden testing, which is Shield essentially. So it's not really a TAM in terms of like the overall market. It's really a projection of where our business could go, I think and we're absolutely in the zone where we think we can get to very high penetration in the market. And that's a relatively low penetration rate in about 5 million or 10 million tests in the market. But we're talking about a sort of $5 billion opportunity from a actually a revenue line point of view, not a TAM point of view.

Yes. So I mean $10 million on the $50 million on the screen would be 20%.

Yes. It's every 3 years, but you have.

Okay. Great. And then some questions for Mike. Would love to know the most stable or high conviction items in the guidance versus where you see the potential for the largest variability?

Yes. I think the place where we're most confident on is our G360 volume and our clinical volume. I think in our guidance, our overall clinical volume growth was at least 35% year-over-year. And so I think that's at the low end of our guidance. And so I think we feel very confident there. And all of the products are going to contribute to that growth. But I think G360 is going to be the real driver in the real revenue driver. And the growth there is going to be similar to last year at sort of getting close to 30% year-over-year. And also ASPs as well on Guardant360. They've been stable at 2,600 to 2,700 for the last 18 months or so. At a minimum, they're going to stay at that stable level. But there is the potential that they could increase. We recently got United positive coverage in London breath. And so that's going to be an upside for us at some point in the year. And we're hearing positive noises from other larger commercial players. So I think there's potential for the ASP to increase. And also on the Guardant360 on the volume, I think since we got their FDA companion diagnostic approval in breast cancer, then that's also helping drive the volume. So I think we're feeling very solid on the guidance on G360 and if anything, there's potential [indiscernible].

Yes. And was the CDx deal a big thing into the Guardant?

Yes, we knew that was coming and so we baked something into the guide. But I think it's fair to say that in the first sort of month or so after that approval, the volumes are going very, very well. So whether or not we can exceed what's in the guide I think time will tell, but so far so good.

And that's paid at the ADLT rate or the precast.

ADLT or the CDx, yes we have that. But now it's been fantastic to see kind of this new sort of paradigm of testing that this new CDx, we have really initiated. It really is not like the other CDx that we've gotten because these mutations, the ESR1 mutations in breast cancer don't exist in the primary tumor. So blood is really the only road to getting these patients on this new class of therapy and you don't know when these mutations will come up so you sort of have to test early and test often to be able to find them. So it's really creating a new paradigm of medicine that we think will be the future of precision medicine in oncology.

Yes. And Mike, you guided officially to a $50 million decline in cash burn, but I just want to clarify for those that might not be up to speed. Like there is a one-off item in '22 that sort of impacts that number, right?

Yes, that's right. We concluded the licensing agreement with Foundation right at the end of 2021. And so we got the settlement amount and we got a sort of a onetime catch up on both. So effectively, we've said our cash burn this year will be about $350 million. It's a reduction of about $100 million compared with [indiscernible] that's sort of onetime start of 2020. So it's a significant reduction in cash burn. '22 was our peak year and so we're really focused on managing that, and we've talked about bringing our OpEx in 2023 below what our OpEx was in '22. So yes, there's a lot of focus on cash burn and OpEx spend from those.

Okay. Great. And so let's move to the smart liquid biopsy platform. If we have some time discussing last slide. So eventually, you'll transfer most, if not all of your products over to that platform with Reveal being the first. So what is it specifically about the Smart liquid biopsy platform that will enable what I believe has been highlighted as a 5x increase in sensitivity.

Yes. So a couple of things. I would say there are 3 kind of qualities that we are leveraging out of the smart liquid biopsy first is just better performance in liquid biopsy. And so we talked about 100x bigger coverage than 360 CDx, 50x better sensitivity than the CDx. So it obviously just takes the field forward from the bread and butter kind of nature of liquid biopsy. Second, it allows us to do a lot more that is not -- hasn't been possible with these types of tests, really thinking about things like where is the metastase is coming from, mapping clonal evolution, thinking about dark matter in terms of precision medicine around epigenomics, where there are so many drugs out there that have interactions with the sort of promoter methylation and so on that have been documented. And we know this can change patients there and with patients on the right therapies, yet, it's just been dark matter that has just been underexplored because we haven't had the tools to do this and a whole host of other functions we can do. I mean even the act in the art of histology in terms of diagnosing disease, is really an epigenomic phenomenon. And so being able to map that at the molecular level is going to be hugely important. And then finally, efficiency in terms of our COGS and costs in terms of running these tests as we consolidate all these tests into a single platform in this new, much more cost-efficient chemistry and they have the ability to invest in terms of the same level of automation we're putting into screening. We've made those investments in R&D, the know-how in terms of a level of automation that we think is unparalleled in this industry, then moving that and leveraging that on the oncology side, allows us to essentially increase our gross margins over time. We get consolidation of R&D work since we're all working on one platform, operational efficiency and other things. So we think this -- this helps us get to a much better business with much better operating margins over time.

All right. Well, I think that's all the time we have. I appreciate both of you being here, and everybody, for joining.

Thank you.

Thank you.